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Stock screens invaluable

About John Dorfman
Picture John Dorfman 617-542-8888
Freelance Columnist
Pittsburgh Tribune-Review

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. His firm or clients may own or trade securities discussed in this column.

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By John Dorfman

Published: Tuesday, Dec. 24, 2013, 12:01 a.m.

One of the biggest bargains in the world of investing is membership in the American Association of Individual Investors.

For $29 a year, members get a monthly magazine, the right to attend chapter meetings and access to an excellent website with more than 60 stock screens.

A stock screen is simply a computerized list of stocks that meet specified criteria. What I love about AAII's web site is that it tells how each screen has done over various time periods, going back in most cases to 1998.

I like to focus on screens that have done well both in the long term and recently. One is the “Piotroski High F Score” screen. According to AAII, this screen has averaged a 21.3 percent annual return since 1998 and has returned 142.3 percent this year through Nov. 30.

Joseph Piotroski is a professor of accounting at the University of Chicago Graduate School of Business. His screen (as interpreted and disseminated by AAII) starts with a low stock price compared to book value (corporate net worth per share).

To pass the screen, a company must pass eight out of nine additional tests, most of them relating to financial strength or operational success.

For example, a stock gets one point if it had a positive return on assets in the preceding fiscal year. If the ROA is higher than the year before, that's good for another point.

Another standard calls for cash flow higher than earnings. That means that earnings are not jacked up by non-cash accounting adjustments.

Companies gain an F-score point if their gross profit margin improved in the latest year.

The Piotroski screen is not infallible. AAII's version of it experienced a 21 percent decline in 2007 and a 41.5 percent decline in 2008, plus small losses in 2000 and 2011. But it has produced gains about three quarters of the time.

Five stocks pass AAII's version of the Piotroski screen. They are:

•SkyWest Inc. (SKYW).

•URS Corp. (URS).

•Golden Star Resources Ltd. (GSS).

•Fresh Del Monte Produce Inc. (FDP).

•Delta Apparel Inc. (DLA).

Skywest, out of St. George, Utah, flies more than 700 planes, serving smaller cities for major airlines such as United and Delta. It operates under various names, including Delta Connection, United Express and US Airways Express.

This airline is more consistently profitable than most: It has posted a gain in 14 of the past 15 years. And its valuations appeal to me — 12 times earnings, 0.2 times revenue and 0.5 times book value.

Skywest's debt is higher than I like, exceeding equity. And like all airlines, it is vulnerable to rising fuel or labor costs. On the whole, my view is mildly positive.

URS, with headquarters in San Francisco, is an engineering and construction company that does a fair amount of defense work. Again, valuations are compelling, at 13 times earnings, 0.3 times revenue and 0.9 times book value.

Deriving about a quarter of its revenue from federal contracts, URS is potentially vulnerable to cuts in government spending. It return on stockholders' equity has never been especially strong, but its balance sheet is. On balance, I like it but don't love it.

Golden Star is a small gold mining company based in Toronto. Its market value is barely over $100 million, and it's a penny stock at 39 cents a share. It used to trade at higher prices, more than $5 a share in October 2010, for example.

The company has two working mines in Ghana and is exploring elsewhere in Africa and in South America. It is cheap at 0.5 times book and 0.2 times revenue, but it has been posting losses lately. As a raw speculation I like it, but the stock is thinly traded, so do not chase it.

Fresh Del Monte Produce, based in the Cayman Islands, produces and sells bananas, pineapples, strawberries, salads, and other fresh fruits and vegetables.

Fresh Del Monte is consistently profitable but slow growing. It is safer than the first three stocks mentioned here but probably has less dramatic potential for gains. It sells for 15 times earnings and 0.9 times book value.

Delta Apparel sells sports clothing under a variety of brand names, including Soffe, Cotton Exchange, Junk Food, and Intensity Athletics; it makes private-label tee shirts.

Two recent loss years (including 2012, when cotton prices were high) mar a generally profitable record, but the company's earnings have been erratic. At just under book value and 0.3 times revenue, the shares are attractively cheap.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at jdorfman@thunderstormcapital.com.

 

 
 


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