With stocks feeling a keen downdraft in the past few weeks, investors are understandably nervous. Rising interest rates and the threat of a slowing economy are casting doubt on the future strength of corporate profits. What's an equity investor to do? How about this: Relax, take a deep breath, and take a look at our latest screen.
This week, we decided to find companies with strong profitability, attractive valuation, and a nice dividend payout to boot. Stocks with those qualities could hold up relatively well in a period of market weakness.
Our first filter: profitability, as measured by gross margin. That's what's left over after subtracting the cost of goods sold from revenues, expressed as a percentage. The stocks on our list had to have a gross margin greater than 25% for the most recent full fiscal year, greater than the average for the S&P 500 index.
DIVIDEND CHECK. Next, return on equity, which is basically a measure of how efficiently a company employs its capital. We looked for outfits with an ROE of 25% for the most recent full fiscal year, also above the average for the S&P 500.
Then we took care of the value part. To ensure that these were reasonably valued stocks, each had to trade at a price-to-earnings ratio (based on the most recent 12-month reporting period) below the S&P 500's multiple of 15.
During a period of wobbly markets, it's nice to own a stock that pays a solid dividend. So we next looked for those issues with a dividend yield above the index's yield of 1.9%.
AND THE WINNERS ARE... Finally, we reached into our own toolkit. We searched for those issues ranked 4 STARS (buy) or 5 STARS (strong buy) by Standard & Poor's equity analysts. Stocks with those designations are expected to post total returns exceeding the total return of the S&P 500 index over the coming 12 months, and to rise in price on an absolute basis.
When we completed our screen, these nine names made the cut: