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9 Stingy Stocks for 2012

The phenomenal streak of the Stingy Stocks was interrupted this year. After posting back-to-back annual gains north of 60% each year for the prior two years, this year they slumped 16.1%. But, despite the down year, the Stingy Stocks still boast a very enviable long-term track record.

I started the method in 2001 in an effort to beat the S&P500 by picking value stocks within the S&P500 itself. Thus far the Stingy Stocks have gained 14.3% annually whereas the S&P500 (as represented by the SPY exchange traded fund) advanced only 2.3% a year over the same period. That's an average outperformance of 12.0 percentage points a year for the Stingy Stocks. The full performance record is shown in Table 1.

Table 1: Past Performance
PeriodStingy StocksS&P500 (SPY)+/-
2001 - 2002 -1.9% -22.1% 20.2
2002 - 2003 33.8% 23.0% 10.8
2003 - 2004 29.8% 13.4% 16.4
2004 - 2005 29.2% 8.2% 21.0
2005 - 2006 28.9% 12.6% 16.3
2006 - 2007 -5.5% 7.4% -12.9
2007 - 2008 -40.1% -37.5% -2.6
2008 - 2009 64.5% 26.0% 38.5
2009 - 2010 69.4% 12.4% 57.0
2010 - 2011 -16.1% -0.3% -15.8
Total Gain Since Inception 275% 25% 250

How do I go about selecting the Stingy Stocks? I stick with companies that are both cheap and relatively safe. As you might imagine, this can be a relatively uncommon combination.

On the bargain front, I like stocks trading at price-to-sales ratios of less than one. Typically only a few stocks pass the test and this year was no exception.

Cheap stocks are great but I also want some assurance that they won't go bust. I start with stocks in the S&P500, which tend to be large and more stable than most, but that's hardly a guarantee.

Because size is an insufficient measure of safety, I also look for companies with little debt and lots of assets. Such firms are stronger than debt-laden companies. Three ratios are useful when searching for companies with little debt. Perhaps the most important is the debt-to-equity ratio which is calculated by dividing a company's long-term debt by shareholder's equity. The amount of debt that a company can comfortably support varies from industry to industry but debt-to-equity ratios of more than one are often too high. I prefer very conservative companies with debt-to-equity ratios of 0.5 or less.

The next useful figure is the current ratio which is calculated by dividing a company's current assets by its current liabilities. Current assets are assets, such as receivables and inventory, that can be turned into cash within the next year. Current liabilities are payments that the company must make over the next year. Naturally, an investor would like a company's current assets to be much more than its current liabilities and I prefer companies with current assets at least twice as large as current liabilities. After all, you can be pretty sure that a firm's creditors will demand prompt payment of the current liabilities. On the other hand, some current assets, such as inventory, might not turn out to be worth quite as much as expected.

Finally, a company's earnings before interest and taxes should be large in comparison to its interest payments. The ratio of earnings-before-interest-and-taxes to interest-payments is called interest coverage and I like this ratio to be at least two or more. It is important to remember that debt-free companies do not have to make interest payments and may not have an interest coverage figure but they should not be excluded from consideration.

While the debt ratios I've selected are useful in determining a firm's ability to shoulder debt, they are not perfect. For instance, some long-term obligations may not be fully reflected on a company's balance sheet and are, sensibly enough, called off-balance sheet debts. Regrettably, off-balance sheet debt can be a source of considerable consternation. Things like unexpected legal liabilities can sideswipe what might otherwise be a good investment. That's why, as with all screening techniques, you should embark on a more detailed investigation of each stock before making a final investment decision.

Continuing the safety theme, I also want a company to show some earnings and cash flow from operations over the last year. After all, it is less likely that a business will go under when it is profitable and has cash coming in the door.

That's a daunting list of requirements but I've summarized the primary criteria in Table 2.

Table 2: Stingy Stock Criteria
1. A member of the S&P500
2. Debt-to-Equity Ratio less than or equal to 50%
3. Current Ratio of more than 2
4. Interest Coverage of more than 2
5. Some Cash Flow from Operations
6. Some Earnings
7. Price to Sales ratio of less than 1

Last year the method uncovered 5 value stocks and the number climbed up to 9 this year. You can review the full list in Table 3. Long-time holding Genuine Parts (GPC) returned again and Western Digital (WDC) made it through from last year. The other stocks are new additions.

I hope that I've piqued your interest, but be sure to fully investigate each stock before investing. Remember, although the Stingy Stocks are relatively safe, there is no such thing as a risk-free stock.

Table 3: Stingy Selections for 2012
CompanyPriceP/SD/EC.R.I.C.P/CFP/EYield
Tyson Foods (TSN) $19.68 0.23 37% 2.0 3 6.9 9.7 0.8%
Lexmark (LXK) $31.94 0.59 43% 2.0 High 6.6 7.4 3.2%
Western Digital (WDC) $27.51 0.65 2% 2.5 65 3.9 8.3 0.0%
Harman (HAR) $38.34 0.68 27% 2.1 10 10.8 17.4 0.8%
Genuine Parts (GPC) $55.80 0.72 9% 2.1 40 14.4 16.0 3.3%
Robert Half (RHI) $24.71 0.95 0% 2.1 High 14.9 27.2 2.3%
Patterson (PDCO) $28.73 0.98 37% 2.9 13 8.5 15.5 1.7%
Quanta (PWR) $19.44 0.98 0% 2.4 127 11.6 40.5 0.0%
Hormel Foods (HRL) $29.27 0.99 9% 2.6 55 15.9 16.4 2.1%
Source: Bloomberg, November 29, 2011

First published in the January 2012 edition of the Canadian MoneySaver. Performance numbers are based on the dates in the data table and do not represent calendar year figures.

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