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Stock Screens

By Michael Kaye, CFA

Stocks with Profit Power

S&P's latest screen finds issues with sterling margins and attractive valuations. Among the names: J&J and eBay

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From Standard & Poor's Equity Research
While many investors keep their eyes firmly fixed on a company's net earnings, there is more to an outfit's profitability than just the number on the bottom line. Gross margin—basically, what is left over from revenues after deducting the cost of sales, expressed as a percentage—is a key measure of a company's health. Why is that? Maintaining a strong gross margin can be a sign that a company operates efficiently—and maintains good pricing power.

With that in mind, we set out to look for stocks in the enviable position of having a strong gross margin with a reasonable valuation. We started with the list of stocks in the Standard &Poor's 500-stock index. We looked for those that had a gross margin in the top 10% of companies the index.

VALUE, TOO.  Then, we turned to the STARS—our STock Appreciation Ranking System. In order to make sure that these issues had attractive prospects for capital appreciation, we screened for those ranked 4 STARS (buy) or 5 STARS (strong buy) by S&P equity analysts. Stocks with those designations are expected to post total returns exceeding the total return of the S&P 500 index over the coming 12 months, and to rise in price on an absolute basis.

We then moved on to the value side of the equation. Of the remaining names on the list, we sifted for those with the lowest price-to-sales ratios.

The screen turned up 10 names. Financial and health-care stocks are well represented on the list.

Company	Ticker	S&P STARS Rank
Apache	APA	4
Biomet	BMET	4
CIT Group	CIT	5
eBay	EBAY	5
EOG Resources	EOG	5
Johnson&Johnson	JNJ	5
Eli Lilly	LLY	5
Pfizer	PFE	4
PNC Financial	PNC	5
St. Jude Medical	STJ	4

Kaye, an analyst for Standard & Poor's Portfolio Services, is the author of The Standard & Poor's Guide to Selecting Stocks

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