Ariston Select: Favored Value Plays
(Formerly Reuters Select)
Many investors believe that the only good values out there are to be found among stocks Wall Street rejects or ignores. That's not so. This screen helps you find reasonable value plays that are well regarded by the investment community.
Rationale for this screen
From an ivory tower standpoint, "value" is the only legitimate investing style. After all, how could any rational person buy a stock that is priced above its objective worth?
In the real world, though, life isn't nearly so simple. The factors that we need in order to calculate intrinsic value are so inherently uncertain as to seem doomed to futility. As a result, Wall Street culture evolved in a variety of directions. One is a focus on growth, especially short-term growth prospects. This approach figures very heavily in the recommendations analysts make. The other involves seeing value as a quest for dogs; very low stock valuation metrics for shares of troubled companies.
It doesn't have to be this way. Despite the practical difficulties inherent in assessing intrinsic value, there's plenty of room for proper consideration of valuation metrics for shares of good companies, stocks that analysts favor. This screen seeks these kinds of stocks.
Specific screen criteria
Here's how the screen was created:
We establish the presence of reasonable valuation by requiring that each stock's Trailing Twelve Month (TTM) P/E ratio to be less than the industry average, and each Price/Sales ratio to be less than or equal to the industry average. We then require that the forward looking PEG ratio (the P/E calculated with reference to the consensus EPS estimate for the next fiscal divided by the consensus long-term projected EPS growth rate) to be no higher than 2.00. Many investors believe that PEG ratios should be no higher than 1.00. Such levels would, indeed, constitute very attractive valuation, and another one of our screens (Growth At A Reasonable Price) is based upon that theme. But in truth, the 1.00 PEG ratio owes more to folklore than the mathematics of stock valuation (which computes theoretical P/Es not just on the basis of growth rates but also with reference to interest rates, stock price volatility and dividend payout ratios).
To measure analyst sentiment, we use the average recommendation score. The average rating is calculated as follows: A Buy gets a score of 1.00. Outperform ratings get 2.00 points. Hold, Underperform, and Sell get 3.00, 4.00 and 5.00 points respectively. Then, we compute a weighted average of all the scores. Suppose a stock has three Outperform and three Buy ratings. It gets three points for the Buys (1.00 times three) and six points for the Outperforms (2.00 times three). The total of nine is divided by the total number of ratings (six consisting of three Buys plus three Outperforms) to produce an Average Rating of 1.50. If we add four Hold recommendations to the mix, that adds another 12 points, bringing the overall total to 21. The Average Rating would be 2.10 (21 divided by 10 ratings). The screen requires that this score be less than 2.00 and that it be less than or equal to where it stood four weeks ago. We also require an increase, within the past four weeks, in the consensus EPS estimate for the current quarter.
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