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Seeking Solid Stocks

In early December I found myself with a bit of extra cash to invest. So, I quickly thought of the many features that I wanted in a stock and set off to the Internet to find them. My first task was to find a good, no fee, stock screening utility. After all, I like it when computers do the bulk of the work. It's even better when they do it for free.

After hopping around web pages, I visited Microsoft's and took a second look at their stock screener.

Many moons ago I visited this site, but was turned off. You see, to use the screener you must first download a small program. This time, I took the leap and downloaded the utility. A few moments later I was quite impressed and began my search.

I started by looking for stocks that met Graham's defensive investor criteria as outlined in The Intelligent Investor (See Figure 1). However, the stock screener only has 5 years worth of data. Undaunted, I approximated and out came nine stocks: AIR, HVT, LZB, RLC, RS, TG, THO, WNC and WSO (See Figures 2 & 3).

Figure 1: Benjamin Graham's Criteria for the Defensive Investor
  • P/E Ratio less than 15.
  • P/Book Ratio less than 1.5.
  • Book Value over 0.
  • Current Ratio over 2.
  • Earnings growth of 33% over 10 years.
  • Uninterrupted dividends over 20 years.
  • Some earnings in each of the past 10 years.
  • Revenue of more than $100 Million (1950).
  • Source: The Intelligent Investor (pages 184-185).

    Figure 2: Screening criteria used to approximate Graham's rules
  • P/E Ratio <= 15
  • P/Book Ratio <= 1.5
  • Book Value >= 0.01
  • Current Ratio >= 2
  • 5 Yr Earnings Growth >= 15%
  • 5 Yr Dividend Growth >= 0%
  • 5 Yr P/E Low >= 0.01
  • 1 Yr Revenue >= $400 Million

    Being of a suspicious nature, I immediately wondered if this list was too good to be true. After all, I'm painfully aware that it can take some time before an announced dividend cut makes it into the average database. The same goes for earnings declines, revenue shortfalls and all manner of other calamities.

    The first thing I checked for were precipitous price declines since they are a good sign that extra digging is required. As it happens, none of the nine stocks showed sudden price plummets but many had slowly declined. For instance, THO had dropped from a year high near $30 down to $20. A recent news release explained the problem; third quarter earnings were down 12.5%. Similarly, AIR had fallen from $28.50 to $12. Why? Earnings had declined by 70% from the previous year.

    The moral of the story is that a good stock screener is just a start. But it's a very handy start.

    I've now happily played with the screener for many hours and have been impressed with the robustness and depth of its data. My only major disappointment is the lack of information on Canadian companies. If you've come across a good, free, Canadian stock screener please let me know. I'm still looking for a few more solid stocks.

    Figure 3: Results of the Stock Screen
    Symbol Company Name P/E P/B Book Current Ratio 5-Year EPS Growth 5-Yr DPS Growth 5-Yr P/E Low Revenue ($M)
    AIR AAR CORP. 11.9 0.95 12.63 3.00 19.97% 1.27% 7.6 920
    HVT Haverty Furniture 7.5 1.20 8.29 3.10 20.58% 5.24% 7.7 674
    LZB La-Z-Boy Inc. 10.0 1.42 11.23 3.10 18.90% 6.21% 8.1 2,077
    RLC Rollins Truck 5.7 1.18 6.80 2.30 19.67% 15.82% 3.6 720
    RS Reliance Steel & Aluminum Co. 11.3 1.50 17.30 3.40 18.54% 26.12% 5.2 1,689
    TG Tredegar Corp. 5.7 1.06 14.69 2.00 27.08% 28.05% 5.9 901
    THO Thor Industries 6.9 1.22 16.29 2.60 26.21% 1.50% 6.4 877
    WNC Wabash National Corp. 5.5 0.44 17.26 2.80 15.31% 8.74% 6.8 1,415
    WSO Watsco, Inc. 10.3 0.94 11.86 3.30 18.52% 6.31% 9.8 1,352
    Source: before the close on December 12 2000.

    Additional Resources:

    First published in the Feb 2001 edition of the Canadian MoneySaver magazine.

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