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New Edge Stocks

by John Bajkowski

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Christina Wise of Investor’s Business Daily reveals which company traits make a story stock an attractive investment in her September 2012 AAII Journal article “The 'New' Edge: Characteristics of Winning Stocks.” These are the fundamental traits that past winning stocks possessed in bull market after bull market, decade after decade. This issue’s First Cut applies the key fundamentals highlighted in the article using AAII’s stock screening and fundamental database, Stock Investor Pro.

The starting universe of 5,564 stocks for this issue’s First Cut consisted of exchange-listed companies. The First Cut first looked for companies with positive current earnings per share that have been able to increase annual earnings at a 25% or higher rate for each of the last three years. Only 168 stocks met that stringent test. The First Cut then required that earnings per share for the most recent quarter be at least 25% higher than same quarter last year. We also looked for companies that have had an accelerating rate of quarter-over-quarter earnings growth. As a confirmation of the strength of earnings per share growth, the First Cut looked for quarter-over-quarter sales growth of at least 25%. Only 12 stocks possessed both strong historical year-over-year annual earnings growth and recent strong and accelerating quarterly growth.

To seek out companies with sustainable and improving profitability, the First Cut followed Wise’s fundamental test that firms have a return on equity of at least 17% and a net profit margin is better than the company’s average margin over the last three years. Since profit margins vary by industry, the First Cut also required that the company's profit margin be higher than the industry norm. This type of filter helps to highlight companies that have a competitive advantage over their peers.

Only 10 stocks passed all of the fundamental factors exhibited by typical market winners and they made the First Cut. The table ranks these stocks by the price change over the last 52 weeks to highlight recent stock market success.

—John Bajkowski, President of AAII

 

Company (Ticker) Ann'l
Sales
Growth
Rate
3 Yr
(%)
Ann'l
EPS
Growth
Rate
3 Yr
(%)
EPS
Growth:
Last Yr to
Current
Yr Est
(%)
Qtr-Over-Qtr
Growth
Return
on
Equity
(%)
Net
Profit
Margin
(%)
Industry
Net
Profit
Margin
(%)
Share
Price
(8/24)
($)
52-Wk
Price
Change
(%)
 
 
 
 
EPS
(%)
Sales
(%)
 
Industry
Arctic Cat Inc (ACAT) 1.3 73.7 66.2 207.7 48.6 20.5 5.5 2.3 42.97 209.6 Auto & Truck Manufacturers
Altisource Portfolio Solutions (ASPS) 38.2 93.9 na 117.3 54.6 55.0 18.3 13.3 84.10 157.5 Consumer Financial Services
CalAmp Corp. (CAMP) 12.1 27.8 366.7 600.0 26.9 36.3 6.0 -4.1 6.81 130.9 Communications Equipment
SPS Commerce, Inc. (SPSC) 23.6 29.4 48.1 400.0 28.1 24.6 21.3 -1.8 33.12 95.9 Software & Programming
CAI International Inc. (CAP) 14.8 53.9 24.7 40.0 37.8 23.5 37.8 9.7 20.62 53.2 Rental & Leasing
Lululemon Athletica inc. (LULU) 41.5 63.6 28.7 39.1 52.9 34.5 17.9 4.0 63.87 30.0 Retail (Apparel)
Mercadolibre Inc (MELI) 29.7 60.6 30.1 67.6 28.0 40.9 27.3 -1.9 80.50 28.3 Computer Services
ACCO Brands Corporation (ACCO) -5.8 27.4 27.5 790.9 32.9 92.0 6.9 -4.7 6.80 13.9 Office Equipment
Michael Kors Holdings Ltd (KORS) 48.6 149.9 74.4 385.7 72.9 39.1 11.1 2.4 53.92 0.0 Apparel/Accessories
Dr. Reddy's Laboratories (RDY) 11.7 68.0 10.3 28.6 28.4 30.5 14.7 -23.8 29.94 -5.3 Biotechnology & Drugs
 

 

  Field: Operator: Factor: Compare to:
  Exchange Not Equal   Over the counter
And EPS-Diluted Continuing 12m >   0
And EPS-Diluted Continuing Y1 >   0
And EPS-Diluted Continuing 12m >=   EPS-Diluted Continuing Y1
And EPS Gr Y2 to Y1 >=   25
And EPS Gr Y3 to Y2 >=   25
And EPS Gr Y4 to Y3 >=   25
And EPS Dil Cont-Growth from Q5 to Q1 >=   25
And EPS Dil Cont-Growth from Q5 to Q1 >   EPS Dil Cont-Growth from Q6 to Q2
And Sales-Growth from Q5 to Q1 >=   25
And Return on equity 12m >=   17
And Net margin 12m >=   Net Margin Avg 3yr
And Net margin 12m >=   Industry Net margin 12m
 
Custom Fields Used in Screen:
EPS Gr Y2 to Y1: GrowthRate([EPS-Diluted Continuing Y1],[EPS-Diluted Continuing Y2],1)
EPS Gr Y3 to Y2: GrowthRate([EPS-Diluted Continuing Y2],[EPS-Diluted Continuing Y3],1)
EPS Gr Y4 to Y3: GrowthRate([EPS-Diluted Continuing Y3],[EPS-Diluted Continuing Y4],1)
Net Margin Avg 3yr: ([Net margin Y1]+[Net margin Y2]+[Net margin Y3])/3
John Bajkowski is president of AAII.


Discussion

Allen Reeves from TN posted over 2 years ago:

I have a book coming out in October of this year, entitled:"THE LAST WAVE? The future of civilization, the U.S., all enterprises, and the individual for the next 40+ years!". I highly recommend it to the AAII for its insightfulness about the future of the global economies. Use its info with trepidation and careful scrutiny.
Allen B. Reeves, DoD physicist retired, on FB as
"Allen Reeves"


B Reddy from IL posted over 2 years ago:

I am a subscriber to " STOCK INVESTOR PRO". Is it possible for you to run this screen ever month. It will be very useful to the members.
V.B.REDDY


R Curry from CA posted over 2 years ago:

John,

Please post the SIPRO screen criteria for this


Jean Henrich from IL posted over 2 years ago:

R Curry, The SI Pro screen criteria appears below the table. You can open it in Excel by clicking on the title above the box. -Jean from AAII


Lee Dunn from NC posted over 2 years ago:

Jean Henrich:
For the SI Pro screen can you show how this screen can be used? That is, I saved this screen, but do not know how to use it. How is the information obtained and how, in a step by step example, can the investor use this screen? Thanks for your help.

Lee Dunn


Charles Rotblut from IL posted over 2 years ago:

Lee,

Are you asking how to set the screen up in Stock Investor Pro? Send us a note at http://www.aaii.com/contact/journal and we'll try to assist you.

-Charles


Ron from GA posted over 2 years ago:

Where's the bottom line, the "proof of the pudding"? i.e. performance stats. All this theory sounds good, but where are the returns?


NewJoizey from NJ posted about 1 year ago:

following Ron from Georgia's comment -

Running this stringent screen would seem to yield strong companies who are doing well now, and historically are ramping their way up in their industries -

But does this necessarily correlate to a good equity investment?

Couldn't it be possible that the market already has priced in the good news about these companies?

I realize that there are no guarantees, but the presumption here is that these companies stocks are likely to increase in value shortly

- But what if any criteria in the screen serves as a supporting indicator that these companies are either undervalued or poised for growth?


Vernon Roberts from FL posted 11 months ago:

HI Since this screen is now over 1 year old, it's easy to look at the performance of these co's for the last year. Will be interesting to see how they actually performed this last year.


Vernon Roberts from FL posted 10 months ago:

Hi- Ron's comment peaked my curiosity so I did this "quick & dirty calculation, not sure the will post here very well, but I'll try. Used amibroker charting software, priemium data weekly EOD data. Calculated gain using weekly close (-1+End/Beg)*100). First: is weekly close from 8/17/2012 to 12/27/2013. Second: is sale from visual top on chart. Here's what I came up with:
WEEKLY WEEKLY
8/24/2012 12/27/2013
Close CLOSE Gain/Loss

ACAT 42.97 56.77 32.12%
ASPS 84.1 160.95 91.38%
CAMP 6.81 26.26 285.61%
SPSC 33.12 67.49 103.77%
CAP 20.62 23.23 12.66%
LULU 63.87 59.16 -7.37%
MELI 79.95 106.01 32.60%
ACCO 6.8 6.4 -5.88%
KORS 53.92 80.58 49.44%
RDY 29.94 41.13 37.37%

with hindsite visual timming: same buy date
WEEKLY week
CHART PEAK close gain/loss
ACAT 10/18/2013 60.74 41.35%
ASPS 12/6/2013 169.19 101.18%
CAMP 12/20/2013 28.27 315.12%
SPSC 10/18/2013 77.98 135.45%
CAP 4/12/2013 29.7 44.03%
LULU 6/7/2013 81.43 27.49%
MELI 10/18/2013 141.77 77.32%
ACCO 1/18/2013 8.89 30.74%
KORS 12/20/2013 83.88 55.56%

Would appear that Mr. Bajkowski 's stock screen worked quite well. :-)
Vernon



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