MSM

A Few Of Our Favorite Screens

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These Are a Few of our Favorite Screens

For the January Round Table, we spent some time with a few screening resources in the quest for some good ideas for further study. We’ll collect them here and tabulate the overall results, using a version of the coach’s poll for collegiate sports (20-16-12-8-6-4-2-1 for votes) and see what percolates to the top of the charts.

Screens Featured

The Top 25

Knighthunt4

Ivory Soap Screen

This screen is based on a recognition that the two most important characteristics of any investment are (1) the return forecast and (2) the quality of the company. The MANIFEST Rank is an index that combines the two characteristics with essentially equal weighting. Here are the top eight results of a current screen based solely on MANIFEST Rank > 99.44

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Triple Play Screen

This is one of the more popular screens that we’ve covered over the years. It generally works best after a bear market has raged for a while.

It focuses on some of the primary drivers for higher long-term return forecasts. The three things we’re looking for are:

  • Elevated return forecast … generally because of a (hopefully) temporarily hammered stock price.
  • Potential for P/E Expansion … a higher P/E in the future than the current P/E.
  • Margin Enhancement … projected profitability in the long-term forecast that is higher than current levels.

Using one of the current leaders for this screen, we note that Qualcomm (QCOM) has a low return forecast of 9-10% according to Value. Keep in mind that the average low return forecast for the Value Line universe is 3-4%.

We also see a future P/E of 16.0x versus current levels of 13-14×.

Value Line expects “flat” net margins in the 33-34%. The reason this triggered in our database is that the analyst consensus is more optimistic than Value Line when it comes to future profitability for Qualcomm.

For more on this Triple Play screening approach, check out the archived presentation at: https://www.manifestinvesting.com/forums/14/topics/2778

Triple play screen 20150129

Gateway Champions

This screen is inspired by our repeat group champions, the Broad Assets investment club of St. Louis. Broad Assets repeated as champion last year and is running 2nd this year as Groundhog VIII comes to a close in a few days. We featured the concept behind this screen in our Victory By Escape Velocity? cover story from May 2014.

Nutshell: If you really believe that stock price follows earnings, it makes all the sense in the world to look for those conditions.

In this case, we focus on year-over-year (2015 over 2014) earnings estimates and focus on the companies with the strongest upside. We also limit the field to companies that have shown increasing earnings for each of the 4-5 years displayed. (All year-over-year figures > 0%)

Lannett (LCI) continues to have strong expectations, but it will be interesting to see what Broad Assets does with LCI in the future as 2016 EPS estimates are finally plateauing. We also note the presence of Balchem (BCPC), a long time favorite of another St. Louis club — Mutual of St. Louis and our friends Jay and Ray.

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Schloss Screen

The American Association of Individual Investors (AAII) features a number of screens based on famous investors and methods including one of our time-honored all-time favorites, Walter Schloss.

Screening Criteria

  • Companies that trade on the over-the-counter market are excluded
  • ADR stocks are excluded
  • Companies in the financial sector are excluded
  • Stock has been traded for at least seven years
  • Current share price is less than the latest quarterly book value per share
  • Current share price is within 10% of its 52-week low (Hugh McManus has to like that one)
  • Percentage of insiders owning shares is higher than the median insider ownership percentage for the entire database
  • Long-term debt from the most recent quarter and fiscal year equals zero

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Piotroski Screen

Joseph Piotroski, associate professor of accounting at Stanford University’s Graduate School of Business, undertook a study of low price-to-book value stocks to see if its possible to establish some basic financial criteria to help separate the winners from the losers.

The result, a favorite screening method among AAII members, is the top-performing screen since inception nearly 20 years ago.

Low Price-to-Book-Value

Piotroski’s work starts with low-price-to-book-value stocks. Price-to-book value was a favorite measure of Benjamin Graham and his disciples who sought companies with a share price below their book value per share. While the market does a good job of valuing securities in the long-run, in the short-run it can overreact to information and push prices away from their true value.

Measures such as price-to-book-value ratio help to identify which stocks may be truly undervalued and neglected.

Motley Fool CAPS

Most frequently chosen Outperform Ratings by the CAPS All-Stars (successful stock pickers) that have 5-Star ratings on 1/29/2015.

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Modified McManus

Hugh likes to shop for high-quality companies when they are trading near their 52-week lows. He keeps a fairly short list of qualified accumulation targets for his personal portfolio. We covered this screening concept here: Gone Fishing … Patiently

What makes this version of the list “modified” is that we’ve applied his shopping methods to the 6000+ companies in the Value Line database, limiting qualifiers to Financial Strength ratings of B+ (or better) and a return forecast (VL 3-5 Yr Proj Ann Tot Return or PAR) to double digits, in general, or better. (Data Source: Value Line Investing Analyzer)

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Great Buffalo

One of our favorite sources of ideas are successful/active fund managers. One of our favorite small company mutual funds is Buffalo Growth (BUFSX) shepherded by Kent Gasaway and his team.

The accompanying table (exported from Morningstar/Premium Version) provides a summary of buy/accumulate decisions made over the last quarter by the Buffalo team.

KYTHERA Biopharmaceuticals (KYTH) is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel prescription products for the aesthetic medicine market.

Case Studies and Analysis Demonstrations

The stocks featured during the January Round Table:

  • Caterpillar (CAT)
  • Google (GOOG)
  • MSC Industrial (MSM)
  • QUALCOMM (QCOM)

The audience selected QUALCOMM (QCOM) from the candidates.

Sell Transaction

MWI Veterinary Supply (MWIV) was “sold” from the tracking portfolio during the session. MWIV is being acquired by Amerisource (ABC) for $190. Ken Kavula selected MWIV back on 11/29/2011 for $64.79, so $1000 became $2969 — an annualized return of 40.5% and a relative return of +22.9% versus the Wilshire 5000.

Archived Recording of January Round Table

The recording of this event is now available on the event page:

https://www.manifestinvesting.com/events/163-round-table-january-2015

It can also be found on YouTube at:

http://youtu.be/38J1L6uYT5c

If you enjoy this session, please leave us a comment or click Like on the YouTube page.  Thanks!

Round Table (January 2015)

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The stocks featured during the January Round Table:

  • Caterpillar (CAT)
  • Google (GOOG)
  • MSC Industrial (MSM)
  • QUALCOMM (QCOM)

The audience selected QUALCOMM (QCOM) from the candidates.

Sell Transaction

MWI Veterinary Supply (MWIV) was “sold” from the tracking portfolio during the session. MWIV is being acquired by Amerisource (ABC) for $190. Ken Kavula selected MWIV back on 11/29/2011 for $64.79, so $1000 became $2969 — an annualized return of 40.5% and a relative return of +22.9% versus the Wilshire 5000.

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MSC Industrial Direct (MSM)

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This month’s stock feature is a company that is never too far from our radar screens. Frankly, I’m a little surprised that MSC Industrial (MSM) has not been selected over the past ten years. Sometimes the best long-term investments aren’t the sexiest. Nuts and bolts matter.

MSC Industrial Direct (MSM) markets industrial products to small- and mid-sized customers throughout the United States. It distributes a full line of industrial products, such as cutting tools, abrasives, measuring instruments, safety equipment, fasteners, welding supplies and electrical supplies. It’s about building and/or fixing things and hence, the health of the general economy matters. Many investors have been rewarded by investments in companies like Danaher, Fastenal, W.W. Grainger and Snap-On and this company is no exception. MSM is worthy of inclusion among these reliable favorites.

The low total return forecast is 12% at Value Line. The stock price could languish a little if the global recession persists.

MSC Industrial (MSM): Business Model Analysis. Continuing with our testing and work-in-progress, we take a look at the judgment milestones for MSC Industrial. The long-term top line and bottom line trends speak for themselves. Based on a growth forecast of 9-10%, projected profitability in the 10% net margin range and a reasonable P/E ratio of 19-20x in the future, the return forecast is 15-16%.

Growth, Profitability, Valuation

Value Line projects long-term sales growth at 9.5%. We’ll use 9.7% for the sales growth forecast based on the regression from 2010-18.

Based on the historical trends, it’s feasible to envision a 10% net margin. The trailing 6-year average is 9.7%. Value Line has a projected net margin of 10.4% in their long-term forecast.

The historical P/E (trailing 6-year average) has been 19.3×. Value Line has a projected average P/E of 22×. At the time of selection (1/12/2015), the average projected annual return for MSM is approximately 15-16%.

The quality RANKING for MSM is 88 (Excellent) with a financial strength composite (percentile ranking) of 97. Earnings stability is 83.

Morningstar has a fair price estimate of $95 (price-to-fair value of 78%) and S&P checks in with a fair value estimate of $83.60 (P/FV of 88%.)

A Main Street Walker

The company has a history of sound decisions. Value Line analyst Simon Shouclair (1/16/2015) points out that “Cash deployment pays off for shareholders. Indeed, MSM has not only raised its dividend, the company has been doling out some substantial special distributions in recent years, including a sizable $3.00 per sh outflow in October 2014. Share repurchases have also helped to boost shareholder value.”

A company that invests in itself when its return forecast is superior is more music to our ears. “Although the untimely stock has been battered of late, patient investors should note the wide total return potential out to late decade.”

Ahhh. Untimely. Battered. Patience. And that’s our time horizon mentioned. Music to our ears, again. There should be little mystery as to why we included the company among of selections for the 2015 Crossing Wall Street Challenge.

Building and fixing Main Street is a great idea.

Fastenal (FAST): Look Out Below?

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Fastenal (FAST) has broken below a relative strength index of 70 recently — and bears watching.

A little weakness in today’s earnings report could  go a long ways (price swoon) as the conditions are a little more vulnerable than usual to a price correction.  As Dan Hess pointed out, other companies (e.g. MSC Industrial) are displaying similar fundamental weakness in their operating results.

As always, this long-term community favorite should have plenty of leash when it comes to portfolio-centered decisions.  Treat it as core and hold unless Fastenal (FAST) is your best challenge candidate for your portfolio.

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Point of View: Update

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Value Line Low Total Return Screen (1/18/2013)

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The Value Line low total return forecast (for approximately 1700 stocks) is 8.2%, down from 8.5% last week.

Companies of Interest

It was nice to see Hillenbrand (HI) get an upward nudge in long-term price forecast. We featured it three and six months ago … and the price has advanced nicely. This boost restores the low total return forecast to 4.5%.

MSC Industrial Direct (MSM) markets industrial products to small- and mid-sized customers throughout the U.S. MSM distributes a full line of industrial products such as cutting tools, abrasives, measuring instruments, safety equipment, fasteners, welding supplies and electrical supplies. Like Grainger (GWW), the company has been a long-time favorite and is worthy of further study — a good opportunity if you believe in a continuing economic recovery.

Materially Stronger: Hillenbrand (HI), Middleby (MIDD), United Rentals (URI), American Water (AWK)

Materially Weaker: Digital River (DRIV), Stonemor (STON), Tecumseh Products (TECUA)