Sometimes the best strategy is not waiting for an ideal event -- it's taking action when circumstances are favorable, yet not quite as good as they could be. As such, I'm closing out 2011 with what is -- at least for me -- an unusual approach for picking recommendations: using favorable, but not ideal, criteria.
Years ago, I created a set of computerized strategies modeled after the thinking of some of history's greatest investors, as gleaned from their writings. (My website, Validea.com, features these strategies.) When a stock earns a ranking of roughly 90% or more from one or more of these, I've designated it as a strong-interest name worthy of being discussed here. As such, the stocks reported in my Real Money columns generally all have a "strong-interest" rating from at least one strategy.
Meanwhile, stocks that earn ratings of between about 75% and 90% from at least one strategy are those that have "some interest." These stocks are liked by at least one strategy, but are not quite favorites -- and these are the stocks I'm highlighting today. While one "some-interest" rating wouldn't be quite strong enough on its own, the effect pans out as robust when it comes from three different strategies.
One such name is Guess (GES), an apparel and accessories company aimed at the young, and best known for its designer jeans. It operates more than 700 stores in the U.S. and Europe, and licenses an additional 790 stores. Among the strategies that like this company are those based on Benjamin Graham, Kenneth Fisher and James P. O'Shaughnessy.
The Graham screen likes Guess' high liquidity, for one thing, with the firm's current ratio -- current assets divided by current liabilities -- at 2.98:1, well above the strategy's 2.0:1 minimum. Also favored are the company's near lack of debt and its moderate price-to-earnings ratio of 11.40. The Fisher strategy, meanwhile, likes the stock's price-to-sales ratio of 1.05:1, which easily falls within the strategy's desired range of 0.75 and 1.5. Also in its favor is its low debt load and solid three-year average net profit margin of 11.08%, which is more than double the strategy's required minimum of 5%.
Finally, the O'Shaughnessy strategy is impressed also by Guess' price-to-sales ratio, as well as the company's large market capitalization of $2.8 billion. Also working in the company's favor is that earnings have risen in each of the past five years.
Turning to the rock star of the tech world, Apple (AAPL), the stock has earned some interest from the O'Shaughnessy, Martin Zweig and Peter Lynch strategies. The O'Shaughnessy strategy is impressed with this tech icon's huge market cap of $375 billion, cash flow per share of $29.83 and number of shares outstanding, which total 940 million. The Zweig strategy gives Apple its solid rating because of its moderate P/E ratio -- 14.58 vs. the market's average of 16) -- and strong revenue and earnings growth.
The Lynch strategy looks what an investor is paying for growth by focusing on the P/E/G ratio, the price-to-earnings ratio to growth. This has to be 1.0 to be acceptable and below 0.5 is great -- and Apple's is 0.23. In fact, the only reason the Lynch strategy does not give Apple its highest rating is that its EPS growth rate is too fast. The strategy does not want to see growth that's faster than 50%, because such growth may not be sustainable. Apple's rate is 62.3%, based on the average of its three-, four- and five-year historical EPS growth rates.
The last stock I will mention is MasterCard (MA), the credit and debit card company that operates the second-largest card network in the world. Several strategies like this stock due to a surfeit of solid qualities.
First, MasterCard's market cap is $48 billion, it has strong cash flow of $19.57 per share, and strong annual earnings growth, at 48%, over the past five years. Earnings have increased in four of the past five years, profit margins come in at 35.82% and relative strength is at 96, meaning the stock has outperformed 96% of all stocks in the market during the past 12 months. Finally, MasterCard's share price is near its 52-week high, which indicates it might be about to break out into new high territory.
All of these companies are doing well and pass most of the criteria of several strategies. That's a strong recommendation, without question.
Here's hoping 2012 is a happy and prosperous year for you.