Major stock market averages are trading near record highs. This means many stocks are overvalued. But, it also means we are in an up trend. That indicates it could be beneficial to look for stocks that show signs of improving fundamentals that could be at the beginning of new up trends.
Improving fundamentals are important to consider but they are rarely enough to base an investment decision on. Many stocks have improving fundamentals. But, it takes the buying power of other investors to push a stock price up.
This is because of the difference between a company and a stock. Although we sometimes forget the difference, these are actually two distinct entities.
The company has business operations and its success or failure is defined by the financial statements that report on those operations. The stock is an ownership interest in the company that is freely traded. Its value is determined in the market place.
In the long run, good companies should be good stocks to own. But, ultimately the price of the stock in the short term changes in response to buying or selling pressure in the stock market. In the short run, it is possible for a good company to be a bad stock. Or, a bad company could be a good stock.
Since we are trading stocks, we looked for good companies with good stocks. Some technical filters to determine whether the price trend is up or down can be used to identify stocks that are good.
We also wanted to focus on low priced stocks since these are the kind of stocks capable of delivering the largest gains in percentage terms.
The Specific Criteria for Our Screen
To do that, we developed a screen to find stocks trading at low prices with a history of sales and earnings growth. To find potential buy candidates, we can screen companies using the free screening tool at FinViz.com. This tool allows us to find companies meeting a variety of criteria.
Specifically, we screened for:
- Stocks trading below $5 a share to focus on cheap stocks.
- Improvement in both sales and earnings over the past quarter. This is a short term filter to identify companies that are potentially at the beginning of a turnaround of fundamentals.
- To confirm that traders believe the turnaround in prices could be sustainable, two price filters were added. The first filter is a requirement that the stock is trading closer to its 52-week high than its 52-week low. This indicates the potential for an up trend. To confirm the up trend, we required stocks to be within 10% of their 50-day high. This should identify stocks in short term up trends.
The specific screen is shown below:
Just four companies passed this screen. Three of them are in the energy sector, a sign that the sector could be turning around after a long bear market.
Ceragon Networks Ltd. (Nasdaq: CRNT) provides wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice, data, and multimedia services worldwide.
The company offers backhaul solutions using microwave technology to transfer telecommunication traffic between base stations, small sells, and the core of the service provider’s network. The company also provides wireless fronthaul solutions that use microwave technology for communication between LTE/LTE-advanced base band digital unit stations and remote radio heads.
CRNT was once a $20 stock.
Analysts now expect the company to report earnings per share (EPS) of about $0.20 this year, $0.22 next year and $0.25 in 2019. With a price to earnings (P/E) ratio if 15, the stock could trade for about $3.25 or so, a substantial gain above the current price.
Precision Drilling Corporation (NYSE: PDS) provides oil and natural gas drilling and related services and products. The company operates in two segments, Contract Drilling Services, and Completion and Production Services.
The Contract Drilling Services segment offers onshore well drilling services to exploration and production companies in the oil and natural gas industry. As of December 31, 2016, the contract drilling segment operated 255 land drilling rigs, including 135 in Canada; 103 in the United States; 5 in Mexico; 4 in Saudi Arabia; 5 in Kuwait; 2 in the Kurdistan region of Iraq; and 1 in the country of Georgia.
The Completion and Production Services segment operated 196 well completion and workover service rigs, and 11 snubbing units in Canada and the United States; approximately 2,200 oilfield rental items, including surface storage, small-flow wastewater treatment, and power generation and solids control equipment; and 132 wellsite accommodation units in Canada.
It also had 43 drilling camps and 4 base camps in Canada; and 10 large-flow wastewater treatment units, 24 pump houses, and 8 potable water production units in Canada.
This stock has been in a persistent down trend.
Analysts expect the company to report a loss for at least the next three years. However, the company is trading at about 60% of its book value and could be attractive to a larger company in the industry as a bargain based on its reported assets.
Fairmount Santrol Holdings Inc. (NYSE: FMSA) provides sand-based proppant solutions for exploration and production companies. The company operates in two segments, Proppant Solutions; and Industrial & Recreational (I&R) Products.
The Proppant Solutions segment primarily provides sand-based proppants for use in hydraulic fracturing operations in the United States, Canada, Argentina, Mexico, China, northern Europe, and the United Arab Emirates.
The I&R Products segment offers raw, coated, and custom blended sands for use in building products, glass, turf and landscape, and filtration industries in the United States, Canada, Mexico, Japan, and China. Fairmount Santrol Holdings Inc. also supplies proppants to oilfield service companies.
FMSA has been a volatile stock since it began trading in late 2014.
The chart could be forming a bullish pattern with the most recent closing lows holding well above the previous lows reached in early 2016.
This company is widely followed on Wall Street. For this year, 17 analysts have published earnings estimate. The mean estimate is for EPS of $0.28. For next year, 16 forecasts have been published and the consensus estimate is for EPS of $0.51. In 2019, 13 analysts have published EPS estimates with an average of $0.48.
With a market average P/E ratio of about 15, the stock could be worth about $7.50 based on average earnings power of about $0.50 per share.
TETRA Technologies, Inc. (NYSE: TTI) operates as a diversified oil and gas services company. It operates through four divisions: Fluids, Production Testing, Compression, and Offshore with operations in the United States, as well as in Latin America, Europe, Asia, the Middle East, and Africa.
TTI was a $30 stock in 2006. Its long operating history indicates the company could be among the long term survivors in its industry.
It is unlikely to get back to that price level in the next few years. But the company is expected to return to profitability in 2019 and a turnaround in the oil industry could allow it to reach that milestone even sooner than that.
Any or all of these stocks offer investment potential based on their fundamentals and technicals. However, they are all aggressive trades and carry the risk of substantial loss that is present in all aggressive investments.
The Stock Trading Tips service, PPK System, is designed to exploit patterns associated with value and momentum, with overreaction and underreaction. You can learn more about this trading service by clicking here.