Growth at a Reasonable Price
How to Use My Stock Screens
Two Low-Volatility, High-Quality Undervalued Stocks
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Growth at a Reasonable Price
I love roller coasters that take me on dizzying rides around amusement parks. In Florida, where I live, we have plenty of opportunities in Tampa and Orlando to ride the Montu, SheiKra, Scorpion, Space Mountain and countless other coasters. However, when it comes to roller coaster rides in the stock market, count me out. The dizzying thrill-ride we have seen during the past two months is not my cup of tea.
Slowing growth in China, financial problems in Greece and the strong U.S. dollar have caused stocks to rise and fall abruptly during the past several weeks and months. A quick check of my database of 275 stocks shows that 63% of the stocks in the database have declined since June 2, 2015. If you’ve lost money lately, you are not alone!
My approach to investing is conservative; the tortoise wins the race. But the race is only won over an extended period of time where cultivating patience is an absolute necessity. My objective is to stay fully invested at all times in stocks and bonds, and only invest in stocks and bonds that will decline a minimal amount during stock market corrections.
How to Use My Stock Screens
How can you achieve the best results for your portfolio? If you want to use a Growth-at-a-Reasonable Price approach and avoid timing your stock purchases and sales, here’s a simple screening process that will provide superior results. My filtering process finds attractive stocks that increase almost every month and every year.
My Previous Picks Shined!
In the Cabot Wealth Advisory that I emailed to subscribers on May 23, 2012, I picked two stocks using a simple screen that advanced at a steady pace and paid decent dividends that doubled along the way. My two choices were Disney (DIS) and CVS Health (CVS), which advanced 161.7% and 138.9% respectively, compared to the Standard & Poor’s 500 Index which gained just 57.6%!
What is my magic screen?
My screen, which is easy to create, searches for companies with all of the following: Standard & Poor’s (S&P) Star Ratings of 4 or higher, S&P Fair Value Rankings of 4 or higher, S&P Quality Ratings of A- or higher, S&P Beta Ratings below 1.40 and dividend yields greater than 0%. In addition, I require companies to be included in one of the following S&P Sectors: Consumer Discretionary, Consumer Staples, Health Care, Information Technology or Utilities.
My brokerage firm has a handy online site with screening tools to effortlessly find stocks fitting the assumptions 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.
How has this system performed in sharply declining markets? Very well. During the past five years, the four largest corrections produced S&P 500 declines of 7.4% to 13.8%, but the stocks that fit the criteria for undervalued stocks with low volatility and high quality decreased less in every instance. The following table depicts the performance of the screened stocks compared to the Standard & Poor’s 500 Index during these difficult periods.
The performance during declining markets over the past five years doesn’t look overly impressive, but if you can beat the stock market during every decline and during most advances, your results will be more than satisfactory. You can easily avoid the loop-de-loops of the volatile stock market roller coaster by investing wisely.
Two Low-Volatility, High-Quality Undervalued Stocks
Two companies that currently fit my screening criteria for undervalued stocks with low volatility and high quality are McKesson (MCK) and Ross Stores (ROST).
McKesson (MCK) distributes ethical and proprietary drugs, surgical supplies and health and beauty products throughout North America to the healthcare industry. The company also provides technical consulting services to biotech and pharmaceutical manufacturers.
McKesson has become more aggressive in pursuing acquisitions to boost sales and earnings growth. In February 2014, McKesson acquired Celesio, a German drug distributor, for $5.4 billion. Celesio provides services in the pharmaceutical and health care sector with operations in 14 countries. The deal will allow McKesson to expand in Europe and will add noticeable sales and earnings in 2015 and beyond.
Revenues for the year ended March 31, 2015 surged 30%, while EPS (earnings per share) advanced 33%. Growth was bolstered by the acquisition of Celesio, which accounted for a majority of the company’s revenue growth. McKesson’s sales and earnings sparkled in the first quarter, which caused analysts to raise sales and earnings forecasts for the remainder of 2015.
I expect sales to rise 5% and EPS to climb 11% during the 12 months ending March 31, 2016. My estimates could be too conservative if Celesio delivers better than-expected results, or if McKesson purchases another company at an advantageous price. McKesson easily qualifies using the six S&P screening criteria shown above. Buy.
Ross Stores (ROST) operates a chain of 1,400 value-priced retail stores located mostly in the U.S. Stores offer primarily first-quality, in-season, name-brand and designer apparel, accessories, footwear and home fashions for the entire family at savings of 20%-60% below department store prices. Ross also operates DD’s DISCOUNTS stores.
The first quarter of 2015 started slow due to harsh winter weather, slow mall traffic and delays with product deliveries caused by West Coast port strikes. Retail demand has remained somewhat mixed, but some segments are showing definite signs of improvement.
Sales increased 8% and EPS rose 15% during the 12 months ended 4/30/15. In the latest quarter, same-store sales advanced 6%. Ross is gaining market share by offering brand-name products at discounted prices. The company plans to open 90 new stores during the next 12 months. Lower oil prices and improving economic conditions should provide a boost.
My forecast includes sales growth of 7% and an EPS increase of 8% to $2.55 for the 12 months ending 4/30/16. Sales and earnings could easily exceed my forecast if new stores generate better-than-expected results and the U.S. economy strengthens further. Buy.
I will continue to follow McKesson, Ross Stores, CVS Healthcare and Disney, as well as many other undervalued, high-quality companies in Cabot Benjamin Graham Value Investor, and (very important), I’ll tell my subscribers when the stocks are fully valued and should be sold! For more information on how to subscribe, click here.
Sincerely,
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
