First, let's look at the 6 indicators that I use to help find stocks for security and growth:
1. Price to Earnings: This indicator is a ratio that compares a company's stock price to its earnings per share. It's sometimes called the P/E ratio, and I find it useful in determining the market's outlook for a company's future earnings. Let's say a company posts full-year earnings at $2.00 per share and the stock is trading at $50 a share. The P/E ratio would be 25 because the stock is trading at 25x earnings. Investors use this in different ways; some prefer stocks with high P/E ratios and others prefer stocks with low P/E ratios. There is no right or wrong way, but I have found that stocks with low P/E ratios return better gains in a market that is trending lower. I believe that any ratio above 20 is a risk in a downtrend market. With a P/E ratio above 20 it has the potential to fall much lower because it trades above earnings, much higher than book value, and with a large number of short-traders. Stocks such as this usually fall very fast with bad news, while stocks with low P/E ratios can usually hold steady if faced with a similar situation. Therefore, one indicator I use is a P/E under 20, which tells me the stock is probably trading close to, or below, book value.
2. Beta is a measure of volatility against the market. If a stock has a beta of 1.6, then it's 60% more volatile than the market. Therefore, I prefer stocks with a beta below 1, and I follow a personal rule to never purchase a stock with a beta above 1.3 in a volatile market that is trending lower. The reason being, in a volatile market, when stocks can cover a large range in a matter of days, holding stocks with a low beta can better protect the investor against the price swings of the market.
3. Yield refers to dividends received from a stock through an annual percentage. The important thing to remember with this indicator is that the stock you are considering pays a dividend and returns capital to shareholders; therefore it will have a yield. Investors seem to purchase stocks with moderate to high yields in an uncertain market to capitalize on a sure return.
4. Debt to assets is expressed as a percentage that I use to judge the financial health of a company. I believe the lower the better, especially in a declining market, because a high debt-to-asset ratio indicates that the company is dependent on debt or loans to remain operational. I was taught to never purchase a stock with a debt to assets over 50, but I prefer 40 because I want a company that is independent and does not rely on financial institutions for its growth or success.
5. 3-Month Performance is self-explanatory: I look for a stock's trend and performance during the previous 3 months to predict its most likely future direction. Stocks that consistently trend higher when the market trends lower show internal strength along with confidence among investors. Therefore I look for stocks that are outperforming the markets and trading in positive territory.
6. Income Statement: I want to see that revenue, earnings, and income are posting gains year-over-year. Along with other indicators, this will show that the company is moving in the right direction. The 9 companies listed below have each improved income statements and are on pace to continue posting gains in the future:
| Company | Ticker | P/E | Beta | Yield | 3-Month Performance | Debt to Assets |
| Microsoft Corp. | (MSFT) | 9.59 | 1.01 | 2.47 | 9.22% | 11% |
| Coca-Cola Comp. | (KO) | 12.96 | 0.58 | 2.71 | 6.10% | 32% |
| McDonald's Corp. | (MCD) | 17.42 | 0.46 | 2.83 | 7.25% | 36% |
| Brystol Myers Squibb | (BMY) | 15.30 | 0.62 | 4.48 | 7.25% | 17% |
| Colgate-Palmolive | (CL) | 17.99 | 0.47 | 2.64 | 3.57% | 30% |
| The Southern Comp. | (SO) | 17.62 | 0.33 | 4.57 | 5.19% | 38% |
| Target Corp. | (TGT) | 11.91 | 0.90 | 2.39 | 7.30% | 36% |
| Kimberly Clark Corp. | (KMB) | 15.91 | 0.41 | 4.16 | 4.07% | 33% |
| PPL Corp. | (PPL) | 11.19 | 0.46 | 5.00 | 3.82% | 41% |
I believe that each of the 9 stocks listed above would make a safe investment with the potential to gain over the next several months. The indicators that were used tell investors that each stock is trading close to book value, does not rely on debt to operate, moves less than the market, returns capital to its shareholders, and has outperformed the market during a time when the Dow Jones has lost 7.5%. Due diligence should be performed to learn more about these companies to decide if one of these stocks would benefit your individual portfolio. But based on past performance, I would conclude that stocks that meet the criteria will outperform the market over the next several months, and should offer investors a strong holding during this time of uncertainty. original post by seekingalpha.com
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