A Quick Way to Find Winning Shares
LONDON -- Do you want to invest in winners? The best way to separate the stock market gold from the dirt is to use a fundamental statistics database. This contains data on a share's vital statistics, and can be used to identify the companies that are doing better than the rest.
Don't forget that just because a company has been successful in the past, that doesn't mean that its good run will continue. Furthermore, just because a business is trading well, that does not mean that its shares will rise.
I've filtered the market on a selection of criteria to find some winning blue chips from the FTSE 100. My data below is from Stockopedia. Other systems are out there. There are studies that show that investing in high-yield stocks can result in improved returns, so I have added this criteria to my search.
1. Share price momentum
This search identifies companies whose share price has been outperforming the market. This is sometimes the result of the market changing its mind about a company and rerating it. However, on occasion, it can be the result of takeover speculation. Investors need to determine what has led to the rise and whether the shares are still cheap. The three companies below are the largest to have outperformed the market by 15% in the last year.
Company | Price (pence) | 12-Month Outperformance | P/E (forecast) | Yield (forecast) | Market Cap (pounds) |
|---|---|---|---|---|---|
Aberdeen Asset Management | 328 | 64.3% | 14.9 | 3.3% | 3,700 million |
Wolseley (ISE: WOS.L) | 2,689 | 40.0% | 14.7 | 2.6% | 7,600 million |
Intercontinental Hotels | 1624 | 38.9% | 18.3 | 2.5% | 4,470 million |
Aberdeen Asset Management has flourished as equity markets have recovered. I attribute this to three factors: increased assets under management, increased fees and rising confidence in future earnings. Currently, the shares look fairly value. Remember, a market correction could have significant adverse impact on Aberdeen's prospects.
2. High dividend yield
Searching for high-yield shares can lead investors into the feared "value trap" -- a share that the market has correctly written off and is doomed to disappoint. Often, dividend yields are high because the market expects the payout will be cut in the future. These are the three highest-yielding shares in the FTSE 100.
Company | Price (pence) | P/E (forecast) | Yield (forecast,) | Market Cap (pounds) |
|---|---|---|---|---|
Resolution | 215 | 8.9 | 9.7% | 3,020 million |
RSA | 114 | 9.5 | 8.3% | 4,020 million |
Aviva (ISE: AV.L) | 329 | 6.9 | 7.9% | 9,450 million |
For about three years now, some commentators have been saying that the RSA dividend is in line for a cut. However, the company has continued to pay out an increasing dividend. Analysts forecast that the dividend will continue rising for another two years. The 2013 estimated yield is a hefty 8.5%.
3. High growth
Winning companies should be able to grow profits faster than the rest. Here, I have searched for the companies with the highest five-year EPS CAGR -- that is, companies with the highest compound annual growth rate of earnings per share over the last five years.
Company | Price (pence) | 5-Year EPS Annual Growth | P/E (forecast) | Yield (forecast) | Market Cap (pounds) |
|---|---|---|---|---|---|
AMEC | 1,111 | 52.1% | 14.3 | 3% | 3,460 million |
Glencore | 338 | 50.0% | 9.7 | 2.6% | 2,321 million |
Fresnillo (ISE: FRES.L) | 1,960 | 44.5% | 29.7 | 1.8% | 13,855 million |
This trio has profited from the resources boom. My favorite is AMEC. The company has changed significantly under its CEO Samir Brikho. Another two years of double-digit earnings and dividend growth are forecast at AMEC. The company's success and prospects have earned it a premium rating compared with its peers.
4. Dividend growth
Just as EPS at a successful company should rise, shareholders also want to see the dividend increasing, too. Income investors are extra demanding: they also want the dividend to rise faster than inflation. I've screened the market for companies with the highest dividend growth rate. I added the requirement that dividends at the company must have increased year-on-year for at least five years.
Company | Price (pence) | 5-Year Annual Dividend Growth | P/E (forecast) | Yield (forecast) | Market Cap (pounds) |
|---|---|---|---|---|---|
Petrofac | 1,603 | 44.0% | 13.8 | 2.5% | 5,500 million |
HargreavesLansdown (ISE: HL.L) | 716 | 39.3% | 24.6 | 3.7% | 3,230 million |
RandgoldResources | 7,670 | 32.0% | 22.7 | 0.5% | 7,020 million |
Oil engineering and services company Petrofac has capitalized on the global resources boom. In the last five years, the shares are up around 220%. In that time, the dividend has increased from $0.09 to $0.59. Another two years of double-digit eps and dividend growth is expected. This means that the shares trade on just 12.2 times the consensus earnings forecast for 2014, and are expected to deliver a yield of 2.8%.
5. High margins
If a company can make a good margin on its sales, then it is likely a safer investment than a company that is trading close to break-even. In difficult times, a high-margin company can cut its prices and still remain profitable. Furthermore, high margins are a sign that there is little waste in a business. All that said, a company's margin is not a favorite measure of mine. Margins naturally vary from one industry to another. Second, management likes to "make hay while the sun shines." Margins at a company can be temporarily high due to favorable industry conditions (such as high resource prices). Investors have to decide if the margin is likely sustainable in the long term.
Here are the three FTSE 100 companies whose average net profit margin over the last five years has been the highest.
Company | Price (pence) | Net Margin, 5-Year Average | P/E (forecast) | Yield (forecast) | Market Cap (pounds) |
|---|---|---|---|---|---|
OldMutual (ISE: OML.L) | 171 | 186.0% | 9.2 | 3.7% | 8,260 million |
Hargreaves Lansdown | 716 | 40.9% | 24.6 | 3.7% | 3,230 million |
Fresnillo | 1,951 | 33.2% | 29.7 | 1.8% | 13,850 million |
I'm a big admirer of Hargreaves Lansdown. Since its formation in 1981, the company has grown fast. Hargreaves Lansdown is one of a handful of U.K. blue chips that is less than 50 years old. The company essentially operates as an online supermarket for fund investors. In the last five years, EPS has grown from 7.9 pence to 24.8 pence. The dividend growth has also been impressive: up from 5.49 pence in 2007 to 15.8 pence for 2012.
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The article A Quick Way to Find Winning Shares originally appeared on Fool.com.
David O'Hara holds no financial position in any of the companies mentioned. The Motley Fool owns shares in Hargreaves Lansdown. The Motley Fool has adisclosure policy.
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