Revisiting an Old Stock Screen

 | May 25, 2012 | 2:30 PM EDT
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I do a fair amount of screening, both in order to generate ideas and, more specifically, as a way to identify companies with common attributes that might outperform as a group, or an index. It's a scattergun approach, and it's appropriate to review results from time to time in order to gauge what's working and what isn't. The results are not always what you might expect. Exactly one year ago, I featured one such technique that combined solid profit margins and growing dividends -- a potentially compelling double-barreled approach in the hunt for smaller names that might outperform.

Here are the specific criteria:

• Market capitalization between $100 million and $5 billion

• Net profit margin of at least 8% for the trailing 12 months and for the latest fiscal year

• Dividend yield greater than 1%

• At least four consecutive years of increasing dividends

• Payout ratio less than 50%

• Price earnings ratio of less than 20

• No financials

Last year's search yielded just 10 names and, on a total return basis over the past year, that group declined just under 1%. Frankly, that's disappointing -- and, while it's certainly a better performance than the Russell 2000 (down 6.6%), and S&P Small Cap Index (down 1.9%) over the same period, that's of little consolation. However, I still believe that there's merit to this approach, especially over the longer term, and I'm not yet ready to throw this one away. I'll continue to track the original group of 10 names, but also wanted to see which names would make the cut now if I used these same criteria.

This year's list is even shorter: I've come up with just seven names, and just one leftover from last year, Lancaster Colony (LANC). It's a name that I've owned in the past, and one that has quietly put up an impressive run of 49 consecutive years of dividend increases.

The others are fracking-equipment name Carbo Ceramics (CRR), casket maker Hillenbrand (HI), oil-and-gas producer W&T Offshore (WTI), gun maker Sturm, Ruger (RGR), water utility American States (WTR) and business rental name McGrath RentCorp (MGRC). That's quite a diverse list of names.

In terms of portfolio statistics, together these names have an average market cap of about $1.1 billion, a price-to-earnings ratio of 13x, trailing 12-month net margin of 13.5%, payout ratio below 32% and yield of about 2.6%.

Stay tuned.

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