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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.

The First Cut screened for minimum dividend growth by requiring at least three increases in the annual dividend over the last six years. Many of the passing stocks also turned out to have an above-average dividend yield.

The final First Cut filter looked for a minimum level of financial strength. Thomsett favors the use of the long-term-debt-to-capital ratio (long-term debt divided by the sum of long-term debt and equity). Each stock passing the First Cut was required to have a lower long-term-debt-to-capital ratio than its five-year average ratio. The 30 stocks passing the First Cut are presented in the table below ranked by their

—John Bajkowski, President of AAII

Company (Ticker) P/E Ratio Div
Yield
(%)
Ann'l Growth Rate Net Profit LT Debt
to
Capital
(%)
Share
Price
(3/11)
($)
 
TTM
(X)
Avg
5-Yr
(X)
(Historical 5-Yr) Margin  
Rev
(%)
EPS
(%)
Div
(%)
Co
(%)
Ind
(%)
 
Description
Oppenheimer Holdings Inc. (OPY) 10.7 na 1.5 8.8 15.2 4.1 3.7 5.1 20.5 29.34 investment banking
General Dynamics Corp. (GD) 11.1 12.4 2.5 9.1 13.8 16.0 8.1 4.3 15.4 76.13 air & combat sys
Newmont Mining Corp. (NEM) 11.3 na 1.2 17.5 49.4 4.6 23.9 0.0 23.9 52.12 gold & copper
DeVry Inc. (DV) 11.9 29.0 0.5 19.7 75.9 na 15.1 6.0 0.0 52.43 educational servs
Getty Realty Corp. (GTY) 12.0 16.2 8.5 4.5 -0.3 1.6 101.1 4.1 17.1 22.53 real estate
Medtronic, Inc. (MDT) 12.7 20.3 2.4 9.5 13.5 19.3 20.7 -2.2 31.6 38.08 medical technology
Ruddick Corporation (RDK) 14.2 15.8 1.4 8.2 9.9 1.8 2.8 1.4 23.7 36.81 supermarkets & textile
National HealthCare Corp. (NHC) 14.4 16.9 2.4 5.7 7.5 13.7 6.1 1.7 1.8 46.25 long-term healthcare
Cinemark Holdings, Inc. (CNK) 15.0 na 4.3 16.0 43.9 na 6.8 -15.2 61.8 19.33 movie theatres
Medicis Pharmaceutical (MRX) 16.5 na 0.8 33.5 20.6 32.0 22.0 -26.1 17.0 31.18 pharmaceuticals
British American Tobacco (BTI) 16.8 16.2 4.7 9.8 11.5 19.4 37.4 10.7 49.2 77.99 tobacco products
H.J. Heinz Company (HNZ) 16.8 19.1 3.6 5.3 8.0 8.1 9.1 3.3 58.7 49.93 consumer pkgd goods
Coca-Cola FEMSA, S.A.B. (KOF) 17.5 17.4 1.5 14.9 6.4 18.2 11.0 0.7 17.8 76.29 beverage products
Owens & Minor, Inc. (OMI) 17.5 18.8 2.6 11.0 10.3 15.2 1.7 -2.2 19.6 30.71 med & surgical prods
MasterCard Incorporated (MA) 17.7 na 0.2 13.5 48.0 na 33.3 2.3 0.0 248.42 credit & debit servs
McCormick & Company (MKC) 17.8 18.4 2.3 5.2 12.0 10.2 11.1 3.3 34.9 48.86 seasoning prods
Chemed Corporation (CHE) 18.3 17.2 0.9 6.9 20.8 16.7 6.4 1.7 25.6 64.95 specialty materials
Artesian Resources Corp. (ARTNA) 18.9 20.0 3.9 9.0 6.1 5.5 12.1 11.7 52.6 19.62 water distribution
Comcast Corporation (CMCSA) 19.3 21.2 1.8 12.5 38.8 na 9.6 2.0 40.0 24.95 video, Internet & phone
American States Water Co. (AWR) 19.8 24.5 3.2 10.9 1.1 2.9 10.5 11.7 0.0 32.93 water & electric util
Church & Dwight Co., Inc. (CHD) 20.6 18.4 1.8 8.3 15.4 20.9 10.5 3.3 11.8 77.16 consumer prods
TransMontaigne Partners LP (TLP) 21.5 25.2 6.7 45.8 13.3 20.5 16.0 2.2 26.1 36.34 gas & oil transport
Automatic Data Processing (ADP) 21.7 20.2 2.9 7.8 12.7 17.2 16.2 -0.4 0.6 50.41 human resources
Monro Muffler Brake, Inc. (MNRO) 22.8 23.5 1.0 10.8 12.3 na 6.9 -0.4 16.5 31.19 auto repair servs
York Water Company (YORW) 23.4 26.0 3.2 10.5 3.8 5.5 22.8 11.7 46.3 16.35 water distribution
Danvers Bancorp, Inc. (DNBK) 23.5 na 0.7 15.0 25.7 na 15.4 4.0 9.5 21.36 banking services
Teekay LNG Partners LP (TGP) 23.8 53.0 6.9 16.4 0.1 29.9 29.7 1.5 66.7 36.67 gas & oil transport
Techne Corporation (TECH) 24.1 25.3 1.5 8.5 12.7 na 40.8 -26.1 0.0 72.09 biotech products
ITC Holdings Corp. (ITC) 24.2 23.4 2.0 27.7 21.8 19.8 25.4 7.0 69.1 68.49 electricity
Hershey Company, The (HSY) 24.3 28.2 2.6 3.3 2.3 6.6 9.0 3.3 63.1 53.73 confection products
  Field: Operator: Factor: Compare to:
  Exchange Not Equal   Over the counter
And Sales 12m >=   Sales Y1
And Sales Y1 >   Sales Y2
And Sales Y2 >   Sales Y3
And Sales Y3 >   Sales Y4
And Sales Y4 >   Sales Y5
And Sales Y5 >   Sales Y6
And Net margin 12m >=   Net margin Y1
And Net margin 12m >   -FC Net Margin - 5 year avg.
And PE >   10
And PE <   25
And Dividend, indicated >=   Dividend Y1
And Dividend Y1 >=   Dividend Y2
And Dividend Y2 >=   Dividend Y3
And Dividend Y3 >=   Dividend Y4
And Dividend Y4 >=   Dividend Y5
And Dividend Y5 >=   Dividend Y6
And Dividend Increases-Y7 to Y1 >=   3
And LT debt/total capital Q1 <   -FC LT debt/total capital - 5
 
Custom Fields:
Net Margin - 5 Yr Avg
([Net margin Y1] + [Net margin Y2] + [Net margin Y3] + [Net margin Y4] + [Net margin Y5])/5
 
LT debt/total capital - 5 Yr Avg
([LT debt/total capital Y1] + [LT debt/total capital Y2] + [LT debt/total capital Y3] + [LT debt/total capital Y4] + [LT debt/total capital Y5])/5
John Bajkowski is president of AAII.


Discussion

Patrick from WI 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 NV 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 CA posted over 3 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 IL posted over 3 years ago:

Hi,

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?

Thanks


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