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| The Basics | Worry-free stocks for summer buyers
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If you'd like some peace of mind while taking your summer vacation, here is a screen to help find steady stocks you won't have to worry about while you're out.
By Harry Domash
Do you really want to follow your stocks while youre on vacation? If not, heres a way, using MSNs Deluxe Screener, to find vacation stocks -- stocks you can buy and forget about while youre busy scaling Mount Kilimanjaro, trying to keep ahead of those bulls in Spain or sipping Mai Tais under a palm tree on your favorite tropical island.
Vacation stocks are not rockets that could flame out while youre scuba diving. Instead, theyre shares of steady growing -- and consistently profitable -- firms that are the best of breed in their industry.
Ill start with basic qualifications that, if you are risk averse, you should consider applying to all of your stock candidates.
Eschew the smallest companies
Sure, the Holy Grail is finding that tiny upstart that grows to the size of Wal-Mart Stores (WMT, news, msgs) while you own it. Thats a great thought, but dont try it while youre on vacation. Small stocks have a nasty habit of crashing and burning when youre not looking. Yes, big companies can stumble. But by and large, the bigger the company, the lower the risk of an unpleasant surprise.
Market capitalization (recent share price multiplied by the number of shares outstanding) is the best gauge of company size. Many experts set the boundary between small-cap and mid-cap companies at $1 billion, which is where I set my minimum. Try increasing it to $5 billion, or even higher, if you want to reduce your risk further.
Screening Parameter: Market Capitalization >= $1 billion
Profitability matters
It was different for a time in the late 90s, but in the end, companies that consistently churn out profits year after year are your best bets, especially for vacation stocks.
Gauging profitability requires more than measuring earnings alone. Say, for instance, you bought a company and it earned $25,000 last year. You'd be a happier camper if you only had to invest $10,000 to earn that sum, as opposed to putting in $250,000.
So earnings have to be compared to something. There are several measures, but return on equity (ROE), which is annual earnings divided by shareholders equity (assets minus liabilities), is the most widely used measure.
Heres why: ROE is a speed limit for earnings growth. In fact, unless a firm raises additional funds, it cant grow earnings faster than its ROE. Of course, many firms do raise additional cash by borrowing or selling shares, but both reduce earnings per share, which is bad for shareholders.
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Most money managers that Ive interviewed wont consider a stock with ROE below 15%. So I used that figure for judging the most recent (trailing 12 months) profitability.
Screening Parameter: Return on Equity >= 15
However, since were looking for no-worry vacation stocks, steady long-term profitability is a must. Given the tough economy in 2000-2002, I cut my candidates a little slack and only required an average 12% ROE over the past five years.
Screening Parameter: ROE: 5-year average >= 12
In you think Im an easy grader, consider this: Out of more than 7,500 U.S. traded stocks, fewer than 900 met these two profitability requirements. Adding the $1 billion market-cap stipulation cut the total down to 500 or so stocks.
When companies grow, so do stock prices
The stock market is all about growth. Without the prospect of future earnings growth, stock prices usually go nowhere. Stocks with a history of stable long-term earnings growth are your best bets for solid future growth.
How much growth is enough? Once again, for vacation stocks, we dont want rockets. With that perspective, 12% average annual earnings growth over the past five years is enough.
Screening Parameter: Annual (5-year) EPS Growth Rate >= 12
Some companies achieve earnings growth by cutting costs rather than by growing sales. Obviously, that cant go on forever. Ultimately, growth comes from selling more products and services. To rule out those pseudo-growers, I required at least 12% average annual revenue growth over the past five years.
Screening Parameter: 5-Year Revenue Growth >= 12
Adding the historical growth requirements cut the field down to less than 200 potential vacation stocks.
Keep an eye on the future
To avoid the proverbial buggy-whip maker whose best days are behind it, I required at least 12% average annual forecast earnings growth over the next five years.
Screening Parameter: EPS Growth Next 5-Years: >= 12
Adding that stipulation reduced the list to 144 candidates. However, many were concentrated in a few industries such as medical equipment or business software. So my next step was to isolate the best stocks in each industry.
Let S&P pick the best of breed
Why waste time scrutinizing financial statements and marketing reports when the researchers at Standard & Poor's have already done the work. S&P goes to great lengths to pick the best of breed in each industry when it selects stocks for its S&P 500 index.
Screening Parameter: S&P Index Membership = S&P 500
Profiting from profits
The best companies in any industry are usually the most profitable. I check that two ways. First, I require return on equity to be at least 10% higher than their industry average. For instance, the ROE must be 22% if the industry average is 20%.
Screening Parameter: Return on Equity >= 1.1 * Industry Average ROE
As a double check, I also require profit margins (net profit divided by sales) to also be at least 10% above the industry average.
Screening Parameter: Net Profit Margin >=1.1 * Industry Average NPM
Staying out of debt
An unexpected spike in interest rates while youre on vacation could sink profits for companies burdened by high debt. To minimize that possibility, I required that qualifying vacation stocks carry lower debt than average for their industry.
The debt-equity ratio is a widely used debt measure. I look for below-average debt by requiring that the debt-equity ratio be no higher than 90% of the industry average.
Screening Parameter: Debt to Equity Ratio <= 0.9* Industry Average D/E
Only 12 vacation candidates survived my best of breed checks.
Avoid stocks on the skids
Being a fundamentalist at heart, I hate to admit this: A stocks price action counts. In my experience, stocks with weak price charts are likely to continue heading down. You dont need to face that headwind while youre on vacation.
Relative strength measures how a stock has performed compared to the overall market over a specified timeframe. I required a 50% relative strength over the past 12-months, which means that passing stocks must have performed at least as well as the average stock over that period.
Screening Parameter: 12-Month Relative Strength >= 50
My screen turned up eight vacation stocks.
| Vacation stocks | | Company name | Industry name | | Bed Bath & Beyond (BBBY, news, msgs) | Home furnishing stores | | Best Buy (BBY, news, msgs) | Electronics stores | | Quest Diagnostics (DGX, news, msgs) | Medical laboratories & research | | St. Jude Medical (STJ, news, msgs) | Medical appliances & equipment | | Walgreen (WAG, news, msgs) | Drug stores | | BJ Services (BJS, news, msgs) | Oil & gas equipment & services | | QLogic (QLGC, news, msgs) | Semiconductor - specialized | | Fiserv (FISV, news, msgs) | Business software & services |
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The list included mostly stocks that, in retrospect, seem obvious. Although three -- Bed Bath & Beyond (BBBY, news, msgs), Best Buy (BBY, news, msgs) and Walgreen (WAG, news, msgs) -- are retail store chains, and each is the undisputed gold standard in its specialty. In fact, the only surprise for me was specialty chipmaker QLogic (QLGC, news, msgs), mainly because I didnt expect to see any semiconductor stocks make the list.
The list of qualifying stocks might have changed by the time you read this. Also, you may want to modify the screen to suit your style. Heres a link to the screen.
As is the case with all screens, consider these stocks as worthwhile research candidates, not a buy list.
At the time of publication, Harry Domash did not own or control positions in any of the stocks mentioned in this article.
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