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Strategies & Market Trends : Screening for Winners -- Ignore unavailable to you. Want to Upgrade?

To: LemonHead who wrote (21)	3/17/1999 9:13:00 AM
From: JZGalt	Respond to of 45

Keith, These would be criteria which have worked recently (last 5-10 years) and they do keep you out of a ton of trouble if you just avoid anything under several billion dollars in market cap. As a first cut for an investor who wants to invest in Gorillas, this will screen out the cream of the crop. However when screening for very large gains in the market without relying on more and more people paying more and more for steady growth, it is sometimes better to look for smaller (under $1B) companies or companies which have fallen on temporary hard times. If analysts follow the stock and if they are growing eps much faster than the market, or have significant market share, then eventually they get "found". Depends on your timeframe. BTW, just as an example I bought a very small starter position in SAVLY yesterday. Debt/Market Cap = 2% ROA = 14% ROE = 19% But which market cap do I use? As of yesterday it had a market cap of $398 MM which would not be considered large, but if you go back to last year it had a market cap near $2B. On another point, I don't think that screening on current ROE and ROA allows you to select stocks whose fortunes are about to change. For instance another stock I own is ORB. 800MM Market Cap ROA = 3.49% ROE = 0.67% Debt/equity = 28% Your screen would just pass this one by without looking back. None of your criteria match. So why do I own this stock? I believe the eps growth is going to be outstanding for the next few years and they have a spinoff coming that is worth almost the entire market cap of the company. Obviously you cannot screen for things like this, but it does show you that a screen will not only include thing you want, but exclude some also. ---- Dave BTW, I'll be happy to sell you my shares if the market cap reaches $5 Billion again. ;-)

To: LemonHead who wrote (21)	3/17/1999 10:36:00 AM
From: JZGalt	Read Replies (3) \| Respond to of 45

Keith, Perhaps I should share my experimental screen at this point. 1. Market cap > 150 million 2. Growth rate for next fiscal year > 20% 3. Growth rate projected for next 5 years > 20% 4. Technology based industry. 5. Consider buying when 5 year projected growth > 1.4X p/e based on 12 month forward eps. Let me explain some of the reasoning behind this screen and if I have time some of the pitfalls. Market cap > 150 million Purely a subjective number. I want companies that are large enough to survive but don't want to exclude the small fastest growing companies in the universe. Growth rate for next fiscal year > 20% Here I want a company that is going to produce good growth going forward. Doesn't have to be outstanding, just good. This item screens out companies which were doing well but are now faltering in their growth projections. Growth rate projected for next 5 years > 20% Here I'm trying to screen for companies which have some sort of analyst following and the analysts are calling for the ability to grow much faster than the market as a whole. Technology based industry. Clearly technology is where the action is and will be for quite some time. I'm just using this criteria to filter out the few companies in the drug industry, or commodities industry that may fit the first few criteria. This is a subjective call, but if I want to understand what is happening to a company, I need to know something about an industry. Technology is a broad enough range to get me more things than I could ever understand without learning the in's and out's of oil trading and how it has an effect on ABC company. I also believe that one of the strongest exports of the US will be technology and that will have an increasingly important share in the world economies going forward. Consider buying when 5 year projected growth > 1.4X p/e based on 12 month forward eps. This is my GARP (Growth At a Reasonable Price) criteria. When they are "cheap enough" you spend time searching to see what warts or gems you can turn up. OK so what's wrong with this screen? First and foremost you are relying on analysts projections for two of the components (forward growth 1 year and forward growth 5 years). We all know some analysts are good and some are bad. We all know sometimes the numbers are not updated for months at a time while analyst have the company "under review" just before they dump the coverage altogether. We all know analysts are typically herd following and sometimes that herd goes right over the edge of the cliff. If you applied these concepts alone to the oil service sector last year, you got killed. On the flip side. Companies which are the strongest typically exhibit a phenomena where eps numbers are met or exceeded (although this is a game at this point), but more importantly they will also tend exhibit a series of eps increases by the analysts. Typical screens use data which has already happened in the form of earnings, growth, ROE, ROA, current debt levels, etc. to avoid the subjective problems in using analysts projections. These numbers are fixed in stone and cannot be moved (except by SEC changing some rules on writing off acquisition R&D stranded costs). The problem with using these numbers is that it doesn't tell you are darn thing about where the company is going as opposed to where it has been. I'd venture to say most of us do not drive our cars by looking in the rear view mirror, so why choose investments by looking at past performance? The only reason to look at past performance is to get some sort of gauge as to the ability of the company to survive longer term, but the typical criteria of 5 yr eps growth just knock out too many technology stocks in rapidly growing areas. Obviously there are a number of other things wrong with selecting stocks in this fashion. 1. You completely miss the YHOO's of the world because they have no earnings when they are cheap and by the time they have earnings, the stock price has moved significantly. 2. You completely miss the MSFT's, CSCO's of the world which are providing very nice returns for their owners year after year and are unlikely to screw up so badly that you will lose money in the near future. 3. The other piece of the puzzle that is missing with this method is cyclical technology stocks. Things like the semiconductor equipment makers will very seldom be correctly identified by this method because when the p/e is low relative to the growth rate projections, you are at or near the top of the cycle. Finally after I find stocks that meet the originally criteria, I apply a one second fundamental analysis before going into the stock any further. If the company has had their eps cut, then avoid it for at least 3 months. This will give you time to discover if the company is really having a problem, or the problem is a blip. Typically the stock price itself will be the signal that there is an "all clear" followed by a confirmation in the eps increase. I violate this sometimes if the market is being "irrational" because of end of the quarter window dressing, or linking things that shouldn't be linked. For example slowing PC sales shouldn't impact the communications chip industry, but when CPQ was falling like a rock in Feb and early March, it impacted the likes of PMCS, LEVL, GALTF, VTSS, AMCC, TXCC. Those stocks popped back up since then because there was no fundamental reason for them to have been down in the first place. One final thing to remember, a screen is just that. It is not the whole picture. ---- Dave