• The First Cut
  • Stocks With Low Risk/Reward Scores

    by John Bajkowski

    Stocks With Low Risk/Reward Scores Splash image

    AAII’s Charles Rotblut lays out a risk/reward scorecard in his upcoming book “Better Good Than Lucky” (W&A Publishing). The scorecard uses 10 basic tests of stock valuation, company performance and financial strength, and portfolio diversification to calculate a risk/reward score that tries to measure if a stock might be an attractive candidate for a portfolio. Eight of the measures are quantitative tests suitable for screening, while two of the measures are qualitative and require investor judgment. This issue’s First Cut uses AAII’s Stock Investor Pro to create a risk/reward score tied to the eight quantitative elements of the scorecard and presents 27 stocks with the lowest--that is, best--score.

    The valuation elements of the score reward stocks with low price-to-book-value and price-earnings ratios. The company performance elements reward companies with consistently positive cash flow from operations and year-over-year increases in revenue, net income and earnings per share. Analysts’ perception of improving company fortunes is measured by examining changes in consensus estimates over the last month. Company financial strength is scored by looking at levels of the current ratio (current assets divided by current liabilities) and debt-to-equity ratio (long-term debt divided by equity and expressed as a percentage). Comparative performance is scored by measuring the return on equity (ROE, net income divided by equity) relative to all firms. For all of the elements, the most attractive figures are given a score of one, while least desirable figures are given a score of five. The scores are added together to form the risk/reward score. Only one stock had a best-possible score of eight, but 27 stocks had scores of 10 or lower. We did not score firms on their ability to maintain a competitive edge or how a stock might help diversify your portfolio holdings, which are also part of the risk/reward score.

    Click here for instructions on creating the risk/reward ratio in Stock Investor Pro.

    Company (Exchange: Ticker) Risk/
    Reward
    Score
    P/B
    Ratio
    (X)
    Fwd
    P/E
    Ratio
    (X)
    No. of
    Yrs/w
    Pos
    Cash
    Flow
    (1–5)
    No. of
    Yrs/w
    Ann'l
    EPS
    Incr
    (1–5)
    EPS
    Est
    Rev
    Dur
    Mo.
    (%)
    Current
    Ratio
    (X)
    Debt-
    to-Eq
    Ratio
    (%)
    Ret
    on
    Eq
    (%)
    Share
    Price
    (6/18)
    ($)
     
     
     
     
     
    Industry
    CVS Caremark (N: CVS) 8 1.26 11.6 5 5 0.1 1.4 23.7 10.4 32.43 Retail (Drugs)
    GameStop Corp. (N: GME) 9 1.10 7.3 5 4 0.3 1.4 16.7 14.4 19.21 Retail (Technology)
    Co Paranaense Energia (N: ELP) 9 1.20 9.1 5 4 3.4 1.9 21.3 26.3 19.30 Electric Utilities
    Humana Inc. (N: HUM) 9 1.36 8.8 5 4 0.7 1.7 27.5 19.5 49.25 Insurance (Accid & Health)
    Northrop Grumman (N: NOC) 9 1.49 10.4 5 4 0.0 1.1 27.2 14.1 62.08 Aerospace and Defense
    Chevron Corp. (N: CVX) 9 1.58 8.7 5 4 0.0 1.5 10.6 14.4 75.52 Oil & Gas - Integrated
    Harbin Electric, Inc. (M: HRBN) 9 1.60 6.5 5 3 5.1 1.9 0.0 10.9 18.07 Electronic Instru & Controls
    Energen Corporation (N: EGN) 9 1.64 10.9 5 4 0.4 1.2 19.3 13.7 48.68 Natural Gas Utilities
    ManTech Int'l (M: MANT) 9 1.94 13.4 5 5 0.1 1.6 12.7 14.4 46.11 Computer Services
    Chinacast Education (M: CAST) 10 1.30 15 5 3 1.2 1.8 9.6 12.0 6.31 Schools
    Medical Action Indus (M: MDCI) 10 1.38 12.8 5 4 13.9 1.6 1.9 12.6 12.06 Medical Equip & Supplies
    Atwood Oceanics (N: ATW) 10 1.43 6.7 5 5 0.9 3.4 20.1 21.9 27.62 Oil Well Services & Equip
    AECOM Technology (N: ACM) 10 1.51 12.4 5 4 0.3 1.5 9.3 11.7 25.26 Business Services
    Synopsys, Inc. (M: SNPS) 10 1.62 14.1 5 3 0.6 1.9 0.0 12.5 22.41 Software & Programming
    Amedisys, Inc. (M: AMED) 10 1.65 8.2 5 5 0.0 1.1 20.8 20.4 46.47 Healthcare Facilities
    Casual Male Retail (M: CMRG) 10 1.66 12.2 5 3 11.7 1.8 1.5 11.2 3.50 Retail (Apparel)
    VSE Corporation (M: VSEC) 10 1.76 8.5 5 5 0.0 1.4 0.0 25.3 36.05 Business Services
    Pearson PLC (ADR) (N: PSO) 10 1.80 13.6 5 4 2.0 1.9 44.5 17.2 14.25 Printing & Publishing
    Walt Disney Co. (N: DIS) 10 1.82 17.3 5 4 0.2 1.2 29.3 10.3 35.15 Broadcasting & Cable TV
    Tetra Tech, Inc. (M: TTEK) 10 1.89 18.6 5 4 0.3 1.7 0.8 12.9 21.40 Waste Management Servs
    CTI Industries Corp. (M: CTIB) 10 1.92 11.8 4 3 26.7 1.1 37.1 16.9 6.72 Fabricated Plastic & Rubber
    BJ's Wholesale Club (N: BJ) 10 1.94 14.8 5 4 1.1 1.2 0.8 12.9 39.66 Retail (Spec Non-Apparel)
    EZCORP, Inc. (M: EZPW) 10 1.94 9.7 5 5 0.1 5.1 4.3 19.7 18.65 Consumer Financial Servs
    Compuware Corp. (M: CPWR) 10 2.15 17.8 5 5 9.2 1.2 0.0 15.7 8.67 Software & Programming
    ITT Corporation (N: ITT) 10 2.27 11.5 5 3 0.1 1.5 34.8 16.3 48.53 Misc. Capital Goods
    Career Education (M: CECO) 10 2.52 9.5 5 3 1.3 1.3 0.2 16.1 27.00 Schools
    Ebix, Inc. (M: EBIX) 10 2.90 12.7 5 5 0.8 1.1 10.4 29.5 15.72 Software & Programming
    John Bajkowski is president of AAII.


    Discussion

    James from FL posted over 5 years ago:

    the stock prices are as of 6/18 In the age of computers I would hope that you could give more up to date figures...


    Ronald from NY posted over 5 years ago:

    why can't you supply the formula to enter in to stock investor pro for Rotbut's system ?
    Also Pitrioski 8


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