Among companies trading on the New York Stock Exchange and the Nasdaq, the companies in the consumer cyclical, consumer defensive, technology and real estate sectors have strong financial strength metrics. Such companies include Ross Stores Inc. (ROST, Financial), O’Reilly Automotive Inc. (ORLY, Financial), Hormel Foods Corp. (HRL, Financial), Public Storage (PSA, Financial) and Texas Instruments Inc. (TXN, Financial).
A comprehensive analysis
As discussed in the previous article series, several industries contain good investing opportunities based on a few financial metrics, including restaurants, retail, semiconductors, software and airlines. This article combines all of the financial metrics and look for the companies that meet the following criteria:
- We will only consider the four sectors discussed above. Additionally, we exclude all over-the-counter stocks and companies with market cap less than $2 billion.
- The company has a financial strength rank of at least 6 and a profitability rank of at least 7.
- The company’s Piotroski F-score is at least 7.
- The company’s Altman Z-score is at least 2.99.
- The company’s Beneish M-score is less than -2.22.
- The company’s Greenblatt earnings yield and Yacktman forward rate of return are at least 2 and 5, respectively.
- The company’s operating margin growth rate is at least 2%.
The “Strong Stocks 2016” Screener lists 27 companies as of Oct. 11.
To determine which companies offer the best investing opportunities, we grade the companies using the following rubric.
| Financial Metric | Rating 2 | Rating 1 | Rating 0 |
| Piotroski F-score | Not applicable. | Current F-score > historical median F-score. |
Current F-score < historical median F-score. |
| Altman Z-score | Current Z-score > 2.99 and outperforms historical median Z-score. |
Current Z-score only outperforms historical median Z-score. |
Current Z-score is both lower than 2.99 and the historical median Z-score. |
| Beneish M-score | Not applicable. | Current value is less than -2.22 | Current value is greater than -2.22. |
| SGA / GP ratio | Less than 0.3 | Not applicable. | Greater than 0.3 |
| Operating margin | Not applicable. | Current value outperforms historical median value. | Current value underperforms historical median value. |
| Net margin | |||
| Return on equity | |||
| Return on invested capital | Current value both outperforms both the historical median value and the WACC. | Current value outperforms either historical median value or WACC, but not the other. | Current value underperforms both the historical median value and the WACC. |
| Cash-to-debt ratio | Company has no debt. Score 2 for both. | Current value is greater than 1. | Current value is less than 1. |
| Interest coverage | Current value is greater than 5. | Current value is less than 5. | |
| Days inventory | Not applicable. | Current value is lower than historical median value. | Current value is higher than historical median value. |
| Days sales outstanding | |||
| Sloan ratio | The magnitude of this value is less than 9. | The magnitude of this value is between 9 and 15. | The magnitude of this value is greater than 15. |
| Greenblatt earnings yield | Not applicable. | Current value outperforms historical median value. | Current value underperforms historical median value. |
| Yacktman forward rate of return |
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We then add up the ratings to get the company’s investing score. To determine the best sectors to invest in, we average the investing scores for each sector.
Strong overall financial metrics lead to value opportunities
As discussed in a previous article, the warning signs can give an overall snapshot of a company’s financial outlook. The number of net warning signs is unofficially defined as follows:
# of net warning signs = 2 * # of severe warning signs + # of medium warning signs - # of good signs
For example, Apple Inc. (AAPL, Financial) has six net warning signs: one severe warning sign, four medium warning signs and zero good signs. The following table summarizes the warning signs for the stocks discussed above.
| Company | Ticker | # of Severe WS | # of Medium WS | # of Good Signs | Net Warning Signs |
| Ross Stores Inc. | ROST | 0 | 5 | 4 | 1 |
| O'Reilly Automotive Inc. | ORLY | 0 | 3 | 3 | 0 |
| Hormel Foods Corp. | HRL | 1 | 1 | 4 | -1 |
| Public Storage | PSA | 0 | 1 | 9 | -8 |
| Texas Instruments Inc. | TXN | 0 | 4 | 3 | 1 |
Among the five stocks, Public Storage has the highest number of good signs, including strong financial strength, high Piotroski and Altman scores, expanding operating margins and historically low valuation ratios. The self-storage company has a financial strength rank of 8 and a profitability rank of 9, and its profit margins and returns are near 10-year highs. Additionally, the company’s return on assets outperforms 95% of global industrial REITs.
See also
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Disclosure: The author has no position in the stocks mentioned in the article.
