AAII Investor Update: My Shopping List Screen

Thursday, October 20, 2011
Charles Rotblut, CFA
AAII Journal Editor

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AAII Model Portfolio September Return 1-Year Return
Shadow Stock -10.1% 7.2%
Mutual Fund -8.5% -0.5%
ETF -9.8% -4.1%

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I am using a new stock screen that I’ve simply titled “Shopping List.” As the name implies, this screen identifies stocks with characteristics I want in a portfolio holding.

This is a restrictive screen designed to both find potential investment candidates and eliminate those companies I would likely pass on buying. There are specific characteristics I personally want in stocks, and a screen is a great tool for finding stocks with those traits.

Before discussing the criteria, I want to emphasize that a screen is merely a database filter. Screens can only determine whether or not a stock meets specific criteria. A stock screen cannot tell you if a stock is an attractive investment. For example, the financial numbers of Hewlett-Packard (HPQ) tell you nothing about what will or won’t happen to the company’s PC business. So, treat any screen as merely a starting point for further research.

I am value investor who likes bargain stocks. Bargain stocks have fundamental characteristics that should drive the price higher. Therefore, I want to see a history of sales and profit growth along with stable to rising earnings estimates. I also want return on equity (ROE) to be above average relative to a company’s peers, since it can be a sign of good management.

Though profits receive a lot of attention, they are merely an accounting figure. This is why I want cash from operations (CFO), which is located on the cash flow statement, to routinely be positive. Furthermore, CFO should also routinely exceed capital expenditures (what the company spends on equipment and other fixed assets). I prefer dividends, and I want them to be either be stable or rising.

The balance sheet must be strong with a current ratio above 1.0 and a debt-to-equity ratio below 50%. Goodwill and intangibles should account for 50% or less of book value. (The reported values of goodwill and intangibles are subjective and can artificially reduce the price-to-book ratio.)

Finally, I set the valuation limits at a maximum price-to-book ratio of 4.0 and a maximum price-earnings ratio of 25.0. I have no intention of paying either multiple for a stock, but I want to set the valuation limits high enough to attract stocks I would be willing to watch while waiting to see if they go “on sale” in the future.

The table below lists the stocks currently passing my screen. Keep in mind that it is merely a starting point; not every stock may look attractive upon further research, as will be the case with any stock screen. If you use our Stock Investor Pro program and want to replicate my screen, reply to this email and I will send instructions.

Stocks Passing My Shopping List Screen

Company Ticker Price-to-Book (x) Price-Earnings (x) Yield (%) Industry
Air Products & Chemicals, Inc. APD 2.87 15.8 2.8 Chemical Manufacturing
CF Industries Holdings, Inc. CF 2.21 10.7 1.1 Chemical Manufacturing
Diamond Offshore Drilling, Inc. DO 2.02 8.7 0.8 Oil Well Services & Equipment
DSW Inc. DSW 2.83 15.1 1.2 Retail (Apparel)
Embraer SA (ADR) ERJ 1.59 11.1 5.6 Aerospace and Defense
Humana Inc. HUM 1.66 10.0 1.3 Insurance (Accident & Health)
Insperity Inc. NSP 2.56 21.8 2.4 Business Services
Intel Corporation INTC 2.55 10.8 3.6 Semiconductors
Ituran Location and Control Ltd. ITRN 2.48 21.6 8.0 Security Systems & Services
Littelfuse, Inc. LFUS 1.95 11.6 1.6 Electronic Instruments & Controls
LUKOIL (ADR) LUKOY 0.68 3.8 6.7 Oil & Gas - Integrated
MTS Systems Corporation MTSC 2.75 12.6 2.8 Scientific & Technical Instruments
National HealthCare Corporation NHC 1.19 9.3 3.3 Healthcare Facilities
Oceaneering International OII 3.04 22.2 1.4 Oil Well Services & Equipment
Span-America Medical Systems SPAN 1.65 10.0 3.2 Scientific & Technical Instruments
Steris Corporation STE 2.19 14.5 2.3 Medical Equipment & Supplies
TESSCO Technologies, Inc. TESS 1.27 8.8 4.3 Communications Equipment
Wolverine World Wide, Inc. WWW 3.08 15.1 1.3 Footwear

AAII Stock Screens

The stock screens on AAII.com have been updated with the latest results. There are over 60 strategies, based on famous investors such as Benjamin Graham, William O’Neil, John Neff and Charles Kirkpatrick.

See how other AAII members are using the screens on the AAII.com Discussion Boards.

Model Portfolios Updated on AAII.com

September marked another brutal month for stocks, and for AAII’s model portfolios. Continued debt problems in the Eurozone and high unemployment weighed on investors’ moods. President Obama unveiled the American Jobs Act, but it has seen strong opposition, even from Democrats. The bill is having difficulties passing both chambers of Congress.

The Model Shadow Stock Portfolio lost 10.1% for the month, following an 11.0% drop in August. The indexes fared even worse, with the Vanguard Small Cap fund (NAESX) losing 11.0% and the DFA US Micro Cap fund (DFSCX) losing 10.6% in September. For the year, the Shadow Stock Portfolio is down 14.7%, the Vanguard Small Cap fund is down 15.5%, and the DFA US Micro Cap fund is down 16.4%. As the numbers show, small-cap stocks have been weaker than their large-cap brethren.

The Model Mutual Fund Portfolio was down 8.5% for the month, its worst month since February of 2009. This compares to the Vanguard Total Stock Market fund (VTSMX), which fell 7.8%. Year to date (through September 30), the Model Mutual Fund Portfolio is down 12.6%, while the Vanguard Total Stock Market fund is down 9.9%.

The Model ETF Portfolio declined 9.8%, its weakest performance since February of 2009. The 80% SPDR S&P 500 ETF (SPY) and 20% iShares MSCI EAFE Index ETF (EFA) benchmark lost 7.5%. Year to date, the Model ETF Portfolio is down 14.8%, while its benchmark is down 10.0%.

There were no transactions made to any of the model portfolios for the month of September.

See the portfolios

The Week Ahead

Nearly 200 members of the S&P 500 will report earnings next week, in what will be one of the busiest weeks of the third-quarter earnings season. Included in this group are Dow components Caterpillar (CAT) on Monday; 3M (MMM) and DuPont (DD) on Tuesday; Boeing (BA) on Wednesday; Exxon Mobil (XOM) and Procter & Gamble (PG) on Thursday; and Chevron (CVX) and Merck (MRK) on Friday.

On the economic front, the Conference Board’s October consumer confidence survey and the August Case-Shiller housing price index will be published on Tuesday. Wednesday will feature September durable goods orders and September new home sales. Third-quarter GDP (the first estimate) and September pending home sales will be released on Thursday. Friday will feature September personal income and spending and the final October University of Michigan consumer sentiment survey.

No Federal Reserve officials are currently scheduled to speak.

The Treasury department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday, and $29 billion of seven-year notes on Thursday.

AAII Sentiment Survey

Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 36.0%, down 3.8 points
  Neutral: 29.4%, up 5.5 points
  Bearish: 34.6%, down 1.8 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »

Bullish sentiment fell 3.8 percentage points to 36.0% in the latest AAII Sentiment Survey. The percentage of individual investors expecting stock prices to rise over the next six months dipped back below the historical average of 39.0%, after rising above it last week for the first time in 12 weeks. Bullish sentiment has now been below its historical average of 39% for 23 out of the last 27 weeks.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, jumped 5.5 percentage points to 29.4%. This is a six-week high. Even with the improvement, neutral sentiment stayed below its historical average of 31% for the 14th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.8 percentage points to 34.6%. This is the fourth consecutive week that pessimism has decreased. Even with the drop, bearish sentiment remained above its historical average of 30% for the 32nd time in the past 35 weeks.

AAII members have become less glum about the short-term outlook for stocks over the past few weeks. This is particularly evident in the bull-bear spread (bullish sentiment minus bearish sentiment), which is positive for the second consecutive week. Optimism is cautious, at best, as concerns about the economy, Washington and European sovereign debt weigh on individual investors' moods.

This week’s special question asked AAII members if this year’s holiday shopping season will be better or worse than last year’s. (The National Retail Federation forecasts holiday sales will rise 2.8%.) Responses were evenly split between those who predict consumers will spend more and those who expect less holiday spending. (A smaller group thought sales would be flat.) Those who are optimistic cited pent-up demand, greater confidence among those who have jobs and the recent returns charted by retail stocks. Those who are pessimistic cite high unemployment, economic uncertainty and rising living costs.

Here is a sampling of the responses:

  • “More holiday spending. If you have a job, life isn’t bad and people held back during the last two years.”
  • “More spending. I was in a major toy retailer’s store this past week and was surprised by the high level of activity.”
  • “Consumers will spend less because of the weak economy.”
  • “With so many people unemployed and living expenses that have increased, I can’t see money being spent that people don’t have.”
  • “Since incomes are stagnant for those who have jobs, I think holiday sales will be about the same as last year.”

Are you bullish, bearish or neutral? Take the AAII Sentiment Survey and tell us.

Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor