The First Cut: Socially Responsible GARP
by John Bajkowski
Socially responsible investing (SRI) integrates social and ethical considerations into the stock selection process. Under the approach, it is common to avoid companies whose products or business practices are considered harmful. SRI investors also use qualitative factors to identify companies that meet their concernsfor instance, those with good employee relations.
While there is no universal SRI screen, this issues First Cut filters companies that most SRI investors would find offensive, and then highlights profitable companies trading at reasonable dividend-adjusted PEG ratios.
The First Cut SRI screen excludes companies in the tobacco, alcoholic beverage, aerospace/defense, casino/gaming, electric utility, energy, and metal mining industries. Companies were also required to be exchange listed and based in the United States.
The dividend-adjusted PEG ratio was used to highlight potentially attractively priced stocks. The PEG ratio is computed by dividing the price-earnings ratio by the sum of the dividend yield and the expected long-term earnings per share growth rate to consider total return potential relative to valuations; the lower the PEG ratio, the greater the potential for an attractively priced stock.
The stocks making the First Cut are ranked in ascending order by PEG ratio. The table also lists the latest fiscal-year earnings per share and expected earnings for the next two years to indicate expected short-term growth, while the long-term expected growth rate indicates longer-term expectations. All First Cut stocks needed to be profitable for each of the last five years. The First Cut also looked for companies with a relative price rank of 50% or higher over the last 13 and 52 weeks.
Our simple screen just skimmed the surface of SRI. Whatever your beliefs, investment success ultimately depends on selecting sound investments.