One of the questions I get most often as an analyst is, "How do you find the stocks you recommend?" There are actually many ways to go about idea generation, but one of the best and most replicable for investors at home is screening. This means asking a computer to look for companies that fit several predetermined and desirable criteria.
The difficult part of screening, of course, is knowing what to ask the computer to look for. To help you out in that regard, I'll share with you today one of the screens we use to find great international investments for our Motley Fool Global Gains research service.
Step 1: Identify an international stock
The first thing you need to do when looking for great international investments is identify companies that do a significant amount of business outside of the United States. Though many people think this means looking for businesses headquartered outside the U.S., we think that's too constricting. After all, there are plenty of U.S. businesses that have strong international operations. So, when looking for international stocks for Global Gains, we first screen for companies that make more than half of their sales outside of the U.S.
Screening for that feature leaves me with 207 companies trading on the major U.S. exchanges. That's too many to be meaningful, which means we need to submit additional criteria.
Step 2: Identify a good business
While there's any number of ways to identify a good business, two simple indicators we use at Global Gains are a multiyear track record of growing operating earnings and a double-digit return on equity.
According to my screen, there are 40 companies that also have a better than 10% return on equity and have grown EBITDA at better than 7% annually over the past three years. That's still too many to be helpful, so we need to get more specific about what we want.
Step 3: Identify a good value
Again, there are many ways to get after valuation, but there are a few thumbnail measures -- such as price to earnings and price to book -- that can be helpful in screening. One we use at Global Gains is enterprise value-to-EBITDA, which takes into account the state of a company's balance sheet and omits charges that are not core to operations. Generally speaking, anything below 7 here gets our attention.
Our candidates
After searching the market for stocks that meet those four criteria, this screen returned 10 companies. Here are the names and their relevant numbers:
|
Company |
Percentage of International Revenue |
Return on Equity |
EBITDA, 3-year CAGR |
EV/EBITDA |
|---|---|---|---|---|
|
Diodes |
79.5% |
12.5% |
11.1% |
6.73 |
|
Elbit Systems |
71.7% |
27.5% |
31.6% |
6.53 |
|
GlaxoSmithKline |
67.2% |
48.5% |
7.67% |
6.28 |
|
CGI Group |
62.7% |
16% |
11.6% |
6.25 |
|
Acergy |
99% |
23.2% |
11.7% |
6.07 |
|
Diamond Offshore Drilling |
72.1% |
32.1% |
14.8% |
4.89 |
|
American Lorain |
99.5% |
18.6% |
31.9% |
4.57 |
|
Fushi Copperweld |
81% |
15.1% |
35% |
4.17 |
|
LG Display |
86.2% |
21.3% |
48.4% |
2.56 |
|
China Sky One Medical |
92.7% |
31.7% |
118.1% |
2.34 |
Source: Capital IQ, a division of Standard & Poor's.
Of those stocks, the one that really pops out to me is GlaxoSmithKline because it's a defensible health-care business with rapidly increasing emerging markets sales with a seemingly compelling valuation.
But remember, screening is just the start of the research process. Savvy investors still need to investigate criteria you can't screen for -- such as the quality of the company's board of directors and market opportunity going forward -- and should double-check the numbers the screener thinks it has found. China Sky One Medical, for example, is currently engaged in a dispute about the veracity of its financials.
With that said, Glaxo is a name I'll be looking at further and discussing at our next Global Gains idea meeting. So that's one lead for you. If you're interested in starting to use screens yourself, click here to check out our free Motley Fool stock screener.
