Few data series have been studied as exhaustively as the financial markets. Analysts and researchers pore over the same set of data looking for relationships that can help them beat the market. Many are driven by the allure of potential profits.
What’s interesting is how little data there really is. Researchers have access to price histories and financial information. Financial data is updated just four times a year. Yet, it not an exaggeration to say that researchers have dedicated their careers to studying this information.
Increasingly, researchers have been identifying characteristics of stocks and companies that can outperform. These characteristics are called factors. The investment manager Blackrock explains:
“Factors are the foundation of portfolios—the broad, persistent forces that have driven returns of stocks, bonds and other assets.
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Factor investing leverages advancements in today’s data and technology to deliberately seek these historical return drivers in portfolios. Understanding how factors work can help you capture their potential for excess return and reduced risk, just as leading institutional investors and active fund managers have done for decades.”
Among the factors that have been identified are value, growth and momentum. This week, we are putting factors to work for us.
Quantifying Value, Growth and Momentum
Value can be defined in a number of ways. To define value for this week’s screen, we focused on the price to sales (P/S) ratio. We limited our list of potential buys to stocks with a P/S ratio below the industry average.
Low fundamental ratios like a low P/S ratio could be a sign of underlying problems. To limit the risk that the P/S ratio is low because the company is in trouble, we screened for a strong balance sheet. We required companies to have low levels of debt and high levels of liquidity.
Specifically, we screened for a debt to equity ratio below 40%. For liquidity, we used the current ratio which compares short term assets like cash and inventory to short term debt which includes liability coming due within the next twelve months.
Generally, a current ratio greater than 1 is an indicator of a financially sound company. We required the current ratio be greater than 1.5 to add a margin of safety to our screening process.
For growth, we also focused on sales. We required year over year sales growth of at least 25%. We also wanted profitable companies and here we also required a 25% increase in earnings.
For momentum, we used two separate time frames. We wanted stocks that have been market leaders over the past year and over the past 13 weeks. The use of a short time period combined with a longer time period helps us avoid stocks that could be falling after making a rapid increase.
Finally, we focused on stocks priced at less than $20 per share. The reason we like cheap stocks is because these are the ones that have been proven to be most likely to deliver large gains.
One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.
Three Stocks Meet Our Strict Requirements
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment opportunities but any individual stock in the list could be a winner or loser.
Innoviva, Inc. (Nasdaq: INVA) engages in the development and commercialization of bio-pharmaceuticals.
Its portfolio of respiratory products include RELVAR/BREO ELLIPTA and ANORO ELLIPTA.
The company, under its the Long-Acting Beta2 Agonist (LABA) collaboration agreement and the strategic alliance agreement with Glaxo Group Limited (GSK), is entitled to receive royalties on the sales of RELVAR/BREO ELLIPTA; and a 15% of any future payments made by GSK under its agreements relating to the combination FF/UMEC/VI and the Bifunctional Muscarinic Antagonist-Beta2 Agonist program, as monotherapy and in combination with other therapeutically active components.
It has LABA collaboration agreement with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease and asthma.
The stock appears to be breaking above resistance on the long term chart.
This is a monthly chart and breaks of resistance at this time frame tend to be more significant than breakouts at shorter time frames.
Analysts expect the company to report earnings per share (EPS) of about $2.20 this year and next. At just 10 times earnings, the stock could deliver a gain of more than 30%.
CVR Refining, LP (NYSE: CVRR) operates as an independent petroleum refiner and marketer of transportation fuels in the United States.
It owns and operates a complex full coking medium-sour crude oil refinery in Coffeyville, Kansas.
The company also controls and operates logistic assets, including approximately 340 miles of owned and leased pipelines; approximately 150 owned crude oil transports; a network of crude oil gathering tank farms; and approximately 6.4 million barrels of owned and leased crude oil storage capacity, as well as approximately 4.5 million barrels of combined refined products and feedstocks storage capacity.
In addition, it owns 170,000 barrels per day pipeline system that transports crude oil from its Broome Station facility to its Coffeyville refinery; approximately 1.5 million barrels of crude oil storage capacity, which supports the gathering system and its Coffeyville refinery; approximately 0.9 million barrels of crude oil storage capacity at its Wynnewood refinery; and approximately 1.5 million barrels of crude oil storage capacity in Cushing, Oklahoma, as well as leases crude oil storage capacity of approximately 2.2 million barrels in Cushing and approximately 0.2 million barrels in Duncan, and approximately 0.1 million barrels at its Wynnewood refinery.
CVRR is a relatively low risk way to trade higher oil prices. The correlation between the two can be seen in the chart below.
Analysts expect EPS of about $1.60 this year and $1.70 next year. An industry average price to earnings (P/E) ratio of 16.6 provides a potential gain of more than 80%.
Sinovac Biotech Ltd. (Nasdaq: SVA) a biopharmaceutical company, engages in the research, development, manufacture, and commercialization of vaccines against human infectious diseases in the People’s Republic of China.
The company’s product portfolio includes vaccines against enterovirus71 (EV710), hepatitis A and B, seasonal influenza, H5N1 pandemic influenza, H1N1 influenza, and mumps, as well as hand, foot, and mouth diseases.
Its marketed products include Healive, an inactivated hepatitis A vaccine; Bilive, a combined inactivated hepatitis A and B vaccine; Anflu, a split viron influenza vaccine; Panflu, a vaccine against the H5N1 influenza virus; Panflu.1, a vaccine against the influenza A H1N1 virus; mumps vaccine; and split viron pandemic influenza vaccine.
The company also completed phase III clinical trials for EV71, varicella, and pneumococcal polysaccharide vaccines.
In addition, it has completed pre-clinical studies for sabin inactivated polio; and focuses on commencing clinical trials for pneumococcal conjugate, Quadrivalent influenza, and rubella vaccines.
The company has a collaboration agreement with GlaxoSmithKline Biologicals SA to develop combination vaccines containing measles for the China market; Tianjin CanSino Biotechnology Inc. to develop a pneumococcal conjugate vaccine; and a license agreement with Medimmune, LLC to use patented reverse genetics technology pertaining to H5N1 influenza virus strain production for vaccines.
The monthly chart below shows the recent breakout price in price.
Estimates are not available for this company which is headquartered in China. That means it does carry more risk than a company with headquarters in the United States.
Any of these stocks could be a potential winner and all worth further research. For those unsure of their ability to dedicate the time to researching the market, the stock trading tips service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks.
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