Quick question: What's the best way to make a fortune in
stocks?
Umm ... start with an even larger fortune?
Try again, funny guy. Though I'll warn you, there isn't
one right answer.
OK, I'll bite. The best way to make a fortune in stocks
is to own some.
Really going out on a limb there, aren't you?
I dunno, after last year's crash, it seems like maybe
there's an argument the other way, y'know?
And the market is up how much since March?
A lot. But it seems like a lot of the stocks that are
up are chowderhead stocks, things that are getting ahead of
themselves. I mean, dude, look at
Ford (NYSE: F) --
Hey, I own and like Ford, though I do agree that it's
kind of optimistically pricedat the moment. Of course, we
could make the same argument about
Amazon.com (Nasdaq: AMZN) or
Goldman Sachs (NYSE: GS) or a whole bunch of
others. Lots of valuations are high at the moment. But that
doesn't mean there aren't great investments out there.
Yeah, but how do we find them?
Well, think about it. We're looking for good companies at
attractive prices, right? What makes a good company? I'd say
that many things go into it, but we can quantify a couple.
For instance, we want companies with low debt that are
generating a good return on their invested capital. That's
just two numbers, but together they give us a peek into the
company's debt load, profitability, and the effectiveness of
its management.
That would be a start. But again, where do we
look?
Have you tried the Fool's
CAPS screener? We can take those two numbers -- the
long-term debt to equity ratioand the company's
return on equity-- and use the screener to create a
list of companies that show well on those two metrics.
That's probably a long list.
Sure. But we've got a great screener, so we can fold in a
few other things to help cut down the list. Let's also look
for companies with relatively low
price-to-earnings ratios
(P/Es)that haven't gotten too far above their
52-week lows. That will help us stay clear of the companies
you were talking about, the ones that have gotten ahead of
themselves valuewise. We can also use the CAPS community's
ratings to our advantage.
CAPS ratings? Tell me more.
CAPSis a lot of things, but on one level it's a game;
members get scored on how well they pick stocks. The best
stock pickers' opinions are weighted accordingly, and the
weighted consensus of the CAPS community on any given stock
is expressed as a
star rating-- one to five stars.
I've found that the star ratings are a pretty good
predictor of which stocks are likely to outperform over the
next year or so. So -- and this is what makes the CAPS
screener so useful -- we can narrow our screen further by
limiting ourselves to four- or five-star stocks.
That seems like a good idea.
OK, so let's try it. I searched for four- or five-star
stocks that were less than 25% above their 52-week lows, had
a P/E of less than 15, a long-term debt-to-equity ratio below
1, and a return of equity of at least 15%. And to make sure
the CAPS ratings were worth something, I limited the search
to stocks that had been picked by at least 100 active CAPS
members. Here are some of the stocks I turned up:
Stock
CAPS Rating
P/E
LT Debt/Equity
Return on Equity
Abbott Laboratories (NYSE: ABT)
*****
13.8
0.57
28.9%
Amgen (Nasdaq: AMGN)
****
12.1 Continued... |