The New Year is now upon us with renewed hopes and dreams. The turn
of the year also usually signifies a dedication to self-improvement
through resolutions or fun goals that we set for ourselves to
accomplish in the coming year. Some of mine include: 1) finishing
those hand-stitched buckskin pants I've been working on for the
last two years, 2) reading three Russian novels, 3) playing the
djembe drum more often and, as always, 4) improving my
stock-selection methods.
In past articles, I've discussed research tools, testing ideas
and ways to pick stocks. In this article I'm going to put it all
together and provide a stock focus list for 2012. While I'm not
advocating a "buy-and-bury-your-head-in-the-sand-for-eternity"
approach, I do believe these stocks have potential for good
profitability if held for the next year or more, which will also
help tax-wise since they'll be considered long-term gains.
To build a one-year focused screen, I'm going to use the
Research Wizard's data and software to find some of the best ideas
that test well over a 52-week holding period. Once I have this
basket of individual factors, I'll put them together to form a
comprehensive strategy.
The list of factors that I tested included valuation ratios
(P/E, P/S, P/Book, etc.), margins (Net, Operating, & Pretax),
growth (earnings & sales), profitability (ROE, ROA, ROI, etc.),
analyst earnings estimate changes and recommendations, and the
Zacks Rank. In this study I simply tested each idea, e.g., P/E, on
multiple 52-week periods from the beginning of 2000 through the end
of 2011. Then I selected the five best factors, making sure that
each factor came from a different style category to diversify the
point of view.
The five factors that I chose were Return on Equity (ROE),
Price/Sales (P/S), Operating Margin, rating change and the Zacks
Rank. Of the 30+ factors I tested, I feel these five have good
performance and are complimentary to each other. They also come
from a diverse set of documented stock anomalies: Fundamental,
Value and Analyst. In fact, a combination of these anomalies
creates what's called a Multi-Anomaly approach. Check it out.
Testing a strategy made up of these five components, which
selected only twelve stocks in each testing period, resulted in an
average compounded annual return of 11.3% from 2000 – 2011. That's
significantly higher than the S&P 500's 0.7% per year over that
same period. I don't even have to ask if you'd rather make 11% or
1% per year. We all know the answer to that.
But, what is really interesting is that I was prepared to warn
you that with only twelve stocks in this strategy, it would have
been much more volatile that the S&P 500. Yet the results
indicate otherwise. The average losing stretch for the S&P 500
was 2.3 years, while it was 1.3 for this strategy. Furthermore, the
average maximum drawdown was -40.4% for the S&P while -39.3%
for the strategy. Finally, the average losing period was -18.0% for
the S&P 500 versus -20.2% for the strategy. These results show
that the historical risks were similar. So would you like to invest
in a strategy that has a similar risk profile to the market yet
makes more than ten times the annual market return? Indeed, another
rhetorical question.
Here's a method for finding highly-rated and upgraded stocks
with good profitability and margins at a reasonable price:
- First, start with only US common stocks.
- Next, create a liquid, investible set of the stocks with the
largest 3000 market values and average daily trading volume
= to 100,000 shares (if there's not enough liquidity, it’ll be
hard for you to trade it).
- Add another filter by selecting those stocks with a Zacks Rank
= 1. (Let's stick with only the best rated stocks.)
- Select only those companies with a positive percentage
change in analyst ratings over the last 4 weeks. (We're looking
for stocks with mostly upgrades over the past month.)
- Keep only those 50 stocks with the highest Return on
Equity. (ROE is a great measure of a firm's
profitability.)
- Pick the 25 stocks with the highest Operating Margin.
(Turning revenue into income is the key to a business.)
- Select the top 12 stocks with the lowest price-to-sales
ratio. (Lower means you want to pay less per unit of company
revenue.)
Here are 12 stocks for 2012 based on this method (1/13/12):
ADS - Alliance Data Systems Corporation
Alliance Data Systems, which probably tops this list, provides
data-driven and transaction-based marketing, and customer loyalty
solutions primarily in the United States and Canada. The stock
price of this company has been appreciating, it is a Strong Buy on
the Zacks Rank, the company is highly profitable and it remains a
good value based on its price-to-sales ratio.
RYN– Rayonier Inc.
Rayonier, a Jacksonville, Florida-based company, engages in the
sale and development of real estate and timberland management, as
well as the production and sale of cellulose fibers in the US and
Australia. This company is financially strong with solid
profitability and margin ratios. This company's stock has also seen
some good price appreciation. The upswing should continue since the
company pays a nice dividend, which is highly desired in this
low-yield market environment.
RL – Ralph Lauren Corporation
This New York-based designer has experienced solid growth and
profitability over the past year and is expected to continue as the
company increases its global brand awareness. The stock price of
this retailer has been jumping, yet remains an excellent value.
Zacks Rank considers this company a Strong Buy and I do too.
GDI – Gardner Denver, Inc.
Gardner Denver designs, manufactures, and markets industrial
machinery and related parts and services throughout the world. This
company has it all: a Strong Buy Zacks Rank, analyst upgrades, good
profitability and margins, and the stock remains a good
bargain.
GNRC – Generac Holdings Inc.
Generac designs, manufactures, and markets backup power
generation products for residential, light-commercial, and
industrial markets in North America. This company makes the 2012
list due to its great Zacks Rank, great profitability and operating
margin, and its P/S ratio.
VPHM – Viropharma Inc.
Viropharma, which engages in the global development and
commercialization of therapeutic products that address serious
diseases, is guiding higher-than-expected sales for the year, which
has sent the stock price soaring even higher. As a result, analysts
have upgraded their recommendations for this company's stock, which
also holds a top Zacks Rank. Profitability and margins remain
strong and the annual sales should make profits higher as well.
MKSI – MKS Instruments Inc.
MKS Instruments is a great bargain for the level of sales and
profitability it offers at its current price. The stock is also a
Zacks #1 Rank and the company has good operating margins, with a
solid Cash Flow. MKS provides instruments, subsystems and process
control solutions that measure, control, power, monitor and analyze
parameters of manufacturing processes worldwide.
SGY – Stone Energy Corp.
Stone Energy is an independent oil and natural gas company that
engages in the acquisition, exploration, development and operation
of oil and gas properties in the Gulf of Mexico and the Appalachian
region. The stock of this company is a good value based on its
inexpensive price, good profitability, strong operating margins,
and great Zacks Rank.
WU – Western Union Co.
Western Union, which provides money transfer and payment
services worldwide, makes the list because of its bargain stock
price, great profitability and Zacks Rank. The improving economic
situation will benefit payment services companies fairly well.
PAY – VeriFone Systems, Inc.
VeriFone is another payment services company that is poised to
do well as the economy improves. Analysts have already begun
upgrading the stock of this profitable and still inexpensive
company.
MNTA – Momenta Pharmaceuticals Inc.
Momenta is a biotech company that specializes in the
characterization and process engineering of complex molecules. This
company is up and coming with strong profitability, a clearly
inexpensive stock price relative to its industry, increasing sales
and income and analyst stock upgrades.
STBZ – State Bank Financial Corporation
Community-based banks offer an attractive alterative to
customers versus the big banks, and this small cap fits the bill
perfectly with its fantastic Zacks Rank, good profitability and
attractive price.
So should we make it a baker's dozen and add one more? No, I'll
give you the chance to work the Research Wizard's magic to come up
with your own lucky number 13. The more you are involved in your
investment process, the better investor you'll become and your
portfolio will reflect it. Click here to learn more!
Here's to a Happy and Profitable 2012!
ALLIANCE DATA (ADS): Free Stock Analysis Report
GARDNER DENVER (GDI): Free Stock Analysis Report
GENERAC HOLDING (GNRC): Free Stock Analysis Report
MKS INSTRUMENTS (MKSI): Free Stock Analysis Report
MOMENTA PHARMA (MNTA): Free Stock Analysis Report
VERIFONE HLDGS (PAY): Free Stock Analysis Report
RALPH LAUREN CP (RL): Free Stock Analysis Report
RAYONIER INC (RYN): Free Stock Analysis Report
STONE ENERGY CP (SGY): Free Stock Analysis Report
VIROPHARMA (VPHM): Free Stock Analysis Report
WESTERN UNION (WU): Free Stock Analysis Report
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