Bulletproof
Stocks
Stocks
That Won't Go Broke
Given the risk that the ongoing credit problems in Europe could still
trip up the U.S. economy, caution should be your watchword, regardless of
whether you’re thinking of jumping on rocketing new companies or sticking
with relatively staid value plays.
Either way, priority number one should be avoiding companies that might
run short of cash in the event of an unexpected business slowdown. Just
the rumors that your stock might be facing bankruptcy would sink its share
price.
Thus, it’s best to stick with stocks unlikely to suffer that fate. I
call them “bulletproof stocks.” Here’s how to find them.
Screening For Stocks That Can't Go Broke
Identifying bulletproof stocks involves developing a set of
requirements that firms with weak or potentially weak balance sheets can’t
possibly meet. You can then use a stock screen to find qualifying stocks.
Stock screens are programs available on certain financial websites that
allow you to search the entire market for those meeting your specific
requirements.
I’m going show you how to use the free Custom Stock Screener offered by
Zacks Investment Research to isolate bulletproof stocks: debt-free,
profitable companies with plenty of cash in the bank.
Find the screener by selecting “Screening” from Zacks homepage (www.zacks.com)
and then click on
Custom Screener. The screener is easy to use
once you get the hang of it. The available search terms (parameters) are
divided into categories such as Valuation, Balance Sheet, Return on
Investment, etc.
You use it by selecting a category containing a search term of interest,
filling in the required information for that parameter, and then clicking
“Add.” The trickiest part of following my description will be finding my
specified search terms, so I’ve listed the corresponding category name in
parenthesis after each search term description. If you’re rusty on your
math terms, you need to know that “>=” translates to “equal to or greater
than,” and “<=” means “equal to or less than.”
Here’s how to construct the bulletproof stocks screen.
No Debt – No Problem
Start by limiting the list to debt-free firms. The debt to equity ratio
compares long-term debt to shareholders equity (book value). Zero values
reflect no long-term debt and the higher the ratio, the higher the debt.
Although we want zero debt, setting the maximum allowable D/E at 0.1
allows companies carrying incidental debt such as long-term leases to
pass. Debt/Equity Ratio <= 0.1 (Liquidity & Coverage)
Cash is King
Next, isolate stocks with plenty of cash on hand to cover current bills.
The quick ratio compares the total of cash in the bank plus accounts
receivables (cash due from customers) to current bills (current
liabilities). Specifying a minimum quick ratio of 2.0 means that cash plus
receivables must be at least double the current liabilities. Quick Ratio
>= 2.0 (Liquidity & Coverage)
Avoid Cash Burners
Cash in the bank isn’t enough. You need to know that those bank balances
aren’t going to disappear. Operating cash flow measures cash that flowed
into or out of a firm’s bank accounts from its operations. Unlike
earnings, which can be manipulated, cash flow must match real bank
balances. For this test, you only need to know is that cash flowed in, not
out (burning cash). For this purpose, the amount doesn’t matter. Cash flow
(millions) >= 0.001 (Income Statement & Growth).
Trust But Verify
While the positive cash flow requirement should be sufficient to assure
that passing firms are profitable, you can’t underestimate the creativity
of motivated accountants. Checking for positive net income helps to assure
that the firm is profitable. Net Income (millions) >= 0.001 (Income
Statement & Growth).
Real Company
Most stocks rack up annual sales well in excess of $100 million. Requiring
$50 million rules out companies that aren’t real businesses. Annual Sales
>= 50 (Income Statement & Growth)
Cheap Just Gets Cheaper
Cheap stocks get that way when savvy investors spy serious problems ahead.
Requiring a minimum $5 trading price rules out stocks facing issues that
the screen may have missed. Last Close >= 5 (Price & Price Changes)
When I ran the screen, it turned up 371 stocks. Use this link to see the
list: http://goo.gl/W3EX3.
Qualifying as bulletproof only means that a stock isn’t a bankruptcy
candidate, not that you’ll make money owning it.
published 12/18/11 |
