Using Stock Screeners
Two Stocks that Will Not Decline
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 (
Walt Disney (
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
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
In the January 2007 issue of Cabot Benjamin Graham Value Letter,
I advised my subscribers to buy
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
In the November 2010 issue of Cabot Benjamin Graham Value
Letter, I advised my subscribers to buy
LKQ Corp. (
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
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.
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
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
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
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
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