SSgA Active Trust - Financial Select Sector SPDR
XLF
40.88
-0.24
(-0.58%)
7:06:12 PM EDT: $40.82 -0.06 (-0.15%)
Finding the Best Stocks in a Down Market
ANALYSIS
PREFACE
The market is tumbling and at this point, even delivering large earnings surprises isn't helping -- think Facebook and Google.
But there is a way to identify the stocks with less risk that have actual earnings, with growing revenue, assets, cash from operations, reasonable debt levels and even pay a dividend. Here's how we go from a cluttered group of nearly 300 companies, down to just 10.
STORY
We start with all companies in all sectors over $10 billion in market cap, we have a list of about 305 companies. Here's that crowded list plotted on one chart, ranked by assets.
Now let's find our gems.
SCAN #1: REVENUE
Let's eliminate any company on the list with revenues under $3 billion. This is our safety check -- no companies with bloated market caps that don't have a legitimate business. This pruning takes us down to 264 companies.
SCAN #2: EARNINGS MARGIN
Next, we will take that list of 264 companies and remove any firm that doesn't have a net income margin of 5% or larger. This assures we not only get companies that are profitable in the last year and by a fairly healthy margin. This drops us to about 230 companies.
Here's how the list looks now:
SCAN #3: REVENUE GROWTH
Next, we will take that list of 230 companies and remove any firm that isn't growing revenue by at least 5%. This cuts our list down to about 100 companies.
Here's how the chart looks now:
SCAN #4: CASH FROM OPERATIONS GROWTH
Next, we will take that list of 100 companies and remove any firm that isn't growing cash from operations by at least 5%. This cuts our list down to about 80 companies.
Here's how the new chart:
SCAN #4 and #5: DEBT AND DIVIDENDS
For our final pruning, we take the remaining companies and remove any that have a debt to equity ratio greater than 0.5 -- this implies that if they do have debt, they are not overburdened by it. We will add to that scan by removing any companies that don't pay a dividend.
Here is our final cut with dividend yield plotted on the y-axis and debt to equity plotted on the x-axis.
We are left with just ten companies.
WHAT WE HAVE
We have taken an enormous population of companies and pruned it down to a the precious few that at the very least show safety and strength. In fact, if we look at the companies left, we find some remarkable names:
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Nvidia (NVDA) is CML Pro's Top Pick for artificial intelligence.
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Apple (AAPL) is CML Pro's Top Pick for mega technology.
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WHY THIS MATTERS
All of this charting research was done using the CML Pro visual scanner in less than 10 minutes.
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Thanks for reading, friends.