As disciplined investment managers, we consider a fundamental and specialized way of selecting securities. Here are our first option scanner standards, which we refine further with proprietary investigation. By itself, however, it gives important information on three crucial factors for stock choice: cash flow, earnings and valuation.
Dividend over 2.5 percent
Has increased volatility in previous 3 years
Beta under 1 (vs S&P 500)
Revenue growth for previous 3 years (2007 and 2008 eliminated nearly all businesses according to this criteria)
Gross and or working margin growth for previous 3 years
Price-to-book-value ratio below that of peer class
Price-to-cash-flow under that of peer class
Once I was young, my mum instructed me to appear three times before crossing the road: left, right, left. I feel that this sage advice (I am still here now) could be applied to choosing securities too.
First, look to your left: the cash-flow you are going to get. For this, nothing beats dividend-paying shares. Research study clearly shows that dividend-paying stocks have less volatility and greater long-term overall returns than non-dividend-paying stocks. Moreover, businesses which have a history of raising their gains are normally the stronger performers in that category. The graph below makes this painfully (for a few) obvious.
Parenthetically, markets are going to do exactly what they can perform, and nobody has timed the them — at least no one we understand — together with any achievement on a constant basis. Thus, focusing on lower-volatility stocks (a beta below 1) can also be crucial.
Now look to your right: potential growth and what’s coming down the road. Firms and their accountants have raised the manipulation of earnings and also balance-sheet things into an art form. However, 1 thing that’s nearly not possible to skew, particularly during prolonged periods of time (absent of fraud, naturally) is internet sales, i.e., earnings growth.