Screening Stocks
A Common Stock Value Investing Strategy requires a great deal of research and one place to start is by screening stocks. A fundamental stock screener can be a great investing tool by providing a list of stocks that meet your initial requirements for further research. The best companies to invest in are those which offer the greatest reward opportunities given their market value. While this may seem simple it is quite different from how most investors choose what to invest in.
Value investing strategies should include fundamental stock analysis of earnings and sales growth, leverage, valuation, and return to shareholders. A valuable tool such as the Kiplinger Stock Screener can help look for great companies to further research. For this example I chose 7 criteria:
1. An S&P 500 company.
2. 5-year historical EPS Growth of 7.5% or more.
3. 5-year historical Sales Growth of 7.5% or more.
4. 5-year dividend growth of 5.0% or more.
5. Dividend yield of 2.0% or more.
6. Debt/Total Capital of 45% or less.
7. Price/Cash Flow of less than 11
These seven screens address the basic important fundamental aspects of the best companies; low debt, growth of earnings, sales, and dividends, and a reasonable stock price compared to cash flow.
Why Cash Flow Instead of Earnings?
I use cash flow instead of earnings because it better reflects the amount of money available for reinvestment and/or return to shareholders. Earnings are affected by non-cash items like depreciation and special charges, so I always put more weight on cash flow than reported earnings.
The search returned 8 of the best companies to do further research on:
1. Abbott Labs (ABT)
2. Aflac (AFL)
3. Century Tel (CTL)
4. General Dynamics (GD)
5. L-3 Communications (LLL)
6. Eli Lilly (LLY)
7. Medtronic (MDT)
8. Microsoft (MSFT)
As portfolio manager of the Arbor Asset Allocation Model Portfolio (AAAMP) I have positions in about half these stocks either individually or through an ETF. The purpose of this example is to show the Do It Yourself Investor how one might start to look for the very best companies to invest in. Of course it’s important to place these investments in a diversified asset allocated portfolio.
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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{ 1 comment… read it below or add one }
..Cash flow ratios are a better measurement of a stocks value than price earnings ratio P E …How much cash a company can generate is one of the more important measures of its health. Yet you will hear more about P E than almost any other metric on valuation but it does not give you an accurate picture of a companys ability to generate cash… When a companys P E is very high or low it gets top billing on the news…Overlooked by many are the equally important I would suggest more important metrics that examine a companys price relative to its cash position..