Value Triple Play
07/11/2003 12:00 am EST
Paul Tracy, and his staff at Street Authority Market Advisor, has developed a stringent screen to isolate financially solid, value-priced stocks. This process began with 10,000 NASDAQ stocks, and ended with just three companies that made the grade. Here's an overview of his system and the companies that survived the screening.
"By purchasing stocks only when they are trading at a significant discount to their actual intrinsic value, we'll basically give ourselves a 'cushion' in case unforeseen corporate events or a steep market correction take place. However, the search for value stocks is often a perilous one. For every undervalued company that regains its former glory, there are usually more that never rebound at all. As we've said before, cheap stocks often trade cheap for a reason. With this in mind, we developed a proprietary screening methodology to try and separate the big winners from the potential losers. Our first step was to eliminate all companies with price-to-book ratios above one. Our next step was to eliminate those companies that are trading below $2.00 per share. We then removed all companies with market caps below $50 million, leaving us with 631 stocks.
"Based on ten criteria, we then screened these remaining stocks, awarding them a rating of one to ten. Our goal was to eliminate companies with weak financials, heavy debt loads, slow growth, negative earnings and poor future prospects. We looked at such factors as p/e below 15, a price to sales ratio below one, positive cash flow and return on assets, more insider buys than sells, low debt-to-equity, etc. Our criteria were stringent, and no single company ended up with a perfect tens. However, one company managed to score a nine and two others scored an eight. This left us with a short list of three value plays with superior financial characteristics:
"Steel Technologies (STTX NASDAQ) processes flat-rolled steel for industrial clients who require steel of precise thickness, width, temper, finish and shape for their manufacturing purposes. STTX was our highest scoring value play, with a nine. AstroPower (APWRE NASDAQ) and Rockford Corp. (ROFO NASDAQ) both earned ratings of eight. Astropower is one of the world's leading designers and manufacturers of solar electric power generation products. Rockford designs and manufactures high-tech audio systems for cars, boats and home theater systems."