In
many aspects of our lives, whatever we want -- food, books, material
comforts -- is within easy reach. Stocks are no exception. No matter
what kind of companies you're looking for, a plethora of stock
screeners and online analysis means you'll likely be able to find them
without breaking a sweat. But despite all of that easily accessed
information, finding the stock that has everything you want is not
quite as simple as all that.
A stock screen, for example, could certainly find companies that fit
your 17 criteria. But when you look for multiple qualifications, it's
easy to end up with meager, if any, results.
That's because it's rare for any one company to hit every single
measure. And that's OK. A company's yield might be low, but rising
quickly. Its P/E may be just out of your desired range, but close
enough that it might fall into it any day now. Its debt might be high,
but it might be paying it off rapidly. It helps to look at any
company's big picture, and that can mean running a series of screens.
Fast growers
For example, many investors look for companies that are experiencing solid revenue and earnings per share (EPS) growth.
When I searched for growth of 10% or more in our CAPS screener, I found dozens of companies, including the following:
|
Company
|
3-Year Avg. Revenue Growth
|
3-Year Avg. EPS Growth
|
|
PotashCorp (NYSE: POT)
|
17%
|
51%
|
|
Monsanto (NYSE: MON)
|
14%
|
36%
|
|
CVS Caremark (NYSE: CVS)
|
29%
|
14%
|
Data: Motley Fool CAPS.
While growth is a good place to start, it's not enough to make a
decision on -- and when you do make up your mind, be sure to think
sensibly about the numbers.
If EPS is growing much faster than revenue, it's probably because
the company is reducing its share count and/or cutting costs. And if
it's posting high growth rates, remember that they won't be sustainable
unless revenue rises briskly, too.
It can also be good to see where revenue and earnings are
coming from. Is the company making more money by selling more products,
or by selling off its value-producing factories? Decisions like the
latter can be a red flag.
High returns on equity
High returns on
equity are another measure many investors like, because they indicate
the company's profitability. Since high ROE can also indicate high debt
loads, however, it's important to look for high ROE in combination with
a low long-term debt-to-equity ratio. Philip Morris International (NYSE: PM), for instance, sports an ROE of 96%, along with a long-term debt-to-equity ratio topping 2.0.
Here are a few companies with high ROE and low debt:
|
Company
|
ROE
|
Long-Term Debt-to-Equity Ratio
|
|
UnitedHealth (NYSE: UNH)
|
16%
|
0.57
|
|
Halliburton (NYSE: HAL)
|
19%
|
0.53
|
|
Monsanto
|
15%
|
0.17
|
|
Potash
|
26%
|
0.60
|
Data: Motley Fool CAPS.
Interestingly, I noticed both Monsanto and PotashCorp in this screen
as well, suggesting that they have more than a few characteristics I
like to see. If you run multiple screens and see some of the same names
popping up repeatedly, that's a promising sign.
Value and income
Among other qualities
you might screen for: a low price-to-earnings (P/E) ratio, high ratings
in our CAPS community, or companies with solid dividends.
A low P/E suggests that a stock might be a bargain (and these days, bargains are everywhere).
A solid (and, ideally, growing) yield will reward you in good times and
bad. A high rating in our CAPS community suggests that other investors
think this company is a good buy.
I've rounded up a few candidates that meet all three of those criteria:
|
Company
|
CAPS Stars
(out of five)
|
Yield
|
P/E
|
|
Philip Morris International
|
*****
|
4.7%
|
16
|
|
Bristol-Myers Squibb (NYSE: BMY)
|
*****
|
5.2%
|
13
|
|
General Electric
|
****
|
2.4%
|
15
|
Data: Motley Fool CAPS.
Interestingly, Philip Morris International shows up here as a good prospect, despite the debt load we mentioned earlier.
Just be careful with the results you get. Don't assume that a P/E of
12 is tantalizing -- it's delectable for a software company, but
dubious for a slower-growing car company. Compare P/Es with their
historical averages, or with those of industry peers.
Be wary of extra-steep dividend yields, too. They could owe to a
falling stock price, possibly for good reason. The best dividends are
sustainable and growing.
The kitchen sink
Whatever measures you
use, just be sure to examine the entire big picture for the companies
you're considering. Yes, the numbers are helpful, but you'll also need
to figure out what sustainable competitive advantages your candidates
have, and how rapidly they might grow. Be sure that they're healthy,
too, with ample cash and little or manageable debt.
It's important to be thorough when you study companies. If you'd
like us to do much of the legwork for you, I invite you to test-drive
our market-beating Motley Fool Inside Value service to see a list of the companies our analysts think are "Best Buys Now."
Our Inside Value analysts look at companies from lots of
angles, assessing their managements, their track records, and their
growth potential. Best of all, they seek stocks trading for
considerably less than they seem to be worth -- and they investigate
much more than a mere P/E ratio to figure that out. You can get a free,
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Longtime Fool contributor Selena Maranjian owns shares of General Electric and eBay. Monsanto and UnitedHealth Group are Motley Fool Inside Value picks. Baidu is a Rule Breakers recommendation. eBay and UnitedHealth Group are Stock Advisor choices. Philip Morris International is a Global Gains recommendation. Motley Fool Options has recommended a bull call spread on eBay. The Fool owns shares of UnitedHealth Group. The Motley Fool is Fools writing for Fools.