A Quick Way To Find Winning Shares

Published in Investing on 12 October 2012

Share screens can help you find successful companies -- fast.

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 (UKX). 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 re-rating 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.

CompanyPrice (p)12m outperformance (%)P/E (forecast)Yield(forecast, %)Market cap (£m)
Aberdeen Asset Management (LSE: ADN)32864.314.93.33,700
Wolseley (LSE: WOS)2,68940.014.72.67,600
Intercontinental Hotels (LSE: IHG)162438.918.32.54,470

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 fair 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.

CompanyPrice (p)P/E (forecast)Yield (forecast, %)Market cap (£m)
Resolution (LSE: RSL)2158.99.73,020
RSA (LSE: RSA)1149.58.34,020
Aviva (LSE: AV)3296.97.99,450

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.

CompanyPrice (p)5 year EPS annual growth (%)P/E (forecast)Yield(forecast, %)Market cap (£m)
AMEC (LSE: AMEC)1,11152.114.333,460
Glencore (LSE: GLEN)33850.09.72.62,321
Fresnillo (LSE: FRES)1,96044.529.71.813,855

This trio has profited from the resources boom. My favourite 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.

CompanyPrice (p)Five-year dividend annual growth (%)P/E (forecast)Yield(forecast, %)Market cap (£m)
Petrofac (LSE: PFC)1,60344.013.82.55,500
Hargreaves Lansdown (LSE: HL)71639.324.63.73,230
Randgold Resources (LSE: RRS)7,67032.022.70.57,020

Oil engineering and services company Petrofac has capitalised 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 favourite measure of mine. Margins naturally vary from one industry to another. Second, management like to 'make hay while the sun shines'. Margins at a company can be temporarily high due to favourable 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.

CompanyPrice (p)Net Margin, 5 Yr Avg (%)P/E (forecast)Yield(forecast, %)Market cap (£m)
Old Mutual (LSE: OML)171186.09.23.78,260
Hargreaves Lansdown71640.924.63.73,230

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 UK 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 7.9p to 24.8p. The dividend growth has also been impressive: up from 5.49p in 2007 to 15.8p for 2012.

If the idea of investing in successful companies appeals, you should check out what Warren Buffett has been buying. This super-investor is famous for seeking out investments in quality companies. Check out the free Motley Fool report "The One UK Share Warren Buffett Loves". The report will be delivered to your inbox immediately.

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Further investment opportunities:

> David holds no financial position in any of the companies mentioned. The Motley Fool owns shares in Hargreaves Lansdown.

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goodlifer 12 Oct 2012 , 6:14pm

Why no mention of PER?

A fine way of losing money is to pay too much for a perfectly good company, particularly when the market's looking good.

And when you're in buying mode it's all too easy to forget it's always possible the share you've chosen so carefully may turn out to be a dud.

This is less painful if it cost six times earnings than sixteen.

JohnnyCyclops 12 Oct 2012 , 8:00pm

Excellent article. Not so much for the specific firms identified (we all have our opinions), but showing in a brief article a number of different ways to explore the market and use the online power of screening tools that didn't exist for individual investors a decade years ago. Clearly you could have added another dozen screens - growing revenues; PEG; etc. but that's not really the point. I've recently been playing around with value and GARP screens, trying to see what makes sense to me.

Of course, knowing WHY you're investing is as important and knowing WHAT to invest in, and will help inform the type of screen (growth, income, value, etc). So it's important to have a plan or hypothesis that the screen is looking to address.

Finally, the numbers screen is likely a start and creates a shortlist. Further qualitative research is required to narrow and confirm the search.

goodlifer 12 Oct 2012 , 10:02pm

FWIW, our investment policy, as it's evolved over the last three or so years.

Please feel free to comment, criticize or shoot down in flames.

Our aim is twofold: partly to protect some of our ill-gotten gains from inflation, partly to generate a bit of pension.
To achieve these aims we look for blue or bluish chips which (a) pay reasonably decent dividends, and (b) hopefully go up 30% or more over the next few years.
In these we reinvest our dividend payments every month, together with any spare cash we haven't managed to spend.

Our checklist, items in no special order.

1) Would I be happy to work for this firm, if need be, or for one of the family to do so?

2) Does it fit in with the rest of our portfolio?
For reasonable diversification we like to have at least fifteen different holdings.
In practice there seems to be no upper limit. the more the merrier.
We don't like any holding to make up more than about 7% of our portfolio - less if possible.

3) Yield
Ideally not below 4 or 5%,
Check dividend cover, history and forecasts

4) Price Earnings Ratio.
Never - well, hardly ever - more than ten times earnings, ideally seven times or less.
Check earnings' history and forecasts

5) Check stockholders' equity and Price/tangible book.

Inevitably we have to compromise - find a share that ticks all boxes, it'll probably go down the tube before the ink's dry on the contract note.
Just one of the reasons why we diversify

Nearly forgot to mention selling.
We aim to sell if, and only if, Mr Market offers us more for a share than we think it's worth.

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