Using Stock Screeners
Two Stocks that Will Not Decline
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I receive emails almost every day from investors who intend to sell everything, because the U.S. economy is too slow, unemployment is too high and the latest crisis in Washington—the so-called “sequester”—is going to send us into another recession pronto.
Latest Ned Davis Research
If you are afraid of the current stock market, I have some research results that might help you invest wisely. Ned Davis Research recently completed a study comparing U.S. GDP (gross domestic product) to stock market performance.
During the past 53 years, when the average annual rate of change for GDP has exceeded 6%, a reading that indicates very strong economic growth, the S&P (Standard & Poor’s 500 Index) actually lost ground at an annualized rate of -4.6% per year. Amazingly, when the rate of change for GDP was 0.5% or below, the S&P rose at a rate of +10.5% per year. As you can see, according to this study, a good economy is bad for stocks and a bad economy is good for stocks!
How can the U.S. economy push the stock market in the opposite direction consistently? It’s simple. Wall Street tends to over-react to everything. When stocks begin to rally, many investors wait on the sidelines until the up-trend is confirmed and it is “safe” to start buying. When the procrastinators and stragglers finally begin to buy, they push the market up higher and longer than is warranted, continuing to buy even as the economy begins to head in the wrong direction. Hence the old saying, "The market can stay irrational longer than you can stay solvent."
What is my stock market forecast?
Based upon the research of Ned Davis and the logic behind it, I believe the stock market will likely rise longer and stronger than anyone is now forecasting. According to another study by Ned Davis Research, since 1928, after the S&P Index made a new high following a bear market, it rose an additional 18% over a period of more than a year. So the chances that the stock market will rise another 18% during the next 12 months or so are pretty good. Of course there will be bumps along the way, but the train has left the station, it is gaining momentum and will be hard to stop.
Where should you be looking to invest?
I have a favorite screen that is easy to use and always leads to finding winning stocks. I wrote about it in the May 23, 2012 Cabot Wealth Advisory. At that time, after screening my database, I recommended two “can’t miss” stocks to buy. CVS Caremark (CVS) and Walt Disney (DIS) did not disappoint; the two stocks are up an average of 24.0% compared to a gain of 15.6% for the Dow Jones Industrial Average since May 23. My gain of 24.0% may not set the world on fire, but if you continue gaining at that pace, you will TRIPLE your investment in five years—with minimal risk.
If you want to use a value approach and avoid timing your stock purchases and sales, read on for this simple screening process. It will provide superior results by finding conservative stocks that increase almost every month and every year.
My Best Approach
My best screen, which is easy to create, searches for companies with all of the following:
S&P (Standard & Poor’s) Star Ratings of 4 or higher, S&P Fair Value Rankings of 4 or higher, S&P Earnings/Dividend Ratings of A- or higher, S&P Beta Ratings below 1.40, and Dividend Yields greater than 1.0%.
In addition, I require companies to be included in one of the following S&P sectors: Consumer Discretionary, Consumer Staples, Health Care, Industrials or Information Technology.
My brokerage firm has a handy online site which provides the necessary tools to effortlessly find stocks fitting the screens listed above. Your broker likely has similar screening capabilities. Holding a good portion of your portfolio in companies that meet the criteria will greatly reduce your chances of suffering large losses during unforeseen market declines.
If you would like to receive my list of 15 companies that qualify using the criteria listed above, send an email with your request to me at firstname.lastname@example.org.
I write the Cabot Benjamin Graham Value Letter and the secret to my success is finding high-quality stocks at bargain prices. I do this by screening … just as Ben Graham prescribed. My screening methodology lets me whittle my 1,000-stock database down to a few buy candidates.
If you pay attention to the fundamentals and buy at reasonable prices, profits will add up quickly!
Speaking of profits, I’m going to toot my own horn a little here. My most recent sell recommendations generated these outstanding results:
In the January 2007 issue of Cabot Benjamin Graham Value Letter, I advised my subscribers to buy eBay (EBAY) at my Buy Price of 29.70. On January 25, 2013, I recommended selling eBay at my Sell Target Price of 56.00 for a gain of 86.6% compared to a gain of just 6.1% for the S&P 500 for the same time period.
In the November 2010 issue of Cabot Benjamin Graham Value Letter, I advised my subscribers to buy LKQ Corp. (LKQ) if its stock price fell to my Buy Price of 10.61. Three weeks later, when LKQ declined to 10.61, my subscribers jumped in. On February 8, 2013, I recommended selling LKQ at my Sell Target Price of 23.66 for a gain of 123.0% compared to a gain of just 27.7% for the S&P 500 for the same time period.
In the August 2011 issue of Cabot Benjamin Graham Value Letter, I advised my subscribers to buy Celgene (CELG) at my Buy Price of 54.11. The stock took off. On March 6, 2013, I recommended selling Celgene at my Sell Target Price of 110.77 for a gain of 104.7% after just 19 months. The S&P gained only 28.6% during the same time period.
My system is simple: buy high-quality stocks when they are undervalued, and sell when the stocks become overvalued. Buy low and sell high—it doesn’t get any simpler!
Two companies that currently fit my screening criteria for undervalued stocks with low volatility and high quality are PetSmart and Target.
PetSmart (PETM) provides top-quality pet products and services in North America. In 2012, PetSmart’s 1,278 stores produced an industry-leading $6.8 billion in revenue. Most stores are located in the U.S. but 73 are in Canada and five are in Puerto Rico.
PetSmart stores carry a broad selection of high-quality pet supplies at everyday low prices. The stores offer 10,000 items, including both nationally recognized brand names and private brands.
The company's extensive product assortment is complemented by value-added pet services, including grooming, pet training, boarding and day camp. Virtually all of its stores offer complete pet training services and feature pet styling salons that provide high-quality grooming services.
PetSmart emphasizes premium dog and cat foods, many of which are not available at supermarkets, warehouse clubs or mass merchandisers. The company also offers its own brands in supermarkets and pet stores.
In addition, PetSmart offers full-service veterinary hospitals in 799 of its stores. Medical Management International operates 791 of the hospitals under the name of Banfield, The Pet Hospital.
PetsHotels provide boarding for dogs and cats, 24-hour supervision, an on-call veterinarian, temperature-controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of January 31, 2013, PetSmart operated 196 PetsHotels within retail stores, and expects to expand this concept. The Doggie Day Camp concept is available at all PetsHotel locations.
Sales advanced 10% during the past 12 months while EPS (earnings per share) soared 39%. I expect sales and earnings growth to slow during the next 12-month period ending 1/31/14. Management also expects slower growth: the announcement of this caused PETM’s stock price to drop to a more reasonable price. I forecast steady 16% earnings growth during the next several years.
PETM shares are reasonably valued at 17.9 times current EPS with a dividend yield of 1.1%. The company’s ratings include: S&P Stars Rank of 4, S&P Fair Value Rank of 4, S&P Quality Rank of A, and an S&P Beta Rating of 0.68. The company operates in a recession-resistant industry. BUY.
Target Corp. (TGT), formerly Dayton Hudson, was founded in 1902 and maintains executive offices in Minneapolis, Minnesota. The company is the second-largest discount retailer in the U.S., behind Wal-Mart Stores. Target stores carry a broad assortment of fashion apparel, electronics, home furnishings and household products at competitive prices. SuperTarget stores are larger and carry a full line of groceries. CityTargets are slightly smaller and tailored toward urban markets.
Target.com offers a more extensive selection of merchandise than the company's physical stores, including exclusive online products. To support sales and earnings growth, Target offers credit to qualified customers through its REDcard. Target will sell its credit card receivables to TD Bank in about six months for $5.6 billion.
Two years ago, Target purchased 220 Zellers stores in Canada, and has sold or sub-leased over 80 of the stores after the purchase. Target has converted or rebuilt 125 stores, which will be ready to open during the next 12 months. The new stores in Canada are expected to add sizeable sales and earnings in 2013.
Growth has slowed during the past year because of the Zellers project in Canada and extensive remodeling in the U.S. During the next two years, though, sales and earnings growth acceleration will be impressive. EPS will likely increase 9% during the 12 months ending 1/31/14 and another 15% in the following year.
At 14.9 times latest EPS and with a dividend yield of 2.2%, TGT shares are quite attractive. The company’s ratings include: S&P Stars Rank of 5, S&P Fair Value Rank of 5, S&P Quality Rank of A+, and an S&P Beta Rating of 0.93. Target has paid dividends since 1965 and increased its dividend every year during the past 41 years. BUY.
I will continue to follow PetSmart and Target, as well as many other undervalued, high-quality companies in my Cabot Benjamin Graham Value Letter. The Special Feature section of this month's letter, available March 14 to subscribers, will feature Benjamin Graham/Warren Buffett Type Stocks that have outperformed the stock market by a margin of three to one. I hope you won’t miss it!
Editor of Cabot Benjamin Graham Value Letter
Editor's Note: You can find additional stocks selling at bargain prices in our new and improved Cabot Benjamin Graham Value Letter. Find out why our subscribers are showering us with compliments!
In every issue, you’ll find Roy’s legendary Maximum Buy and Minimum Sell Prices for over 250 well-known stocks.