On the Rise, on the Cheap
MARCH 25, 2005
Advice from Standard and Poors
STOCK SCREENS • From S&P
By Michael Kaye, CFA
Stocks with upward momentum are always intriguing, and those with undervalued shares and good fundamentals are even more appealing
If a stock is in the midst of a winning streak, does that make it a good investment? Momentum investors think so. They buy stocks that have been strong recently in the belief that the factors pushing a stock upward will continue to propel it. Though the notion that stocks on a roll will continue to move higher is dismissed in some quarters, many investors follow this approach.
The idea is intriguing, and it gave us the starting point for this week's screen. We looked for companies whose price performance earned them an S&P 13-week relative-strength ranking of 95 or greater, placing it in the top 5% of all stocks in the S&P universe. To make sure that these were companies of some substance, each name on the list had to have a market cap above $1 billion.
FINDING 4s AND 5s. Strong momentum is all well and good, but we needed more. Specifically, we wanted to find those high-momentum stocks that had the potential to rise even higher. So we turned to another proprietary S&P tool: our fair value rankings.
S&P's fair value -- the price at which a stock should trade at current market levels -- is based on fundamental data such as corporate earnings and growth potential, price-to- book value, return on equity, and current yield relative to the S&P 500-stock index.
An S&P fair value ranking of "5" indicates that a stock is significantly undervalued, while a ranking of "4" indicates stocks that are moderately undervalued, with a fair value modestly higher than the current price. We set our final filter to screen for stocks with those rankings.
When we finished running the numbers, these nine names turned up:
Strong Momentum, High Fair Value Rank
Company Ticker
Ascential Software ASCL
IVAX Corp. IVX
Longs Drug Stores LDG
National Oilwell Varco NOV
Office Depot ODP
Panera Bread PNRA
Patterson-UTI Energy PTEN
SunGard Data Systems SDS
Walter Industries WLT
businessweek.com
[Harry: SDS has gapped due to a take over rumor. It no longer meets the critieria the author set forward in my opinion.] |
