Trying to find value in an over-valued market is difficult to say the least. This becomes even more problematic when we discuss the issue within the reality of a late-stage economic cycle and the potential for an economic recession.
So, in looking for opportunity at a time where there is a rising unfavorable economic and earnings backdrop, we turned to our database to screen for stocks with a very strict set of fundamental guidelines.
In order for a company to become a watch list candidate it must have:
- Five-year average returns on equity (ROE) greater than 15%;
- Five-year average returns on invested capital (ROIC) greater than 15%;
- Debt-to-equity (D/E) less than or equal to 80% of the industry average;
- Five-year average pretax profit margin (PM) 20% higher than the industry average;
- Current price-to-book value multiples(P/B) below historical and industry multiples;
- Current price-to-cash flow (P/CF) ratios below the industry average
Out of the universe of more than 6,500 issues, only 10 passed the test.
This should immediately ring some alarm bells on the market as a whole with respect to valuations and the risk being undertaken by investors in general.
However, here are the 10 top stocks we are adding to our watch list currently.
*Disclosure: We currently own BA in both our Equity and Equity/ETF portfolio models.
**While REMI made the screening list, it is excluded from consideration due to being under $5/share.
Below I am providing a brief snapshot of each for your own review.
- Warning: The company is facing numerous class action lawsuits which could have an adverse effect on the company.
- Warning: This is a sub-$5 stock and is extremely high risk. It is not suitable for investors or our portfolios.
Importantly, just because these companies cleared a screen, such is only the first step in determining if it should be added to an investment portfolio. Each company must be evaluated not only on it fundamental merits but its price trends as well. They should also be evaluated relative to other holdings in your portfolio, your own personal risk tolerance, and your investment objectives.
Disclaimer: As always, you must do your homework BEFORE making any investment. The information contained herein should not be construed as investment advice or a solicitation to buy or sell any security. Past performance is no guarantee of future results. Use of this information is at your own risk and peril.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube