of a screen as a formula or recipe of ingredients used to guide computer software to select a batch of good stock picks. We used software developed by Zacks Investment Research, a Chicago firm that tracks Wall Street’s rankings of stocks and acres of other financial statistics on virtually every publicly traded company. Our value sample dug up stocks that could continue doling out returns while withstanding more punishment should stocks continue to stumble. Our selection of growth stocks produced shares we felt were modestly priced for their prospects, with the potential to move sharply higher in a turnaround.
n The Bigger the Better. Both screens are limited to stocks with a market worth of $2 billion or more, a criterion we chose to keep risk to a minimum. In this turbulent market, a little bit of girth is bound to steady a stock’s performance and is a signal that management quite possibly has hunkered down in other troublesome times.
Inside Moves. Our screens sleuthed out clues from the boardroom–insider stock trading–as a hint from corporate management that business at its company was doing fine. The CEO and executive suite cronies tend to buy their own company’s stock big when prospects are good and the stock is cheap. We, therefore, looked for companies that reported 2% or greater increases in inside ownership in the previous 12 weeks. In most cases we got more than we asked for; all of our selections reported a 7% or higher increase in stock purchases by executives over the previous quarter save one, Venator (NYSE: Z), with a 2.7% climb.
Down With Debt. We struck companies strapped with debt off our list in the name of keeping risk down. If times stay bad, we think a relatively clean balance sheet could free up cash for better pursuits by management. So, we limited our value picks to a debt-to-equity ratio of 0.66 or less. We permitted our growth group a little slack by looking for companies with a ratio of 1.00 or less.
Growth–How to Get It On the Cheap. From there, our screens diverge. For good growth picks, we scanned for companies that could beat Wall Street’s historical annual average increase in corporate earnings of 7% to 8%. In fact, we chose selections that are projected to surpass that figure, with at least a 10% average annual increase over the next five years, a sign that a company should benefit greatly once a recovery sets in.
Value–Built to Take a Licking. Since value stocks sometimes take a while to gain market recognition before rising in value, we looked to collect some income during the wait–a dividend payout or yield, a slice of profits management reserves for shareholders each quarter. In the past few years, the dividend paid by the stocks of the S&P 500 has dwindled to a paltry 1.4%–just under 2% of a company’s share price, in other words. That’s a far cry from the 4% the S&P 500 has averaged over the years. We wouldn’t settle for