Is Cheap Growth Still Available After Rally?

This was the theme behind my latest stock screen. After the massive run-up, investors need to be careful that laggards were not left behind for good reason. So I screened for cheap stocks relative to their expected growth rates while requiring high return on assets (ROA) and return on equity (ROE).  I added an additional requirement that the stock be within 50% of its 52-week lows to make sure I don’t buy in at the top. The specific criteria are listed below:

  • PEG < 1;
  • ROA > 10%;
  • ROE > 15%;
  • Positive revenue growth in current and next fiscal year;
  • Positive EPS growth in current and next fiscal year;
  • Within 50% of 52-week low;

As of October 2nd, the screen turned up nine names. You can view the list here, complete with valuation figures and business summaries.

Again, it is important to recognize possible weaknesses in the screens we use. For instance, revenue can be fudged and accounting earnings are not necessarily accurate in representing a business’ true operating status. Unfortunately, the software did not allow for screening for cash flow growth. Also, many of the criteria are dependent on analyst estimates, which are notoriously unreliable. Nevertheless, we use screens to generate possible leads for further research, not as a definitive guide for our investments, so any discrepancies should be caught as we dig into a given company.

The results were diverse, ranging from Allegiant Travel Company (ALGT) to home health services provider, Almost Family, Inc. (AFAM). As is the case with many of my screens, small caps dominated the list with only two companies, First Solar (FLSR) and Myriad Genetics (MYGN), topping $1B in market capitalization.  Two stocks, Arbitron (ARB) and the Ensign Group (ENSG) , paid dividends to supplement their expected growth.

High levels of insider ownership and short interest seemed to run through most of the names on this list. Caveat emptor.

See the full results of the cheap, quality growth screen.

Leave a Reply