By Michael Kaye, CFA In the Stock Screens column, our aim is to identify promising investment candidates -- or conversely, stocks to avoid -- by sifting the lists of stocks in the Standard & Poor's database for various investment criteria. The cornerstone of our screening process is S&P's STARS, a method of ranking stocks, based on quantitative analysis performed by S&P analysts, for their appreciation potential.
The STARS system has had an impressive track record: The portfolio of stocks with the highest ranking, 5 STARS (buy), since its inception in 1987, has outperformed the S&P 500-stock index by an average of 7% annually.
Of course, we have other proprietary tools to evaluate stocks. S&P's Fair Value ranking system seeks to outperform the market by buying undervalued stocks and selling them when they reach maximum price appreciation. The model calculates a stock's weekly fair value -- the price at which S&P believes an issue should trade at current market levels. The calculations are based on fundamental data such as earnings growth potential, price-to-book value, return on equity, and dividend yield relative to that of the S&P 500.
BEST OF BOTH WORLDS. Each stock assessed under the model is ranked in one of five categories. Tier 5 is the highest ranking and contains stocks considered the most undervalued. These are issues with a fair value considerably greater than their current price, implying superior potential for price appreciation.
The Fair Value Portfolio, comprising the highest ranked stocks in the Fair Value universe, has had an impressive run this year, with a 72% return year-to-date through Oct. 31.
So this week, we thought we'd find the best of both worlds and present a list of "5x5" stocks. We screened for those issues ranked 5 STARS by S&P analysts -- and that carry a Fair Value ranking of 5. As an added kicker, we then winnowed that list down by screening for those issues that offered a cash dividend. These six stocks made the cut:
Tops in STARS and Fair Value
S&P STARS Rank
Capital One Financial (COF)
Cardinal Health (CAH)
Oxford Health Plans (OHP)
Kaye is a portfolio services analyst for Standard & Poor's