Scoring 100 on a Top Guru's Scale

08/18/2010 12:00 pm EST


John Reese

Founder and CEO, And Validea Capital Management

John Reese, editor of Validea Hot List, says a retailer scores 100% on guru James O’Shaughnessy’s criteria of small-cap value plus strong growth and relative strength.

Ross Stores (Nasdaq: ROST) operates two chains of off-price retail apparel and home accessories stores. As of January 30, 2010, the Company operated 1,005 stores, of which 953 were Ross Dress for Less (Ross) locations in 27 states and Guam and 52 were dd's DISCOUNTS stores in four states.

Both chains target women and men between the ages of 18 and 54. Ross’s target customers are primarily from middle income households, while the dd's DISCOUNTS target customer is from more moderate-income households.

Ross offers name-brand and designer apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 60% off department- and specialty- store regular prices. dd's DISCOUNTS features a moderately priced assortment of name- brand apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices.

Market Capitalization: Pass

The first requirement of [James O’Shaughnessy’s] Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. ROST, with a market cap [above $6 billion], passes this criterion.

Earnings Per Share Persistence: Pass

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. Ross Stores, whose annual earnings before extraordinary items for the last five years (from earliest to the most recent fiscal year) were $1.36, $1.70, $1.90, $2.33 and $3.54 [per share], passes this test.

Price/Sales Ratio: Pass

The price/sales ratio should be below 1.5x. This value criterion, coupled with the growth criterion, identifies growth stocks that are still cheap to buy. Ross Stores’ price/sales ratio of 0.8x trailing-12-month sales, passes this criterion.

Relative Strength: Pass

The final criterion for the cornerstone growth strategy requires that the relative strength of the company be among the top 50 of the stocks screened using the previous criterion. (Relative strength measures the change of a stock’s price over a period of time relative to the price change of an index such as the Standard & Poor’s 500—Editor.)

This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. ROST, whose relative strength [was 62 recently], [was] in the top 50 and would pass this last criterion. (The stock closed below $50 Tuesday—Editor.)

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