Today I decided to do a random stock screening process to pick some strong fundamental medium to small cap stocks (market cap less than 5b) with relative low P/E ratio (<= 20) in order to test my stock picking methodology:
Here are my screening criteria via Yahoo finance stock screener:
(1) Market cap <= 5b - to filter out large cap stocks
(2) Forward P/E <= 20 - to filter out high P/E ratio stocks
(3) Return on Equity >= 15% - to identify strong growth stock
(4) Earning growth past 5 years >= 10% - to identify strong growth stock
(5) Quick Ratio >= 1 - to find out financial sound companies
(6) Total Debt / Equity <= 0.5 - to find out financial sound companies
Below are the screening results total 12 stocks which can fulfil above criteria:
AAON , AAON, Inc. , 24.55
CGA , China Green Agric , 7.35 Stock price less than $10.00
CNU , Continucare Corp. , 4.5 Stock price less than $10.00
DORM , Dorman Products, , 36.49
FSIN , Fushi Copperweld, , 9.32 Stock price less than $10.00
HANS , Hansen Natural Co , 51.21
IDCC , InterDigital, Inc , 33.57
KEI , Keithley Instrume , 21.58
LANC , Lancaster Colony , 49.92
MMS , Maximus, Inc. Com , 60.63
OMPI , Obagi Medical Pro , 11.41
PTI , Patni Computer Sy , 20.9
Three of them current price less than $10.00 per share I will not take them into consideration, I prefer to trade stocks within $10.00 - $100.00 range.
I also filtered out another 5 stocks due to their inconsistent earnings or a relative low average ROE rate (<15%) for the past 5 years.
IDCC KEI OMPI - inconsistent EPSGR for the past 5 years
DORM MMS -
past 5 years average ROE less than 15%
Now only left AAON, HANS, LANC, and PTI; I will estimate their intrinsic value.
AAON | | | |
Sector | Industry | ROE (5 yrs) | GM (5 yrs) |
Industrial Materials | Building Materials | 24.67% | 23.86% |
EPS (2010) | EPSGR (5 yrs) | EPS (2015) | P/E (5 yrs) |
$1.44 | 9.86% | $2.30 | 15.60 |
P(2015) | P(2010) | P(current) | P(52-Week ) |
$35.94 | $17.87 | $24.55 | 18.00-26.13 |
HANS | | | |
Sector | Industry | ROE (5 yrs) | GM (5 yrs) |
Consumer Goods | Beverages - Soft Drinks | 40.33% | 52.56% |
EPS (2010) | EPSGR (5 yrs) | EPS (2015) | P/E (5 yrs) |
$2.21 | 17.40% | $4.93 | 15.50 |
P(2015) | P(2010) | P(current) | P(52-Week ) |
$76.42 | $38.00 | $51.21 | 24.01-52.84 |
LANC | | | |
Sector | Industry | ROE (5 yrs) | GM (5 yrs) |
Consumer Goods | Packaged Foods | 18.86% | 21.01% |
EPS (2010) | EPSGR (5 yrs) | EPS (2015) | P/E (5 yrs) |
$4.07 | 22.93% | $11.42 | 15.50 |
P(2015) | P(2010) | P(current) | P(52-Week ) |
$177.01 | $88.02 | $49.92 | 43.28-61.60 |
PTI | | | |
Sector | Industry | ROE (5 yrs) | GM (5 yrs) |
Software | Software - Application | 17.14% | 34.56% |
EPS (2010) | EPSGR (5 yrs) | EPS (2015) | P/E (5 yrs) |
$2.12 | 19.78% | $5.23 | 11.68 |
P(2015) | P(2010) | P(current) | P(52-Week ) |
$61.09 | $30.38 | $20.90 | 18.11-28.33 |
Note:
- 5 years average data were calculated from 2006 - 2010.
- If 5 years average P/E higher than S&P 500 5 years average P/E, S&P 500 P/E ratio will be applied.
- P(2015): estimated stock price in 2015 - this if stock price Future Value (FV).
- P(2010): estimated stock price after applied annual discount rate of 15% in today's value - this is the intrinsic value or Present Value (PV) of the stock price.
- P(52-week): 52 weeks stock price movement range range.
You can see from above table currently AAON & HANS are over-valued, I will put it under my watch list and wait for the market correction in order to get the real bargain deal.
Now let's look at LANC & PTI in deeper details:
LANC - Lancaster Colony manufactures food products, automotive accessories, glass products, and candles. The company's largest division, which produces specialty foods, markets condiments, baked goods, and pasta under brand names such as Girard's, Pfeiffer, and Marzetti. Its automotive division produces floor mats, truck splash guards, and other parts, which it sells to auto manufacturers and retail stores.
Current stock price $49.92 was within lower band of 52-week price range and also about 44% discount to it's intrinsic value price $88.02.
The intrinsic value was calculated base on past 5 years (2006 - 2010) EPS data 1.45, 1.28, 3.18, 4.07, 4.07 to work out growth rate @ 22.93% per annum.
But if we look at the EPS data from 2000 - 2005 2.49, 3.11, 2.24, 2.67, 2.48 it seems that the EPS growth was inconsistent and also without any clear trends.
If we take more conservative estimation, let's say the growth rate for next 5 years will be 15% per annum (since 5 years average ROE was about 18.86%) which worked out the intrinsic value is about $63 per share. Current stock price is about 21% lower than intrinsic stock price and we should take this opportunity to buy this stock and wait for market to recognise it's true value.
PTI - Patni Computer Systems, an offshore-centric IT service provider from India, is known for its long history of managing large client relationships and its strong domain expertise in the select industries of insurance, manufacturing, financial services, and telecommunications. However, Patni does suffer from high client concentration and a limited global presence. In our opinion, Patni is a relatively weak player in a good industry.
Current stock price $20.90 was also close to the lower band of 52-week price range and it was about 31% discount to it's intrinsic value price $30.38.
But same findings can be derived from past 10 years EPS data.
2001 - 2005: 0.48, 0.64, 0.66, 0.92, 0.96 - growth rate @ 14.87%
2006 - 2010: 0.86, 1.64, 1.50, 1.84, 2.12 - growth rate @ 19.78%
We can find that past 5 years earning growth was much faster than previous 5 years period. Since the average ROE (for past 5 years) was about 17%, we can take a conservative estimation the next 5 years EPS will be increasing about 15% per annum which work out the new intrinsic value is $24.63.
Current price $20.90 was about 15% lower than the intrinsic value. To me 15% was not a clear margin of safety I will put it under my watch-list and wait for the stock price drop to below $19.70 (80% of the intrinsic value $24.63) then start to buy it.
