Derek A. Barrett's  Instablog

Derek A. Barrett
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I buy established, good companies with strong management, solid balance sheets, free cash flow, growing earnings, and increasing dividends. This is a long strategy, which buys value situations, combining the fundamentals of Growth at a Reasonable Price, with Dividend Growth Investing. This style... More
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  • mbkelly75 Master Screening Method 0 comments
    Jun 24, 2011 11:08 PM

    Legendary poster mbkelly75 posted his screening method over a year ago. I am reposting it here to save for future reference:


    It is a good question. This is where screening followed by Due Diligence comes in. Ben Graham (in a seminar in 1975) said that you could do well (minimum 50% gain over a 2 year period is what he looked for) simply by buying a stock with a low Price/Book - under 2/3 or 0.66 - but said to use a basket of 30 for safety. I find using P/S under 1 helps to narrow down the list to truly good undervalued companies as opposed to bad companies that are low for a reason. A Price Earnings Growth Ratio (PEG Ratio) under 0.65 can show a buy also and under 0.50 is a buy.
    So go out to your favorite screening program and we have a simple but effective screen ( I like's screening system - here is a link if you need ) using just those 3 parameters: P/B = Low (<1), PEG = Low (<1), P/S = Low (<1).
    This morning, this screen gave me 44 stocks of all market caps that may or may not pay a dividend but are all at least decent values. This would make a basket right now if you were lazy. If you want to narrow it down to dividend paying stocks - add that parameter - FinViz makes changing the screens very fast and easy. Look at the Dividend Yield Parameter and set it for Positive (>0%). This has narrowed it down to 15 stocks (again a lazy basket).
    3 stocks have a PEG less than 0.50 (CEG = 0.16, FMR = 0.37, TRH = 0.49)
    1 stock has a P/B 0.66 or less (EIHI = 0.64) although if you round up to 0.67 instead of down to 0.66 you can have a second stock (HIMX = 0.67)
    I have found that a really low P/S (0.25 or less) works really well but let's just look at low P/S = 0.50 or less today.
    3 stocks have a P/S less than 0.50 (KBALB = 0.25, PZE = 0.44, CEG = 0.48) You could use these 3 as a basket also and do well.
    CEG showed up twice so we will look and see if it is trending up or down right now. Clicking on the ticker symbol shows us that it is trending up very nicely, has a 2.75% dividend and a very nice P/FCF Ratio of 2.87 (less than 15 is attractive), the Quick Ratio is 1.75 (over 1.0 is nice), the ROE (74.81%) is way over the PE (1.69) so that signals value here also.
    This link will tell us some more:
    The dividend is safe enough with only a 4% Pay Out Ratio, but we just missed the dividend so it will be a bit over 2 months before the X Div date comes up again - you have time before the dividend gets paid again. They have not been the best investment long term - Total Return figures going back 5 years are negative.
    So let us go to another link to check some more:
    A couple things here really stand out - they have a huge Operational Cash Flow that gives them a P/CFO Ratio of only 1.71 (less than 5.0 is attractive) When this is combined with the P/FCF Ratio of 2.87 - this is wonderful - this is a stock that you should probably back up the truck for - this combination is fairly rare and wonderful to find.
    You can also look at the Forward Intrinsic Value and see that it is higher than today's price ($68.45 compared to $37.40)
    Click on one more link to get a Piotroski Score to see how solid the company is (8 or 9 is outstanding, 5 or more is good, 4 or less you should probably avoid or be very careful of, 1 or 2 do not buy under any circumstances) CEG is a 3 and this is bad so if you buy this one - use a tight trailing stop loss to prevent disaster.
    10 ATR is a nice one to use and FinViz tells us that the ATR = 0.72 so set the stop loss at 7.2% (7% would probably work well and be easier to figure if your broker does not allow you to use trailing stop losses automatically). I would go ahead and buy CEG and set the stop loss at 7.2% for protection.
    I hope that this look at my thought process for stocks is a help to you. It did not show just stocks that have started or re-started a dividend but it will point out good investments anyway. Value is where you find it. Have fun checking for your own ideas.
    BTW - I used 3 parameters at the beginning as just low P/B and Low P/S gave me 561 stocks, You could make a basket of the 289 stocks with a P/B of 0.66 or less or make a basket of the 178 stocks with a P/S of 0.25 or less but more than 0.0 or take the time to find out which of those stocks are in both sets and make a basket that way that would be safer than either set by itself. This would give you the 30 or more needed for a safe basket as Ben Graham said. Once again - have fun !!!!

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