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Written and copyright © 2010-2013 by Thomas N. Bulkowski. All rights reserved.
This article discusses fundamental criteria shared by stocks that double.
For the last year, I have been working on my fifth book. Part of it covers fundamental analysis, or picking stocks based on value. I just finished a chapter on stocks that double
in price within five years and I thought I'd share the results with you. I used data from 1992 to 2007 on almost 1,000 stocks, but not all stocks covered the entire span. Fundamentals
were provided by Value Line.
Here is the list of common elements.
- Start with small cap stocks, those with market caps (shares outstanding times stock price) less than $1 billion.
- Stocks priced between $5 and $20 have the highest frequency of doubling.
- Look for low price to book ratio, below 2.5.
- Find stocks that are reducing capital spending (cap ex).
- Price to cash flow below 8 is good, below 2 is better.
- Focus on stocks that do not pay dividends, but this is a 60/40 thing.
- Look for companies cutting their long term debt.
- Increasing net profit helps but it's not that important.
- A price to earnings ratio below 25 is good, below 20 is better.
- Keep the price to sales ratio below 1.0.
- Look for return on equity between 8% and 14% but be flexible.
I picked the items I liked and did a scan for those fundamentals and found 31 stocks. Here's what I looked for:
- Small caps,
- Stocks priced from $1 to 20,
- Price to book value less than 2.5,
- Price to cash flow less than 2.0,
- PE ratio less than 25 and
- PSR less than 1.0.
Preliminary testing showed the criteria performed well. I would add a test for reduced capital spending
since that helped boost performance.
After looking at the stocks that this criteria found, I can see why they are priced so cheaply. Most of them are trash, but you can do your own scans and see what you can find.
-- Thomas Bulkowski
Written and copyright © 2010-2013 by Thomas N. Bulkowski. All rights reserved. I'd love to go out with you, but I never go out on days that end in 'Y.'
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