The recent market downturn has been broad-based, with aggressive selling pretty much across the board. When the majority of stocks are falling uniformly, some stocks end up getting penalized perhaps too harshly. While the pundits are debating the increasing likelihood of slower growth or even another recession, it seems that stocks generally are priced very pessimistically already, with the overall valuations, as measured by P/E ratios, similar to where they were at the lows in early 2009.
One part of the market that has been hit a bit too hard in my opinion: large companies with strong balance sheets and a solid history of growth. Some might refer to these as “Blue-Chips”. Many of these companies were able to maintain or even grow earnings during the last recession or at least recover very quickly and move to new highs in sales and earnings subsequently. If this move down proves not to be a precursor of bad times ahead, but rather an example of stocks being more volatile than the larger economy, I would expect these types of companies to do well as their valuations ahead better reflect their prospects. On the other hand, if times are going to be tough, these stocks may benefit from investors favoring them compared to companies with worse balance sheets.
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With this in mind, I wanted to design a screen with the goal of identifying large growth companies that appear to be very attractively priced. Here are the parameters I used:
- S&P 500 member
- Annual Sales > $1 billion
- 5-year Annualized Sales Growth > 10%
- 5-year Annualized Earnings Growth > 10%
- Earnings growth past quarter vs. year-ago > 10%
- Projected 2011 Earnings Growth >10%
- Projected 2012 Earnings Growth > 10%
- Net Debt to Capital < 0%
- Forward PE < 20
- PE vs. 5-year Average < 1X
Here is what we get as a first cut: