Where History Is on Your Side
Once a stock builds up a record over several years, investors can begin to get a sense of roughly how it should be valued. Following how a stock trades in relation to its five-year average price-to-earnings (p-e) ratio can give clues as to whether it is highly valued in terms of its historical record and possibly poised for a contraction—or, if it's at the low end of its range, it has room to expand.
We wanted to emphasize the latter in this week's screen. We started by sifting our database for those issues trading at p-e ratios less than half that of the average of their p-e ratios from the end of the last five years. We excluded from the screen any stock that had a negative p-e, or a p-e with values above 100 for any period.
Once we established that a stock's valuations were below historic levels, we wanted to ensure that they were attractive in other respects. So we next looked for those issues with Standard & Poor's highest investment ranking, 5 STARS (strong buy).
Stocks with that designation are expected by S&P equity analysts to outperform the S&P 500 index on a total-return basis by a wide margin over the coming 12 months, with the shares rising in price on an absolute basis.
This was another tough one. When we finished our screen, four names emerged:
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