How should an investor address the ever-present question as to whether an exciting, media-saturated stock is actually a sound opportunity? In anticipation of Snapchat Inc.’s IPO, Validea CEO John Reese addresses the quandary in his article for Nasdaq this week.
Citing new research by Charles Lee and Ken Li of Stanford University, Reese explains the need for caution in situations such as this. Findings suggest that “those companies most likely to issue stock have a history of negative return-on-assets, high valuation multiples, previous capital raises and positive price momentum.”
Circling back to screening models he created based on the strategies of investing legends such as Warren Buffett and the late Benjamin Graham, Reese identifies five high-scoring stocks:
- Herman Miller, Inc. (MLHR) is engaged in the research, design, manufacture, sale and distribution of office furniture systems, related products and services. The stock has a favorable price-sales ratio and growth in earnings-per-share (inflation-adjusted).
- Principal Financial Group Inc. (PFG), an investment management company offering a range of financial products and services, earns a thumb’s up for its persistent earnings-per-share growth over the last five years, favorable price-sales ratio and free cash flow-per-share.
- Cooper Tire & Rubber Co. (CTB) is a manufacturer and marketer of replacement tires with a favorable ratio of price-earnings to EPS growth (PEG ratio) as well as modest debt-equity. Its three-year average net profit margin adds interest.
- Michael Kors Holdings Ltd. (KORS) is a designer, marketer, distributor and retailer of branded women’s apparel and accessories that has low leverage and favorable liquidity. Even given the recent struggles in the retail sector, KORS could be among those that present an investment opportunity.
- Maximus Inc. (MMS) provides business process services to government health and human services agencies. The company has both a healthy revenue base and favorable price-earnings ratio as well as modest debt levels.