AAII Investor Update: A Shopping List Screen

by: AAII

I am using a new stock screen that I've simply titled "Shopping List." As the name implies, this screen identifies stocks with characteristics I want in a portfolio holding.

This is a restrictive screen designed to both find potential investment candidates and eliminate those companies I would likely pass on buying. There are specific characteristics I personally want in stocks, and a screen is a great tool for finding stocks with those traits.

Before discussing the criteria, I want to emphasize that a screen is merely a database filter. Screens can only determine whether or not a stock meets specific criteria. A stock screen cannot tell you if a stock is an attractive investment. For example, the financial numbers of Hewlett-Packard (NYSE:HPQ) tell you nothing about what will or won't happen to the company's PC business. So, treat any screen as merely a starting point for further research.

I am value investor who likes bargain stocks. Bargain stocks have fundamental characteristics that should drive the price higher. Therefore, I want to see a history of sales and profit growth along with stable to rising earnings estimates. I also want return on equity (ROE) to be above average relative to a company's peers, since it can be a sign of good management.

Though profits receive a lot of attention, they are merely an accounting figure. This is why I want cash from operations (CFO), which is located on the cash flow statement, to routinely be positive. Furthermore, CFO should also routinely exceed capital expenditures (what the company spends on equipment and other fixed assets). I prefer dividends, and I want them to be either be stable or rising.

The balance sheet must be strong with a current ratio above 1.0 and a debt-to-equity ratio below 50%. Goodwill and intangibles should account for 50% or less of book value. (The reported values of goodwill and intangibles are subjective and can artificially reduce the price-to-book ratio.)

Finally, I set the valuation limits at a maximum price-to-book ratio of 4.0 and a maximum price-earnings ratio of 25.0. I have no intention of paying either multiple for a stock, but I want to set the valuation limits high enough to attract stocks I would be willing to watch while waiting to see if they go "on sale" in the future.

The table below lists the stocks currently passing my screen. Keep in mind that it is merely a starting point; not every stock may look attractive upon further research, as will be the case with any stock screen. If you use our Stock Investor Pro program and want to replicate my screen, reply to this email and I will send instructions.

Stocks Passing My Shopping List Screen

Company Ticker Price-to-Book (x) Price-Earnings (x) Yield (%) Industry
Air Products & Chemicals, Inc. APD 2.87 15.8 2.8 Chemical Manufacturing
CF Industries Holdings, Inc. CF 2.21 10.7 1.1 Chemical Manufacturing
Diamond Offshore Drilling, Inc. DO 2.02 8.7 0.8 Oil Well Services & Equipment
DSW Inc. DSW 2.83 15.1 1.2 Retail (Apparel)
Embraer SA (ADR) ERJ 1.59 11.1 5.6 Aerospace and Defense
Humana Inc. HUM 1.66 10.0 1.3 Insurance (Accident & Health)
Insperity Inc. NSP 2.56 21.8 2.4 Business Services
Intel Corporation INTC 2.55 10.8 3.6 Semiconductors
Ituran Location and Control Ltd. ITRN 2.48 21.6 8.0 Security Systems & Services
Littelfuse, Inc. LFUS 1.95 11.6 1.6 Electronic Instruments & Controls
LUKOIL (ADR) OTCPK:LUKOY 0.68 3.8 6.7 Oil & Gas - Integrated
MTS Systems Corporation MTSC 2.75 12.6 2.8 Scientific & Technical Instruments
National HealthCare Corporation NHC 1.19 9.3 3.3 Healthcare Facilities
Oceaneering International OII 3.04 22.2 1.4 Oil Well Services & Equipment
Span-America Medical Systems SPAN 1.65 10.0 3.2 Scientific & Technical Instruments
Steris Corporation STE 2.19 14.5 2.3 Medical Equipment & Supplies
TESSCO Technologies, Inc. TESS 1.27 8.8 4.3 Communications Equipment
Wolverine World Wide, Inc. WWW 3.08 15.1 1.3 Footwear

This Week's Gratis Tip

A common theme of all good stock screens is that they look for characteristics of winning stocks. Like a good recipe, you want criteria that both enhance a screen and complement each other. Quantitative Strategies for Selecting Stocks lists the characteristics that lead to better returns.

The Week Ahead

Nearly 200 members of the S&P 500 will report earnings next week, in what will be one of the busiest weeks of the third-quarter earnings season. Included in this group are Dow components Caterpillar (NYSE:CAT) on Monday; 3M (NYSE:MMM) and DuPont (DD) on Tuesday; Boeing (NYSE:BA) on Wednesday; Exxon Mobil (NYSE:XOM) and Procter & Gamble (NYSE:PG) on Thursday; and Chevron (NYSE:CVX) and Merck (NYSE:MRK) on Friday.

On the economic front, the Conference Board's October consumer confidence survey and the August Case-Shiller housing price index will be published on Tuesday. Wednesday will feature September durable goods orders and September new home sales. Third-quarter GDP (the first estimate) and September pending home sales will be released on Thursday. Friday will feature September personal income and spending and the final October University of Michigan consumer sentiment survey.

No Federal Reserve officials are currently scheduled to speak.

The Treasury department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday, and $29 billion of seven-year notes on Thursday.

Charles Rotblut, CFA is a Vice President with AAII and editor of the AAII Journal.