Build Your Fantasy Portfolio

Talk about a picture-postcard afternoon: 72 degrees, partly cloudy, light breeze -- ideal spring weather to be lounging in the bleachers at Wrigley Field enjoying a Cubs game. Unfortunately, I'm about a thousand miles away, stuck inside staring at a computer monitor. On the bright side, I am fortunate enough to work from home, which means that this article will probably be written between innings.

In the meantime, I can still check the latest standings of my baseball Fantasy League team. From this morning's results, it seems that my Beer Garden Bombers have sprinted out to an early lead so far this season, thanks in part to Yankees catcher Jorge Posada's stellar early performance.

Great, you say, so where are you going with all this? Believe it or not, fantasy baseball can be an untapped source of quality investment ideas.

What's the Wall Street equivalent of an RBI?
Essentially, the whole concept is to assemble a portfolio of players that are likely to score high in a number of predetermined categories. Naturally, the metrics most commonly used are critical to success on the field: batting average, runs, stolen bases, WHIP ratio (walks + hits / innings pitched), etc.

Of course, many of the traits that define a great player are impossible to measure. Try recording hustle, teamwork, or leadership in a box score. At the same time, there are no points awarded for executing a perfect cut-off throw or sliding in hard to second base to break up a potential double play -- but such plays routinely win games.

Is the financial world any different? Instead of earned run average (ERA) over the past five seasons, we might be dealing with earnings per share (EPS) over the trailing five fiscal years. And just as some of baseball's most important attributes don't fit neatly into a category, essential qualities like competitive advantage and economic moat can be equally difficult to define quantitatively.

Regardless, a carefully calculated point structure can be a great way to numerically express a player's value to his overall team. By the same token, it's not difficult to devise a scoring system to uncover the A-Rods of the financial world. The challenge lies in finding the equivalent financial categories that are most likely to drive stock performance.

The search for the "five-tool" company
There are reams of academic studies and back-tested historical data that delve into this very subject -- generally with inconclusive results. Some characteristics, such as a pattern of rising dividends, have proven to correlate with rising stock prices. Still, there is no single magic formula or equation that can be applied to pinpoint a stock poised for a breakout performance.

On the diamond, the most coveted players excel in all facets of the game. These well-rounded athletes -- often referred to as "five-tool" players -- can do it all. At the plate, they possess home run power, yet still hit consistently, for a high batting average. In the field, they make sparkling defensive plays and have cannon-like throwing arms. And on the basepaths, they flash enough speed to routinely stretch singles into doubles.

Not surprisingly, it only takes a few of these gifted players to carry a team to a winning season. Similarly, adding a handful of "five-tool" companies to your portfolio can significantly boost your returns over time.

The question, then, is which traits most clearly indicate future success. When searching for the most promising stocks to round out your roster, you might play small-ball with a seasoned veteran like Johnson & Johnson (NYSE:JNJ). It has increased dividends every year for more than four decades, and it has in excess of $13 billion in cash (net of debt) on its balance sheet. Or maybe you'd rather swing for the fences with an unproven but potentially explosive rookie like Baidu.com (NASDAQ:BIDU). It's expected to post powerful annual earnings growth north of 60% over the next five years.

As the general manager of your own team, this is a decision only you can make, but it never hurts to focus your draft picks on profitable companies that are generating healthy cash flows, lifting their dividend payouts, and growing their earnings -- yet still trading at a discount to the market.

The scouting report
If those criteria sound appealing to you, then the following stock screen might help narrow down the pool of prospects:

Average: A company that converts every at-bat (dollar of revenues) into more than $0.25 of operating cash flow, for an impressive .250 average or greater. (Cash flow as at least 25% of revenues.)

Power: A highly profitable company that makes sure its revenues and capital carry a long way. (Operating margins greater than 20%, and return on equity (ROE) of 12% or better.)

Throwing: A company that throws its teammates a strong and steadily rising stream of dividend payments. (Dividend CAGR 10% or more in the last five years.)

Speed: A company that is expected to deliver solid bottom-line growth rates over the next few years. (Projected EPS growth in line with or greater than the industry average.)

Defense: Despite the factors above, these companies are still reasonably valued. (Forward P/E less than 16.)

Based on the parameters above, the following five companies rank among the league's top prospects.

While there are certainly companies forecast to grow faster than Pfizer, or trading at a lower forward multiple than Coca-Cola, only a select few can boast all the talents of this multidimensional group.

Not coincidentally, Coca-Cola, Intel, and Pfizer are in Philip Durell's Motley Fool Inside Value newsletter lineup. Philip takes a true Moneyball approach, searching for five-tool companies but refusing to pay more than his margin of safety will allow. You can view his complete roster of market-beating picks and buy reports (since inception, Philip's picks are beating the S&P 13% to 9% on average) for free with a 30-day trial. Click here for the details.

Fool contributor Nathan Slaughter would like to start an underground movement to ban the designated hitter. He owns none of the companies mentioned. The Fool has a disclosure policy.