Whether markets are soaring or crashing, you always need to protect your portfolio. Stocks that incorporate a margin of safety, where you buy for less than their intrinsic value, are more likely to hold ground during a market downturn, and very likely to show strong gains over time. Indeed, buying value-priced and smaller-cap stocks may be the best way for individual investors to consistently outperform institutional investors and the broader market. And we've laid out some ways you can guesstimate a company's intrinsic value and determine the potential margin of safety.
We know that value stocks are great, we know that they're one of the few places where an individual has a market-beating advantage over institutional investors, and we know how to tell whether a value candidate really has a margin of safety. There's just one thing we don't know: Where do we find these stocks?
Even if we limit ourselves to U.S. stocks with market caps over $200 million, we're still talking about thousands of stocks ... and we need to find a dozen or so, possibly obscure names in that pile. How do we do it?
Screen test
The most commonly used approach is to employ a stock screener, a simple search tool that finds stocks that meet certain criteria. Here at the Fool, our Motley Fool CAPS service has a useful stock screener that includes both fundamental characteristics of stocks, as well as what our CAPS community of investors thinks about their prospects.
Of course, a screener isn't of much use unless you know what to tell it to look for. While it will take some experimentation to get good results out of any given screener, I set this one to look for smaller stocks (under $3 billion or so) with reasonable price-to-earnings ratios, healthy growth projections, and good net margins. Using those criteria, here are some of the stocks that made the list:
|
Stock |
P/E |
5-Year Projected |
Net Profit Margin |
|---|---|---|---|
|
Atwood Oceanics (NYSE: ATW) |
9.5 |
20.0% |
40.9% |
|
Trina Solar (NYSE: TSL) |
15.0 |
17.2% |
11.6% |
|
Sohu.com (Nasdaq: SOHU) |
13.4 |
13.0% |
28.7% |
|
Neutral Tandem (Nasdaq: TNDM) |
14.0 |
21.5% |
24.5% |
|
STEC (Nasdaq: STEC) |
7.8 |
56.3% |
20.5% |
|
Universal Travel Group (NYSE: UTA) |
12.8 |
25.0% |
11.6% |
|
AZZ (NYSE: AZZ) |
10.3 |
16.0% |
10.7% |
Source: Yahoo! Finance. As of March 3.
These aren't recommendations by themselves, of course, but they do look like promising candidates for further research.
Donning your CAPS
That's not all CAPS can do for you. You can also see what particular members of the service have to say about each of the most promising candidates. Simply hop over to the site, enter the ticker, and click to get lots of info on the stock.
Spending a few minutes on a stock's CAPS page -- and following the links to stories about the stock -- can give you an idea of recent developments and key issues facing the company, which are great places to start your research.
If all this sounds like more time and effort than you can afford to spend, you can also get some help. Our Motley Fool Inside Value newsletter analyzes a host of value stocks, looking for the best margins of safety and making brand-new stock recommendations in each month's issue. Inside, you'll find ideas backed by in-depth research, easy-to-understand summaries, a great members-only discussion board, and a track record that is beating the market since the service's inception. You can see Inside Value free for 30 days. Access to all past issues is included and there is no obligation to subscribe.
Hard up for good ideas? Let Chuck Saletta show you the only stocks worth owning today.
