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Five Stock Picks for the Level-Headed Investor

The story centered around his highly-intelligent, "switched-on" friend Art, who would become extremely reactive when the market rose, call O'Shaughnessy and instruct him to go "all in" on his most aggressive strategy-one which would have done well over the prior several years. O'Shaughnessy (founder of the asset management firm bearing his name) would advise his friend against the move, but to no avail. At which point, O'Shaughnessy recalled, "I would hang up the phone, get on the speaker so that everyone in the office could hear and say, 'We've just called a market top.'"

Art became a bellwether, a contrary indicator supporting the notion that, when it comes to investing, going against the herd mentality is a more prudent course. O'Shaughnessy, author of the stock market tome What Works on Wall Street, underscored the unfortunate yet predictable outcome of his friend's approach, who applied his knee-jerk tack only with" his own investments, not those he made for his children. "Five to seven years later, " O'Shaughnessy asserted, "the kids were much richer."

While not unusual, the tale of "Art the Contrary Indicator" rarely ends well. Emotional investing will get you into trouble since, typically, by the time you want to buy in most of the easy gains have been made and, conversely, once you decide to sell most of the damage has been done. "We just can't help ourselves," says O'Shaughnessy. Human nature, he argues, leads us to predict, a tendency difficult to overcome and a recipe for trouble when shopping for stocks. It also conditions us to bolt when faced with fear or uncertainty. Back when the writing was literally on the wall, "the guy who ran away from the rustling bush," argues O'Shaughnessy, was the one who survived and continued to evolve.

When it comes to buying stocks, it is essential for investors to value process over outcome, to understand the concrete facts about the stocks that they (or their fund manager) are choosing to purchase and the basis for their appeal. Underlying fundamentals, not headlines, lead to good investing decisions.

This is not a revelation to anyone who subscribes to some of the most successful investors. Along with James O'Shaughnessy, gurus such as Warren Buffett and Peter Lynch strongly subscribe to this view. Using the strategies of these and other investing legends, I created screening models that identify those stocks that meet concrete criteria based on underlying fundamentals such as price-earnings ratios, growth in earnings-per-share, operating cash flow, stock price performance and a host of other metrics. In this way, investors can filter through the noise and dig into what makes a company tick.

Using these models, I have identified five stocks that stack up under O'Shaughnessy's as well as other investment strategies:

HP Inc. ( HPQ ) is a provider of technology, software, related solutions and services. Our James O'Shaughnessy-based investment strategy favors the company's cash flow per share of $1.75, which exceeds the market mean of $1.60. The company has 1.7 billion shares outstanding (versus the market average of 632 million shares), which this model prefers because it is characteristic of a well-known, highly traded company. Trailing 12-month sales of $48.67 billion are more than 1.5 times the market mean. The company also earns a perfect score under our Joel Greenblatt-based methodology due to its earnings yield of 12.54% and return-on-total capital of 98.42%.

ING Groep N.V. ( ING ) offers banking services and products in the Netherlands, Belgium, Germany and Australia. Our Peter Lynch-based model favors the company's price-earnings relative to growth in earnings-per-share (PEG ratio) of 0.74 (must be under 1.0 to pass). Our O'Shaughnessy-inspired model likes the cash flow-per-share of $1.91 (versus the market mean of $1.60) and large number of outstanding shares (3.8 billion versus the market mean of 632 million). Trailing 12-month sales of $46.8 billion exceed the market mean by more than 1.5 times. The dividend yield of 4.93% adds appeal.)

NK Lukoil PAO (ADR) ( LUKOY ) is an energy company involved in oil exploration, production, refining, marketing and distribution. Our Kenneth Fisher-based stock screening model favors the company's price-sales ratio of 0.47 compared to the maximum allowed level of 0.75. Three-year average net profit margin of 5.4% is above the minimum requirement, and total debt-equity of 23.86% adds appeal. Our O'Shaughnessy-based investment strategy likes the cash flow-per-share of $10.92 (versus market mean of $1.60), and trailing 12-month sales of $92.92 billion are well above 1.5 times the market mean ($20.97 billion). Dividend yield is attractive at 5.70%.

Verizon Communications In. ( VZ ) provides communications, information and entertainment products and services. The company earns a perfect score under our O'Shaughnessy-based investment methodology due to its size (market cap of $198.37 billion) and cash flow-per-share of $7.24 is nearly five times the market mean ($1.60). Dividend yield is favorable at 4.75%. The company is highly traded, with shares outstanding (4.08 billion) well above the market average (632 million), and the company's trailing 12-month sales ($125.98 billion) are six times the market mean.

General Motors Company ( GM ) designs, builds and sells cars, trucks crossovers and automobile parts. Our Lynch-based strategy finds the PEG ratio of 0.27 to be exceptional, and our O'Shaughnessy-inspired screening model gives the company a perfect score based on its size (market cap of $50.01 billion) and cash flow-per-share of $13.15 (versus market mean of $1.60). Trailing 12-month sales total $166.38 billion (compared to the market mean of $20.97 billion), and the dividend yield of 4.55% adds interest.

I'm long HPQ, ING, LUKOY, VZ, GM.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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