Free Annual Reports
Poking Holes In Stock Screeners (IM,TSO,ODP)
One of the first things investors will find in the media when the market drops is a list of stocks that are either too cheap to resist or to strong to stay down long. Usually these lists of "undervalued" shares are not generated by humans. They come from a screen that has been set up to find bargains. (To learn the basics of computer-aided trading, see Getting To Know Stock Screeners.)
In this article we'll look at three companies that might make it through a typical screen, but, as we'll see, none of them is truly undervalued. The lesson is don't always trust a machine.
Screens That Find Deals?
These screens are often set up to find companies that have below-value P/Es, trade at low multiples of revenue or are likely to experience rapid revenue growth over the next few years. Jeremy Siegel recently wrote that the stocks to look for have an 'A' rating with Standard & Poor's. And, he suggests that you stay away from small-cap firms. (For more on the 'A' rating, see What Is A Corporate Credit Rating?.)
Another set of stocks that investors might look at, aside from those with a rating of 'A' by S&P, is based on a valuation metric such as low P/E, low price-to-book, or low debt companies. By conducting a screen for companies that fit this criterion, you can come up with a list of companies, but that doesn't mean these are quality firms.
Do Humans Really Matter?
One of the stocks that made the cut was computer wholesaler Ingram Micro (NYSE:IM). The company has tiny margins and its net income went down from $115.5 million to $89.4 million in the last quarter. The company's stock is up about 4% over the last two years, compared to the S&P which is up about 17%.
Ingram Micro's shares appear to do poorly whether the market is up or down. At first glance, this company doesn't appear to be hiding much growth potential, and the low P/E multiple may very well be warranted.
Another stock that made it through the low-P/E, and low-debt screener was refiner Tesoro (NYSE:TSO). Citigroup recently downgraded the stock to 'sell' and UBS initiated it at 'neutral'. Those are not the kind of research ratings likely to draw in risk-averse investors.
The downgrade will likely lead to selloffs of this stock, which will push this one south. At first glance, I am not really interested in TSO as a possible investment.
Office Depot (NYSE:ODP) also made it through the screener. Unfortunately, small business customers are cutting back spending and the firm is in fierce competition with Office Max (NYSE:OMX) and Staples (Nasdaq:SPLS). When you are operating in an environment like Office Depot's, it is difficult to set yourself apart from your larger competitors either by price or product offerings.
Do The Research
There is an old saying that "cheap gets expensive". Looking for shares that are at the low end of their trading ranges may seem like a good place to find stocks that are likely to bounce up, but it is also just as likely that they are down for a reason. Although screeners are a very useful, you should always do your own research before you decide to invest in any stock.
For more on finding real value, see Value By The Book and Warren Buffett: How He Does It.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
In this article we'll look at three companies that might make it through a typical screen, but, as we'll see, none of them is truly undervalued. The lesson is don't always trust a machine.
Screens That Find Deals?
These screens are often set up to find companies that have below-value P/Es, trade at low multiples of revenue or are likely to experience rapid revenue growth over the next few years. Jeremy Siegel recently wrote that the stocks to look for have an 'A' rating with Standard & Poor's. And, he suggests that you stay away from small-cap firms. (For more on the 'A' rating, see What Is A Corporate Credit Rating?.)
Another set of stocks that investors might look at, aside from those with a rating of 'A' by S&P, is based on a valuation metric such as low P/E, low price-to-book, or low debt companies. By conducting a screen for companies that fit this criterion, you can come up with a list of companies, but that doesn't mean these are quality firms.
Do Humans Really Matter?
One of the stocks that made the cut was computer wholesaler Ingram Micro (NYSE:IM). The company has tiny margins and its net income went down from $115.5 million to $89.4 million in the last quarter. The company's stock is up about 4% over the last two years, compared to the S&P which is up about 17%.
Another stock that made it through the low-P/E, and low-debt screener was refiner Tesoro (NYSE:TSO). Citigroup recently downgraded the stock to 'sell' and UBS initiated it at 'neutral'. Those are not the kind of research ratings likely to draw in risk-averse investors.
The downgrade will likely lead to selloffs of this stock, which will push this one south. At first glance, I am not really interested in TSO as a possible investment.
Office Depot (NYSE:ODP) also made it through the screener. Unfortunately, small business customers are cutting back spending and the firm is in fierce competition with Office Max (NYSE:OMX) and Staples (Nasdaq:SPLS). When you are operating in an environment like Office Depot's, it is difficult to set yourself apart from your larger competitors either by price or product offerings.
Do The Research
There is an old saying that "cheap gets expensive". Looking for shares that are at the low end of their trading ranges may seem like a good place to find stocks that are likely to bounce up, but it is also just as likely that they are down for a reason. Although screeners are a very useful, you should always do your own research before you decide to invest in any stock.
For more on finding real value, see Value By The Book and Warren Buffett: How He Does It.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Douglas McIntyre
Douglas A. McIntyre is the editor of 24/7 Wall St., a financial commentary site. He has been president of Switchboard.com, which was the 10th most visited website in the world, and publisher of Financial World Magazine. He has served on the board of TheStreet.com. McIntyre graduated from Harvard magna cum laude.
Free Annual Reports
