By
Anders Bylund
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More Articles
April 9, 2009
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"I need some wisdom
I need some truth
I need some beauty
I need some proof"
-- From "Satisfied" by Bob Seger and the Silver Bullet Band
Silver bullets that can deliver a killer stock with every single shot don't exist. But you can separate the also-rans from the leaders with lesser weapons, and you'll get much the same effect. You can win in any market with a sound set of minimum requirements for every stock you pick.
My standards
Here's my short-short list of standards that every new investment should be able to meet. Falling below the bars I'm setting sends up yellow flags that could indicate that the stock won't be able to outperform a simple S&P 500 index fund, or perhaps is heading for "the Great Bankruptcy Gig in the Sky."
- We don't want to buy into companies with shaky finances. A current ratio of 1.5 or more usually shows that the company has the ability to cover the costs of operations in the short term. Let's start there.
- Then I want to call in some outside help. Stocks under heavy short-sale attack are often a) overvalued, b) risky, or c) both. The movers and shakers in short sales tend to be big-money institutional investors, hedge funds, and the like. Betting millions of dollars on shaky research can be costly, since the downside potential on shorts is nigh-on unlimited. So let's look for thinly shorted stocks with a max of 3 days to cover the short interest. Anything higher means the big boys are seriously skeptical.
- And then comes the heavy cavalry: you and your investing peers. If the 130,000-plus members of our CAPS community agree that this is at least a respectable three-star stock (out of five), that's a strong vote of confidence.
The results
Feel free to dig into that fat stack of screen results yourself (nearly 700 when I ran it). Your mileage may vary as market conditions change, and you can tweak the screen with any criteria your heart desires. Here's a representative sample I'm highlighting today:
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Company
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Current Ratio
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Short Interest (days to cover)
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CAPS Rating (out of 5)
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Exxon Mobil (NYSE: XOM )
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1.5
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0.8
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****
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NVIDIA (Nasdaq: NVDA )
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2.8
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1.9
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****
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Google (Nasdaq: GOOG )
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8.8
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0.9
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***
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Goldcorp (NYSE: GG )
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1.6
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0.0
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***
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Western Union (NYSE: WU )
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1.7
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1.1
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*****
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Stryker (NYSE: SYK )
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3.4
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1.5
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*****
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Sasol (NYSE: SSL )
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2.0
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0.8
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*****
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Data from Motley Fool CAPS, 4/9/2009.
As you can see, businesses from every walk of life can live up to these criteria -- high-tech or basic materials, young or storied, ultra-rich or merely solvent. This should be a good place to start your search for the next addition to your own portfolio. There's something for everyone, and these stocks should not crash and burn anytime soon.
It's the closest thing to a silver bullet you can hope for.
Learn the secrets of safe investing right here:
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