In his 1984 classic Super Stocks, Kenneth Fisher dropped a bit of a bomb on the investment world: While strategists for decades had been valuing stocks using the price/earnings or price/book ratios, Fisher touted the price/sales ratio is an even better gauge of a stock's true value. His book turned the "PSR" into a key stock evaluation tool that is used by millions of investors today.
But as influential as the PSR was, Fisher himself warned that it was not the be-all, end-all of stockpicking. "By itself, the PSR is still a limited single tool - a powerful one to be sure, but still limited," he wrote in Super Stocks. "No single tool allows enough cross-check capability to ensure results. Life just isn't that easy."
Fisher was spot on. A good investment strategy uses a number of metrics to gauge a stock's attractiveness. And I'll take it a step further: The best investment approaches actually use multiple strategies.
That's what I've found over the years using my Guru Strategies, each of which is based on the approach of a different investing great, including Fisher. When one of these models is high on a stock, it bodes well for those shares. But when two or more of these guru-inspired strategies like a particular stock, it can really mean good times are ahead.
My individual strategies look at numerous fundamental and financial variables when assessing a stock, and many of those variables differ significantly from model to model. For a company to pass one model, it thus has to be pretty well-rounded. To pass two different models, however, a stock really has to be strong when looked at from a number of perspectives. Often this means the company has strong growth, attractively valued shares, impressive profitability, and low debt.
Over the long run, those are the kind of stocks that I want in my portfolio. Here's a look at a handful of companies that currently get approval from more than one of my Guru Strategies.
The TJX Companies (NYSE:TJX): This parent of discounters Marshalls, T.J. Maxx, and Home Goods ($45 billion market cap) gets strong interest from both my Warren Buffett- and James O'Shaughnessy-based models. The Buffett approach likes that TJX has averaged a 39.6% return on equity over the past decade, more than doubling this model's 15% target and indicating that TJX has the "durable competitive advantage" Buffett likes to see. In addition, it has increased earnings per share in each year of that stretch, and it has enough annual earnings ($2.2 billion) that it could, if need be, pay off all of its debt ($1.6 billion) in well under two years, the standard my Buffett-inspired strategy prefers. The O'Shaughnessy-based growth stock model looks for firms that have upped EPS in each year of the past five-year period, which TJX has done. The model also looks for a key combination of variables: a high relative strength, which is a sign the market is embracing the stock, and a low price/sales ratio, which is a sign it hasn't gotten too pricey. TJX has a solid 12-month relative strength of 74, and its P/S ratio of 1.49 comes in just below this model's 1.5 upper limit. Keep an eye on that P/S, though.
Cal-Maine Foods (NASDAQ:CALM): This egg producer sells its eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The $2.4-billion-market-capitalization firm has taken in about $2 billion in sales over the past 12 months.
The model I base on the writings of hedge fund guru Joel Greenblatt is particularly high on Cal-Maine. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes Cal-Maine's 24.2% earnings yield and 57.5% ROC, which combine to make the stock the 2nd-best in the entire U.S. market right now, according to this approach.
Cal-Maine also gets strong interest from the model I base on mutual fund legend Peter Lynch's approach, which likes its 22% long-term earnings per share growth rate and 6.9 price/earnings ratio. Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide Cal-Maine's P/E by its growth rate, we get an excellent PEG of 0.31. Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt/equity ratios less than 80%. Cal-Maine's D/E is just 3%, another good sign.
National Oilwell Varco (NYSE:NOV): Varco makes equipment used in oil and gas drilling, completion and production operations, and also provides oilfield services to the upstream oil and gas industry. It has an $11 billion market cap.
Benjamin Graham was known as the "Father of Value Investing", and the model I base on his writings thinks this oil services firm is a bargain. It likes that Varco has about twice as much in net current assets as it does in long-term debt and trades for only 9.3 times earnings and 0.64 times book value. My Lynch-based approach also likes the stock, which has a 6% dividend yield and 0.63 yield adjusted PEG ratio. (For large dividend-paying companies, Lynch added dividend yield to the "growth" portion of the PEG ratio.)
ePlus Inc. (NASDAQ:PLUS): This Virginia-based information/technology firm ($700 million market capitalization) is a favorite of my O'Shaughnessy model, thanks to its strong momentum (a 12-month relative strength of 91) and good value (0.6 price/sales ratio). My Lynch model also likes the stock, which has grown EPS at a 28% rate over the long haul and has a P/E of about 14, making for a 0.5 PEG ratio.
Vitamin Shoppe Inc. (NYSE:VSI): This New Jersey-based multi-channel specialty retailer manufactures vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. The firm sells through retail stores and direct selling (through e-commerce and catalogs).
VSI ($820 million market cap) gets high marks from my Fisher-inspired model. A few reasons: its 0.65 price/sales ratio, its 22.9% long-term inflation-adjusted EPS growth rate, and its 1% debt/equity ratio. It's also a favorite of my Lynch-based model, which likes the stock's 14.3 P/E ratio and 0.57 PEG ratio.
Disclosure: I am/we are long VSI, PLUS, NOV, TJX, CALM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.