Thomsett's Fundamental Tests

by John Bajkowski

Thomsett's Fundamental Tests Splash image

It is important for investors to use a range of fundamental factors in their selection process to help provide a complete picture of a stock’s value and underlying financial strength. Michael Thomsett’s feature article in this month’s issue (starting on page 7) illustrates the use of four fundamental indicators that work together to measure the attractiveness of a stock while providing a study of the recent company results and working capital.

As a test of revenue strength, the First Cut seeks out exchange-listed stocks that have been able to consistently increase their annual revenue over each of the last five years. Optimally, earnings should be growing even faster than revenues. To measure earnings strength, the First Cut filter requires a current net profit margin (net income divided by revenues) higher than the average net profit margin over the last five years. The table below also highlights the median net profit margin of the corresponding industry in which a company competes. The company’s figure should be above the industry norm.

Thomsett prefers to avoid companies with extremely high or low price-earnings ratios, so the First Cut looks for stocks with a ratio between 10 and 25 times trailing earnings per share (TTM). It is helpful to examine the price-earnings ratio over time, so the table below highlights the current price-earnings ratio and the average price-earnings ratio over the last five years.

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John Bajkowski is president of AAII.


Patrick from Wisconsin posted over 3 years ago:

my 1st week in aaii-so i am going to spend the weekend reviewing these stocks. i have been a member of the motley fools since 12/28/08 so i do have knowledge in this area. so far everything i have read is very informative. i am taking everything step by step so i understand the thinking of the aaii organization. thanks pat

F from Nevada posted over 3 years ago:

Are FirstCut screens in SIPro form posted on AAII website?

Numbers listed under EPS are EPS-Diluted-Continuing 12m.

5 of the listed stocks have only 2 (not 3) dividend increases over 6 years per SIPro data as of 3/11/2001.

Paul from California posted over 2 years ago:

Please clarify: I understand that the "Shaddow Stocks" are basically micro caps and do not include partnership companies. The First Cut portfolio includes many large caps (i.e. HSY, GD MDT, et. al.) and at least one partnership (TGP). If the purpose of the exercise is to demonstrate the usefulness of applying the 4 Fundamental Tests, it is indeed impressive. However, this strays dramatically from the logic behind the selection of stocks in the "Shaddow."

David from Illinois posted over 2 years ago:


I like that criteria and think he is good one. so, can you add that Screening Criteria to be one of the stock screens, so we can follow it monthly?


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