Big companies may, on the surface, seem very similar but many are, in fact, run in very different ways. Air carriers Southwest Airlines (LUV) and United Continental (UAL) and discounters Wal-Mart (WMT) and Target (TGT) are examples. One way these differences manifest themselves is in how financially conservative a company is. Some management teams try to avoid debt (financially conservative) while others rely heavily on debt (financially more liberal).
A well-known measure of how financially conservative a company may be is the current ratio. Made famous by the "father" of investment analysis, Benjamin Graham, the current ratio is defined as current assets divided by current liabilities. It measures how easily a company can pay off current liabilities by relying solely on its current assets. Graham, who loved financially conservative companies, wanted to see the current ratio at 2:1 or better.
Graham was conservative, but for my really conservative readers, I decided to screen for companies with a current ratio of at least 3:1. While this would make Graham very happy, I also looked for names that earned the approval of one of my guru strategies. I created these by automating the strategies described by great investors, such as Peter Lynch and James P. O'Shaughnessy, in their writings.
I figure that a company that has at least a 3:1 current ratio and earns a high score from any of my guru strategists is worth looking at as an investment by conservative investors.
Not many companies pass these stringent requirements, but one that does is Foot Locker (FL), which sells athletically oriented shoes and apparel via a chain of over 3,500 stores located in 30 countries. The company's current ratio is 3.53:1 and it earns the approval of my Peter Lynch-based strategy. This strategy focuses on the P/E/G ratio, which is price-to-earnings relative to growth, and measures how much an investor is paying for growth. A P/E/G of up to 1.0 is acceptable and below 0.50 is considered very strong. Foot Locker's P/E/G is an enviable 0.41. In addition, the company has little debt. Combining its favorable price (as seen in its P/E/G), low debt and solid current ratio, Foot Locker earns consideration as a conservative investment opportunity.
Though it is a leading edge luxury apparel designer and retailer, there is nothing showy about Michael Kors Holdings' (KORS) financial management. Its current ratio is a highly conservative 5.49:1, and it is favored by my Joel Greenblatt-based strategy. This strategy looks at just two variables -- earnings yield and return on total capital -- and uses these to rank a company from among the thousands of publicly traded stocks on Nasdaq and the New York Stock Exchange. Among all these companies, Michael Kors is ranked 24. An impressive current ratio and a high Greenblatt ranking places KORS among stocks suitable for conservative investors.
