Stocks With Strong Recommendations

 | Dec 02, 2013 | 11:30 AM EST  | Comments
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Stock quotes in this article:

afsi

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swhc

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orcl

Followers of my columns know that to choose stocks, I use computerized strategies I created based on the way great investors choose stocks. The investors I mimicked included Peter Lynch, Warren Buffett, David Dreman and Benjamin Graham, along with a host of others.

Many years ago, after I tried to devise my own investment strategy, it occurred to me there was no reason to reinvent the wheel. Others, who were smarter and more knowledgeable, had already developed strategies for stock market investing whose value had been proven over time.

More than a decade has passed since I started following most of the strategies I automated, and history has proven me right: these are great strategies that, over the long term, have almost always outperformed the market (I measure the market via the S&P 500).

If a company gets a high score from one of these guru strategies, it qualifies to be written about in this column. Today, I want to be especially conservative by reporting on three companies who earn accolades from two guru strategies. Earning the praise of one guru is impressive; when two stand up and cheer for a company, you know it is strongly recommended.

AmTrust Financial Services (AFSI) is a multinational specialty property and casualty insurer targeted to the small- to mid-sized business. My Peter Lynch and James O'Shaughnessy strategies are high on this insurer. The O'Shaughnessy strategy likes that earnings per share have increased in each of the past five years and that the price-to-sales ratio, a measure of how cheap is a stock, is at 1.20. That's nicely below the 1.50 maximum allowed. And the O'Shaughnessy strategy likes that the stock's relative strength is 79.

The Lynch strategy's most important variable is the P/E/G ratio, which is price-to-earnings relative to growth, and is a measure of how much the investor is paying for growth. AmTrust's P/E/G is 0.75, well below the 1.0 maximum allowed. The company is also doing a good job investing its assets, earning a return on assets of 3.23%, well above the 1.0% minimum required.

Another Lynch-favored stock is enterprise software giant, Oracle (ORCL). Its yield-adjusted P/E/G is a solid 0.71. My Warren Buffett-based strategy also likes this company. Aspects of Oracle liked by this strategy are a dominant market position, an EPS that have increased in each of the past 10 years and return on equity that averaged 23.7% over the past decade.

Also favorable is an estimate by the strategy that investors will earn an annual 15.1% on their Oracle investment. All of these factors make this a stock worth owning.

Legendary firearms maker Smith & Wesson (SWHC), in business since 1852, earns the trust of my Lynch and Joel Greenblatt strategies. The Lynch strategy likes this company because of its extremely low P/E/G, which is 0.20.

The Greenblatt strategy looks at earnings yield and return on total capital. It ranks a company on how well it does according to these variables vs. all the thousands of stocks in our database. Right now, Smith & Wesson ranks 21 among all of these stocks, which is quite a testament to how well the company is performing.

None of these companies are get-rich-quick type investments. They are well-established, well-respected, financially-solid firms with track records of success. It is no surprise, really, that two guru strategies like each of these companies -- there is a lot to like about all of them.

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