Screening Results (February 2016)
In Search of “First Stage” Potential
by Mark Robertson
As we’ve watched the Broad Assets investment club win three of the last four years in the Groundhog group competition, we’ve searched for a common theme … a genesis of their statistically significant success.
Escape Velocity?
Our May 2014 cover story captured the essence pretty well. We’re looking for companies that are not only well-positioned for the long term with the insurance component of high quality, but companies poised to deliver large year-over-year increases in earnings. If we believe that stock prices follow earnings — and we do — it seems natural to seek these launch pad situations.
This month’s screening results are an attempt to do just that. The list that follows is a collection of excellent quality companies. But they also have relatively large expectations for 2016 earnings vs. 2015. The average forecast increase is 12.4%. All of these top that threshold. We include the relative strength index (RSI) for a glance at oversold potential. (RSI near 30) We’ll check back in a year to see if the EPS step changes take shape and if prices follow. If they do, it won’t hurt my Groundhog 2016 entry a bit.
Expecting Alpha 
Of all the stocks listed, the one that seems out of sync with the others is Baidu because of the low total return estimate at Value Line. Since earnings are impacted by large investments in various growth initiatives, I wonder if their analyst is over compensating. Everyone should also take note of Morningstar Stock Investor Editor Matthew Coffina’s Open Letter to the CEO and Independent Directors of Baidu in regard to the proposed sale of its online video subsidiary iQiyi. Certainly long-term growth potential could be impacted by letting go of a “Netflix-like” business. Insider deals don’t improve confidence in China stocks.
I concur. Keep in mind that Value Line (and other fundamental houses) are often challenged by companies that early in their life cycle — where EPS are relatively new to them. Morningstar and S&P (and others) are more optimistic while at the same time operating with “elevated vigilance” about the issues you raise.