Screening for Price Potential - Investment Ideas
12 Septembre 2011 - 2:00AM
Zacks
In this volatile market it makes sense to pay attention to stock
values. Where are they today, and where are they anticipated to be?
We can find out these answers to determine value by looking at the
current stock price and the estimated price targets.
Every well-followed company has a list of analysts who provide,
on a quarterly basis, their earnings estimates for that company
going forward. They will usually provide a price target as well
based on a number of metrics, but grounded in some form of
discounted future cash flows. That is, what amount of money do they
expect this company to generate in the form of free cash flow in
the future?
Furthermore, by discounting these cash flows back to today, what
value can be reasonably applied to the company's stock? When you
have a large enough number of analysts providing this type of data,
you can easily find an average (mean) or consensus number that best
exemplifies a high probability result. It is in this context that
we will search for companies with the best price appreciation
potential based on the average estimates to their price
targets.
For a simple example: if company XYZ trades at $5 and the
average analysts' price target is $7.50, then its price potential
would be 50%. To arrive at that number we simply subtract the
current price of 5 from the average price target of 7.50 and that
answer (2.5) is then divided by the current price (5). Visually, it
looks like this: (7.5 – 5 = 2.5) & (2.5 / 5.0 = .50 or 50%).
This is the price appreciation potential we could anticipate from
this stock.
Parameters Defined
In order to determine which stocks we want to screen for, we
need to set up some basic parameters. For one, I want stocks where
there are at least 7 different analysts providing data. A good way
to reason this parameter is by appreciating that the larger the
sample of data we use, the stronger its result. Also, any data
points that are too far on the extreme will be averaged in toward
the center.
While I'm at it, I will also request that each stock come with
at least a Zacks #2 Rank and have a market capitalization of
minimally $3 billion. You can achieve this by simply going to the
Zacks Custom Screener and entering in the information as shown
below:
![](http://www.zacks.com/images/upload_dir/1315858933.jpg)
First ADD each of the criteria with the appropriate number in
the box and then RUN the screen.
Improving Your Screening Results
In addition to creating a subset of companies to filter, you may
want to add some additional criteria. The Research Wizard can help
to broaden our category options and create our Price Potential
calculation. Let's begin by using the Research Wizard to add 2
additional criteria to this screen:
- Pretax Margin Average for the last 5 years of greater than
20%. This will bring forth companies who have maintained a
consistent, positive financial posture.
- Relative Strength (vs. S&P 500) of over 60% for the last
4 weeks. This will produce stocks whose performance has been
among the best in the market in the last month. This should
eliminate any companies that have been showing signs of
underperformance relative to the broader market.
![](http://www.zacks.com/images/upload_dir/1315859194.jpg)
Next, I need to add the Price Appreciation Potential calculation
to the report. With the Research Wizard, this is an easy task. As
you will see here, not only are there an expanded number of
criteria to choose from (over 650 different financial measures),
but you can actually create your own criteria! Remember our
calculation of Price Appreciation Potential from the third
paragraph above. Here is a graphic representation:
- Item 242 = Average Short Term Target Price
- Item 5 = Current Price
In our calculation creation area, we will input our subject
heading for our report column and then add the calculation itself
((i242 – i5)/ i5 * 100. We multiply the calculation by 100
to convert our decimal answer into a readable percentage
format.
![](http://www.zacks.com/images/upload_dir/1315859425.jpg)
Click 'OK' and now it's ready to go. Then from the main page
click 'Run Query' and a broad list of diverse companies is produced
with their expected appreciation, pretax margins and all of the
other data I screened for.
![](http://www.zacks.com/images/upload_dir/1315859594.jpg)
5 Stocks to Buy
From the results of this screen, I will choose a diverse set of
5 stocks with some of the strongest metrics.
- Apple Inc. (AAPL) has to be considered one of, if not
the strongest company on the globe today in a number of areas,
including innovation, product leadership, marketing and sales.
Apple designs, manufactures and markets personal computers and
related personal computing and communicating solutions for sale
primarily to education, creative, consumer and business
customers.
- Baidu Inc. (BIDU) is the 'Google' of China, the world's
largest and fastest growing Internet market. The company offers a
Chinese language search platform and conducts its operations
principally through Baidu Online Network Technology Co., Ltd., a
network of third-party Web sites and software applications.
Furthermore, the company offers Japanese search services, including
Web search, image search, video search and blog search
capabilities. It also offers online marketing services to its
customers directly and through other distribution networks.
- Coach Inc. (COH) is a well sought after brand maker of
fine leather goods the world over. The company attributes the
prominence of the Coach brand to the unique combination of its
original American attitude and design, its heritage in fine leather
products, its superior product quality and durability, and its
commitment to customer service.
- Potash Corp. of Saskatchewan Inc. (POT) is the world's
largest potash company, the third largest phosphate producer and
the second largest nitrogen producer in the world. Behind its
growing success lies a vital infrastructure: knowledgeable PCS
Sales staff throughout Canada and the United States, a
transportation network that includes truck, train, barge, lake ship
and ocean vessel, and warehouses strategically located in major
consuming areas.
Precision Drilling Corp. (PDS) is another well run
Canadian outfit. Precision Drilling Corporation is an oilfield
services company. It provides contract drilling, well servicing and
strategic support services to the oil and gas industry in North
America and internationally. It provides land drilling, directional
drilling, turnkey drilling, camp and catering services, procures
and distributes oilfield supplies. It also offers service rigs for
well completion and workover services, snubbing services and
wastewater treatment services, tubulars, well control equipment,
wellsite accommodations. Precision Drilling Corporation is
headquartered in Calgary.
Conclusion
Screening for potential price appreciation can be a great way to
highlight winning stocks. By utilizing the professional screening
tools that Zacks has to offer can make this task both fun and
rewarding. Our Custom Screener offers you instant screening
capabilities and the Research Wizard allows for descriptive reports
and custom calculations. Making yourself a better and more informed
investor puts you on the path to success.
David Bright is a member of the Zacks Research Wizard Group
and contributes Investment Ideas utilizing tools available at
Zacks.
Disclosure: Officers, directors and/or employees of Zacks
Investment Research may own or have sold short securities and/or
hold long and/or short positions in options that are mentioned in
this material. An affiliated investment advisory firm may own or
have sold short securities and/or hold long and/or short positions
in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and
strategies are available at:
http://www.zacks.com/performance.
APPLE INC (AAPL): Free Stock Analysis Report
BAIDU INC (BIDU): Free Stock Analysis Report
COACH INC (COH): Free Stock Analysis Report
PRECISION DRILL (PDS): Free Stock Analysis Report
POTASH SASK (POT): Free Stock Analysis Report
Zacks Investment Research
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