Friday Stock Screen : Great Expectations for Profits

January 18, 2008

It is Friday afternoon and the markets have not been fun to watch. It has been a long week… So, what better way to spend the day than doing some research and combing through a few stock screens. Here is one that may help to generate some ideas.

According to the MSN Money screener, “This search should appeal particularly to “value” investors, but it is biased toward smaller companies and looks across all sectors. It includes parameters such as high return on investment and low debt to equity ratio in order to set a quality bar. The result: Beaten-up stocks with a lot of potential growth ahead.”

Remember, this should be used for idea generation as the market throwing curve-balls and it is hard to trust any one strategy these days.

Criteria for Screen:

P/E Ratio: Current <= 20
Market Capitalization <= $1 billion
Debt to Equity Ratio <= 0.5
EPS Growth Next 5 Yr >= 20
Return on Equity >= 10
Price/Sales Ratio <= 2

Great Expectations Stock Screen

Results: (HSOA) (FRPT) (NTRI) (AEIS) (BRNC) (LNDC) (SMMX) (EXFO) (SLXP)(SIMG) (CTRN) (VVTV) (FMR) (TRID) (VLCM) (ASTE) (ETEL) (GIII) (TWGP) (GIFI) (PRX) (SNHY) (NVTL) (RECN) (HDIX)

Learn how to create and implement stock screens for profitable results.

 

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Horowitz & Company Clients do not hold positions in stocks mentioned.

SAPI Slugs 2008 – Quant Screen Results

November 29, 2007

S&P Index Slugs (SAPI Slugs) Adapted from Pages 44-45 of The Disciplined Investor – Essential Strategies for Success

According to MSN Money, this simple but effective value search presents a pure yield play. It is similar but potentially superior to the better-known “Dogs of the Dow” search we reviewed on November 14th because it draws from a wider pool of large-cap stocks and includes a secondary financial-strength overlay.

The search was also developed and tested by money manager and author Jim O’Shaughnessy. The strategy calls for buying the top 20 stocks from the result set of this search, ranked by dividend yield. These should be held for 1 year and then rescreened and rebalanced. It can be combined with O’Shaughnessy’s Momentum Growth search to create a balanced 30-stock, 1-year portfolio. This search criteria and others are available in the stock screener section of the MSN Money website and can also be downloaded from The Disciplined Investor website. Below is the criteria used to create the screen with the MSN Money Deluxe Screener.

SAPI SLUGS Criteria

The theory of using more than one screen is to allow for greater diversification within the portfolio. This way, if one particular screening method is sorely out of favor, the other may help to avoid massive losses. In his research, O’Shaughnessy built portfolios for one year each. Translated, this means that once you buy the resulting stocks and effectively hold them for 52 weeks, you can rerun the screen to find the stocks to include in the next cycle.For most individual investors, this is a tedious task and can result in excessive trading fees. Also, as has been discussed, the tax implications alone could be extremely detrimental to a portfolio’s performance. This is precisely why these methods are often used within tax-deferred accounts along with additional fundamental overlays. Suffice it to say that these screens should be used as initial idea generators, not as absolute methodologies.

Click Table to Enlarge

Sapi Slugs 2008

The theory of using more than one screen is to allow for greater diversification within the portfolio. This way, if one particular screening method is sorely out of favor, the other may help to avoid massive losses. In his research, O’Shaughnessy built portfolios for one year each. Translated, this means that once you buy the resulting stocks and effectively hold them for 52 weeks, you can rerun the screen to find the stocks to include in the next cycle. For most individual investors, this is a tedious task and can result in excessive trading fees.

Also, as has been discussed, the tax implications alone could be extremely detrimental to a portfolio’s performance. This is precisely why these methods are often used within tax-deferred accounts along with additional fundamental overlays. Suffice it to say that these screens should be used as initial idea generators, not as absolute methodologies.

This chart shows a 1-Year price performance for the 10 highest yielding stocks within the SAPI Slugs using the above screening criteria.

SAPI Slugs Chart
* There are many more screens along with additional strategies available within the pages of The Disciplined Investor.
Note: Horowitz & Company clients may hold long or short positions in any position mentioned.

Screen: Dogs of the Dow – 2008 Preview

November 14, 2007

The Disciplined Investor

Each year, the Dogs-of-the-Dow are recalculated in January to find the 10 DJIA members with the highest dividend yield. This year there have been few changes to the names that look to be included in this strategy for 2008. Some of the reason is because of the problems that occurred in 2007 for some of the DJIA names. We also need to consider the fact that higher yielding stocks are concentrated within a small subset of the DJIA.

As we are seeing an immense level of volatility, it seems to be a good idea to look at a strategy that invests in companies that have (or at least seem to have) high quality and provide a decent dividend yield. The benefit to investors is that these are Mega-Caps and are considered “blue-chips.” The contrarian view which this strategy/screen is based on has often outpaced the DJIA. That is appealing in a time when there is such a great deal of uncertainty.

Below is the list of “Dogs” based on current prices and yields. The table also shows stocks which were included in 2007 and, by a process of elimination, reveals which stocks should be in the 2008 list.

Dogs of the Dow
The Disciplined Investor has many more screens and teaches readers how to use the MSN Money Screening tool among others.

Disclosure: Horowitz & Company clients may have long and/or short positions in the securities mentioned.

Earnings Momentum and Analyst Upgrade Screen

October 9, 2007

I have been busy. Too busy. It has been a whirlwind of book, audiobook, podcast, clients, portfolios and much more. So, I apologize for not being close to the keyboard. That said, I realized that there were many emails and many comments about two recent posts that focused on “Quant screens” and thought that one more couldn’t hurt…

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(Excerpt from The Disciplined Investor)

The MSN Money stock-screening tool makes available some great ways to unearth sometimes buried opportunities. One that has been found to be very profitable in an upward momentum bull market is a screen that searches out the information reported by seasoned analysts. The very thought that analysts are raising their assumptions can cause the sentiment surrounding a stock to quickly change. As has been seen from the bull markets that occurred during the latter part of the 90s, earning surprises both to the up and downsides have a habit of creating either prosperity or poverty. This particular screen is meant to be used as a brainstorming tool for those stocks that may be possible short to mid-term momentum plays.

When an analyst that closely studies a certain company or sector changes his or her rating or earnings estimate for that company or sector, it is a pretty good sign that there is something more going on than meets the eye. Companies such as Zacks Investment Research are in the business of following these analysts and tracking the changes that they make to their ratings and earnings estimates.

This search focuses on the companies with the highest earnings-per-share growth projected for next year, for which the analysts have increased their estimates. It also adds additional parameters and overlays to find the stocks with the greatest recent price changes and upward-moving technical trends.

The Screen: Momentum Earnings Up
You will undoubtedly find many stocks that you have probably never heard of within these results. Caveat emptor! Try not to let yourself get sucked into the temptation of following the historic returns. Be sure to keep a cool head and think about the company and its longer-term prospects.

Momentum Screen

The screen was run on the MSN Money Site with the following criteria:
1) Earnings Estimate Increased Since <In The Last Month>
2) EPS Growth Next Yr High As Possible
3) Previous Day’s Closing Price >= 50-Day Moving Average
4) % Price Change Last 6 Mos. Display Only


Stocks from Screen (10/9/2007) : (BGP) (EQIX) (NAVI) (LYV) (BLOG) (XTXI) (OMTR) (EYE) (MDCO) (CNO) (CNTF) (CRM) (OMRI) (OCNF) (MFA) (OHB) (SLH) (OPTM) (MMR) (WRES) (ANH) (OMN) (ONXX) (INTV) (MOGN)

Disclosure: Horowitz & Company clients may hold Lng or Short positions in the stocks mentioned

Stock Valuation – Sears in Focus

September 27, 2007

(Excerpt from The Disciplined Investor, pages 90-91 – See Inside the Book at Amazon)

There are several types of assets a company can own. Each business is different but all will have some combination of capital stock, land, some form of real estate, inventory, trucks and many other items of value. These assets will have differing abilities to create profits as well as levels of liquidity. Some assets are characterized as tangible while others may be considered use or even current.

As an example, inventory is usually very easy to convert to cash. Therefore it would be considered liquid. On the other end of the spectrum would be farmland and any other items that require a longer time to sell and, therefore, require much more time to liquidate. On the balance sheets, liquidity is important. It is differentiated by the terms current assets and non-current assets.

Another distinction that is considered is whether they are “real.” Remember that some assets, such as cash, are easily valued and liquidated. Then there are those that are much more difficult to pin a price on, such as farmland and buildings. Regardless, the fact is that you can actually touch and feel these, and they are therefore considered “tangible assets.” Beyond those assets that we can easily see, there are those that have significant value but are not quite as apparent. Goodwill, as an example, may include the value of a name brand or possibly a well-known company spokesperson. (Think of William Shatner and Priceline.com)

It takes a good eye to recognize the hidden values that may be found on the balance sheet. For instance, take as a good example Sears. For years, they were valued according to generally accepted accounting principles (GAAP) as well as traditional investment valuation techniques. It was only recently that the idea of valuing Sears to include their significant real estate holdings was introduced. This occurred as analysts realized that they have tremendous unrealized value in their land holdings. During 2004-2006, Sears’ stock shot up as investors wanted to own them as a real estate play, in addition to their ability to create revenue from the sale of washers and dryers. (end of excerpt)

The idea that Sears (SHLD) could be a real estate play had pushed investors to buy up shares in late 2004, pushing towards $190 in mid 2007. The move was from a long-term base in the $40-$50 range. Now, the stock is hovering around $130 and the same force that pushed it higher have brought out the skeptics who believe that the significant real estate holdings could further erode the price of the shares. (not to mention that it is essential a hedge fund now)

The 30% move down for the stock since the high in mid-may appears to be a result ofSears the announcements of lackluster earnings and the realization that forward earnings will come under pressure because of lower consumer demand. In fact, it was only a few weeks ago that Sears announced a 40% reduction of profits : “Our gross margins came under pressure from sales declines and increased promotional activity, and as a result, our net income was significantly below last year and our expectations,” Chief Executive and President Aylwin Lewis said in a statement August 20th, 2007. (and similar statement in quarters past)

So, what about the real estate holdings? Do we look to write down the stock value in the same way as we need to for all other real estate plays that had the same increase during the boom of 2004-2007? If we look to unwind the value of the real estate (Estimated at $15 billion) from the company price, we could extrapolated that from the Market Cap of $18 billion, the shares are still trading at a significantly high multiple considering that the fact that the retailer is bleeding heavily. If we just look at the real estate, then we are hit with the concern over valuation.

Add both of these to the mix and unless Edward Lampert has some more magic up his sleeves, then this is going to flounder…AT BEST! Until they can get a handle on the paltry margin problem (shrinking as we speak) and the realization that the land value is only good if they sell (which they are not) then there is no reason to own this stock.

Will a mystery buyer come out of the woodwork and offer a premium? Probably not as there is a substantial premium already built in this in the form of the real estate value/multiple. This is clearly not the type of position that a Disciplined Investor would buy or hold today as there is many problems concerning the ability to properly value the shares.

SHLD Chart

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