by Steve McDonald, Bond Strategist, The Oxford Club
Friday, March 8, 2013
In focus this week; a Buffett screen for stocks, the new miracle stock picking system and this week’s Slap in the Face Award.
Rueters’ John Kozey recently ran a stock screen that was designed to mimic the criteria Warren Buffet is known to use when selecting stocks. The 30 stocks the screen kicked out are on your screen now:
Mosaic (NYSE: MOS)
Newmont Mining (NYSE:NEM)
PPG Industries (NYSE: PPG)
Air Products & Chemicals (NYSE: APD)
Nucor (NYSE: NUE)
Eastman Chemical (NYSE: EMN)
Johnson Controls (NYSE: JCI)
General Mills (NYSE: GIS)
Archer Daniels Midland (NYSE: ADM)
Sysco (NYSE: SYY)
Hershey (NYSE: HSY)
Campbell Soup (NYSE: CPB)
Coca-Cola Enterprises (NYSE: CCE)
Baker Hughes (NYSE: BHI)
Transocean (NYSE: RIG)
Illinois Tool Works (NYSE: ITW)
CSX (NYSE: CSX)
Norfolk Southern (NYSE: NSC)
Cummins (NYSE: CMI)
Paccar (NYSE: PCAR)
Ingersoll Rand (NYSE: IR)
Tyco International (NYSE: TYC)
Parker Hannifin (NYSE: PH)
Stanley Black & Decker (NYSE: SWK)
Dover (NYSE: DOV)
Rockwell Automation (NYSE: ROK)
Republic Services (NYSE: RSG)
Fluor (NYSE: FLR)
None of these will be found in the “stock-of-the-month club.” No penny stocks, you won’t find them flying around chat rooms, just stable, well-run companies that meet two of Buffett’s primary requirements; modest debt and growing, not growing quickly, but growing earnings and dividends.
It seems too simple, but if the third richest man in the world likes these criteria, who am I to argue?
But what was most interesting about this Buffett screen was that it included a metric that almost anyone can use. In fact, both of the components are easily found on Yahoo!’s key statistic page on their stock quote page:
EV, enterprise value, market cap plus debt, minus cash and cash equivalents, and EBITDA, earnings before interest, taxes, depreciation and amortization
A lot of words but it’s a simple way of looking at what is considered to be one of the first checks in the takeover value of a company. And, isn’t that what Buffett really does, buy so much of a company he ends up owning most or all of it.
Both EV and EBITDA are calculated for you by Yahoo! and the ratio can be a quick way to cut away the waste and get into the finest cuts the market has to offer.
By the way, the three stocks Kozey chose to focus on in his article were Archer Daniels Midlands, Sysco, and Illinois Tool Works. But, of the 30 stocks picked by Kozey’s screen, the only one Buffett currently owns is ADM.
Remember: Screens are helpful to narrow the field, but far from the final word.
The Newest Miracle Stock Picking System
Next up, the newest miracle stock picking system
This system was described in a Wall Street Journal article as the holy grail of stock picking. It beat the market by 4% annually between 1963 and 2011, and had a lot less downside than even value stocks during the same period.
That’s saying a lot! They are called quality stocks, as compared to value or growth.
This system focuses on the top-line (revenues minus basic expenses), rather than the traditional focus on the bottom-line, or earnings.
The author of the system, Robert Novy-Marx of the University of Rochester, says his system looks for bargain basement “quality” stocks. Novy-Marx says “you get much more informative signals about companies using this method.”
One very interesting aspect of companies that fall into the quality stock arena is their willingness to invest in their future profitability. Unlike other methods quality doesn’t penalize for R&D spending.
Quality looks for tomorrow’s winners with a focus on a price to book of 1.7 or lower, a ratio of revenues, minus cost of goods, divided by total assets and is limited to large companies.
Systems come and go but what I like about this one is the fact that it focuses on cheap stocks. Buy low….and, you know the rest of that one.
The pros have really taken notice of this new idea. Mutual fund companies are launching quality based funds and ETF’s and closed ends can’t be far behind.
Take a closer look at the quality method. But, don’t kid yourself, no one system will ever be able to address all the issues involved in picking stocks. But, if this can force our members to stop overpaying for equities and focus on stocks on the low end of their price swings, it will be worth the time.
Quality stocks, it sounds almost too simple!
SITFA: Student Loan Edition
Finally, the sitfa
Sometimes I have trouble picking the winner of the sitfa, but this week a whole big part of the herd was an easy winner.
If you have a few years of market experience under your belt, you are gonna love this one.
SLM, one of the largest of all student loan lenders, recently sold $1.1 billion worth of these loans.
In case you didn’t already know, the default rate for these bonds is sky high compared to most other debt. 31% of people paying back student loans are at least 90 days late. 31%.
Bad enough, right? But hold on!
The student loans that were most in demand during the recent SLM sale were the riskiest of all the loans offered. There were 15 bids for each of the highest risk bonds. 15 bids for every garbage bond offered.
Get ready, here comes the killer. These loans are not backed by anything! Since the collapse SLM has tightened their lending standards and defaults are down a little, but come on.
Does the herd really have no understanding of money, at all?
Watch yourselves out there. The rush for yield is leading directly to the cliff!
I guess so…Unbelievable!
Steve30 Warren Buffett Stocks... and the latest Miracle Stock Picking System,