Some of the most widely hated stocks wind up in Tom Sassi's portfolio. Indeed, his fund has the word "contrarian" in it -- he's co-manager of Scudder Contrarian.
Studies show that over the long haul, stocks with low price-earnings ratios tend to perform better than stocks with high P/E ratios. And Wall Street often goes overboard in punishing sound companies that are encountering temporary problems. Such sell-offs, Sassi says, create opportunities. But, he says, "it takes a strong stomach to invest this way."
Sassi likes cheap stocks. But he won't buy shares in a company unless he thinks it can generate above-average growth. He identifies stocks that he believes can rise 50% to 100% over one to three years. At the same time, he buys only stocks he thinks won't drop more than another 10% to 15%.
After running computer screens similar to the one below, he determines which stocks and industries have fallen for good reasons and which will likely rebound. Has a recession depressed a company's earnings? Has a more cost-efficient competitor begun taking market share? Has a crucial patent expired?
Sassi employs a simple sell discipline. Because he cares about price, he starts to sell a stock if its P/E ratio rises above that of the S&P 500. Plus, "selling quickly if you're wrong keeps you from debacles," he says.
You can find stocks that could show up on Sassi's shopping list by screening for these criteria:
- Market value: $1 billion and up
- Price-earnings ratio: at least 25% less than that of the S&P 500, based on the current year's earnings estimates (find the S&P's P/E ratio by dividing the current value of the S&P by the current year's consensus earnings estimate)
- Estimated long-term earnings-growth rate: 9% or more (representing at least 30% more than the S&P 500's estimated growth rate of 7%)
- Dividend yield: greater than the S&P's
- Debt-to-equity ratio: less than 67%
Run the Screen
Stock Finder
[ Top ]
Small and fast growing