Harry Domash's Winning Investing


Finding Bulletproof Stocks 

Stocks That Won't Go Broke

Holding a stock that files for bankruptcy usually means that you’ll end up losing your entire investment. In fact, even rumors that one of your stocks might go under could ruin your day.

Thus, it’s always a good idea to confine your investing to financially solid firms that won’t buckle if our economy takes an unexpected dive. I call them “bulletproof stocks.”

I described such a strategy for identifying such stocks a couple of years ago, but today, I’m tweaking it somewhat and adding a test to rule out stocks in long-term declining industries.  

Stock Screen for Finding Bulletproof Stocks

As is often the case, I’ll demonstrate the process using the user-friendly Finviz stock screener. From the Finviz home page (finviz.com), start by selecting Screener, and then, on the Filters bar, click on All to see all available screening filters. Use the adjacent dropdown menu to select a value for each filter that you want to use in the screen.

Since the U.S. economy is by far the strongest, start by using the Country filter to specify U.S.-based stocks.

No Debt & Lots of Cash

Then, limit your list to low-debt stocks by specifying “under 0.3” for debt/equity ratio (D/E), which compares total debt to shareholders equity (book value). Firms with no debt would have zero D/E and the higher the ratio, the higher the debt. While specifying zero D/E sounds tempting, in fact, almost all firms carry some debt.

Next, limit your list to cash rich firms by specifying “Over 2” for Quick Ratio, which requires that a passing firm’s readily available cash is a least double its current liabilities.

Then we’ll check free cash flow to rule out stocks that are draining their cash reserves to fund operations. We’ll do that by checking free cash flow, which measures the cash remaining after funding current operations and making the investments required to remain competitive. For this test, the amount doesn’t matter; we’re only confirming that cash is flowing in, not out. Since Finviz doesn’t have a free cash flow filter, specify “Over 5” for the Price/Free Cash Flow ratio, which could only be positive if cash flow is positive. As a check, also require “Positive” for profitability measure Return on Equity, which assures that passing firms are reporting positive net income.

Rule Out Riskiest Bets

Cheap stocks get that way because market players see problems ahead. Avoid them by specifying “Over $10” for price.

Firms that are in declining industries, such as retail, for instance, could pass all of our tests, but still face future financial problems. Specify “Positive” for “Sales Growth Past Five Years” to minimize that risk.

BulletProof Stock List

When I ran the screen, Finviz listed 132 Bulletproof Stocks. Click on Market Cap (value of outstanding shares) to sort the list by company size with the largest companies first. By that measure, the top five Bulletproof stocks were Alphabet (GOOGL), Facebook (FB), Nike (NKE), Adobe Systems (ADBE) and Regeneron Pharmaceuticals (REGN). Click here to see which stocks the screen is turning up today.

Qualifying as bulletproof means that a stock isn’t a bankruptcy candidate, not that you’ll make money owning it. You still have to do your due diligence. The more you know about your stocks, the better your results.

published 2/21/17

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