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| The Basics | A top blogger's market-beating strategy
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(Page 2) of 2
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Leverage
The financial-leverage ratio, which is total assets divided by shareholders equity (book value), is a good debt measure. A leverage ratio of one means that the company has no debt. The higher the ratio, the more debt. The median leverage ratio of all companies making up the S&P 500 index is around five. I specified a maximum acceptable leverage ratio of five. Try reducing it to three or four if you only want to see companies with the strongest balance sheets.
Screening parameter: Leverage Ratio <= 5
Cash flow
Cash flow measures real money flowing into, or out of, a companys bank accounts. Unlike reported earnings, which are subject to myriad accounting decisions, there is little a company can do to overstate its bank balances. Thats why many experts view cash flow as a better performance gauge than earnings.
To isolate the strongest stocks, I limited the field to companies' reporting positive cash flow, meaning a companys operations are generating surplus cash.
You cant screen for positive cash flow directly, but you can accomplish the same thing by requiring a positive price-to-cash-flow ratio. The ratio wont be positive unless cash flow is a positive number.
Screening parameter: Price/Cash Flow Ratio >= 0.1
Revenues and revenue growth
Although the market focuses mostly on earnings, a company has to sell products or services to make money. Most publicly traded corporations rack up revenues (sales) in the hundreds of millions, if not billions of dollars. I require at least $40 million in annual revenues, which rules out stocks that dont have real businesses.
A company can boost earnings by cutting costs but, in the end, revenue growth propels earnings growth. The strongest stocks are those that are growing revenues the fastest. I set my minimum last quarters year-over-year revenue growth at 20%. Most companies wont meet that requirement, so reduce it to 15% if you dont get enough candidates.
Screening parameter: 12-Month Revenue => 40 million
Screening parameter: Rev Growth Qtr vs. Qtr >= 20
Weak, but improving, stock charts
Now that weve limited the field to the fundamentally strongest stocks, let's find the charts we need.
Weak chart
Relative strength measures a stocks price performance over a specified time frame compared to the overall market. For example, a 12-month relative strength of 70 means a stock has outperformed 70% of all stocks over the past 12 months.
I required a six-month relative strength of 40 or less. That means that passing stocks must have underperformed 60% of all stocks over the past six months.
Screening parameter: 6-Month Relative Strength <= 40
Improving chart
I made use of two of the screeners technical analysis parameters to isolate stocks with strengthening price charts.
On Balance Volume compares trading volumes on days that the stock moves up in price vs. days when it drops. If trading volume on up days exceeds volume on down days, it signals that money is flowing into the stock, and the On Balance Volume indicator moves up. Conversely, OBV drops when selling volume surpasses buying volume.
By experimentation, I found that OBV values of 75 or higher generally selected stocks with strengthening price charts. It did turn up some charts that didnt fit the bill, but I found I could eliminate most of those duds by requiring that passing stocks must also be trading above their 50-day moving average.
The moving average is the average closing price over a specified time frame. Most technical analysts consider a stock in an uptrend if its above its moving average. MSNs screener provides two moving-average parameters, 50-days and 200-days. I chose 50-days because the shorter time frame best describes recent stock action.
Screening parameter: On Balance Volume >= 75
Screening parameter: Last Price >= 50-day Moving Average
My screen listed 28 stocks in a variety of industries. However, five were in the residential-construction industry (homebuilders) and six stocks were in the energy sector. Those are two groups of fundamentally strong stocks that were out of favor, but have begun to show signs of life recently.
Here's the list:
| Strong stocks with improving charts. | | Company | Last Price | Industry Name | | Commercial Vehicle Group (CVGI, news, msgs) | 19.10 | Auto parts | | HNI (HNI, news, msgs) | 59.17 | Business equipment | | John H. Harland (JH, news, msgs) | 39.54 | Business services | | Dorchester Minerals (DMLP, news, msgs) | 26.10 | Diversified investments | | BP Prudhoe Bay Royalty Trust (BPT, news, msgs) | 72.00 | Diversified investments | | Cleco (CNL, news, msgs) | 22.60 | Electric utilities | | Energen (EGN, news, msgs) | 35.66 | Gas utilities | | New Jersey Resources (NJR, news, msgs) | 45.57 | Gas utilities | | YPF Sociedad Anonima (YPF, news, msgs) | 54.33 | Independent oil & gas | | Travelzoo (TZOO, news, msgs) | 18.63 | Internet information providers | | Varsity Group (VSTY, news, msgs) | 4.23 | Internet service providers | | Youbet.com (UBET, news, msgs) | 5.10 | Internet software & services | | Chevron (CVX, news, msgs) | 58.91 | Major integrated oil & gas | | ConocoPhillips (COP, news, msgs) | 65.15 | Major integrated oil & gas | | Syneron Medical (ELOS, news, msgs) | 30.71 | Medical appliances & equipment | | Patterson-UTI Energy (PTEN, news, msgs) | 32.59 | Oil & gas drilling & exploration | | Holly Energy Partners (HEP, news, msgs) | 41.50 | Oil & gas pipelines | | Kinder Morgan Energy Partners (KMP, news, msgs) | 48.10 | Oil & gas pipelines | | Arbor Realty Trust (ABR, news, msgs) | 26.82 | REIT - Diversified | | Ventas (VTR, news, msgs) | 32.19 | REIT - Healthcare facilities | | Orleans Homebuilders (OHB, news, msgs) | 20.99 | Residential construction | | Toll Brothers (TOL, news, msgs) | 33.99 | Residential construction | | M/I Homes (MHO, news, msgs) | 46.77 | Residential construction | | Lennar (LEN, news, msgs) | 59.57 | Residential construction | | M.D.C. Holdings (MDC, news, msgs) | 63.95 | Residential construction | | NVR (NVR, news, msgs) | 759.00 | Residential construction | | B + H Ocean Carriers (BHO, news, msgs) | 19.82 | Shipping | | Dampskibsselskabet Torm (TRMD, news, msgs) | 49.29 | Shipping |
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Although I got the idea from the Barrons article, my screen isnt meant to replicate Kirks screen, just his overall concept of looking for strong firms with a weak, but improving, price chart.
As with all screens, consider the results as candidates for further research, not a buy list.
Harry Domash does not own, control or have a short position in any of the stocks mentioned in this column.
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