June 24, 2007

Marco's Handy Dandy New Highs Analyser
by Marco den Ouden 

Long time readers know that I start my search for good stocks to invest in by looking for stocks hitting new highs.  (See How I Select My Stocks) After calling up the New Highs tables at Globeinvestor.com, I check out the company snapshots to see which stocks are growing earnings at better than 25% a year and go from there.

When I started doing this in 2000, my wife was a stay-at-home Mom and I she would go through the new highs each day and fill out a form on each I had prepared. Then I just had to look through the collected forms and see which stocks looked promising and research them further.

With the kids grown and my wife working again, I have been using a more scatter-shot approach. Often there are just too many new highs in a week to weed through them all. And I don't have the time or patience to do it. I would just look through stocks on the new highs list at random until I found a likely candidate. But doing this meant I could easily miss a really good pick just because I found another one and stopped looking. So I wanted to devise a way of keeping a running record that could be added to and revised as needed.

An easier way to do this would be to keep a running record like we used to and just quickly update it every day. To that end, I decided to prepare a spreadsheet that could be added to as needed.

This week presented an ideal opportunity to start because Friday was a down day pushing the TSX down for the week to date and limiting the number of new highs at the end of the day. So I prepared a spreadsheet with the following parameters.

The table lists the stock name, symbol, and earnings per share in the most recent three years as well as the return on equity. That is followed by three spreadsheet calculations to help analyze the stocks quickly and easily.

The first calculation, called Rating 1, returns a 1 if EPS 1 is greater than EPS 2 and a zero if not. The second, called Rating 2, returns a 1 if EPS 2 is greater than EPS 3 and a zero if not. The Strength calculation gives the growth in earnings per share in the most recent full year.

In the example above, Agrium had an EPS of $0.25 a share in 2006 compared to an EPS of $2.14. That gives it a Rating 1 of 0. The Strength number tells us the EPS declined 88.32% in 2006. At a glance I can tell this stock does not meet my criteria for investment.

By contrast, Algoma Central has 1s for both Rating 1 and Rating 2 and the EPS growth in 2006 was 33.62%, better than the 25% I am looking for.

Not all the new highs tabulated by Globeinvestor can be entered in my table. Some don't have a snapshot available. Some don't have three years of data. Those I omit. Friday, there were 34 stocks that could be entered into the table. After adjusting the entries for anomalies due to negative numbers, we have our final table. Click for the complete table. It will open in a new window.

Now that the data is entered, I can manipulate the table to look at the data in different ways. One of the handy functions in a spreadsheet is to order the stocks according to the variables in a column. First let's look at the stocks ordered by growth in earnings per share in the last year. Click the highlighted words to bring up this table. Or you can check them out ordered by Return on Equity.

Return on equity measures the ratio of profitability to invested equity. It is sometimes called return on net worth. A strong return on equity means the company is making a strong profit on each invested dollar.

Looking at our two ordered tables, we see that Coast Wholesale Appliances Income Fund had a strong growth in earnings per share in 2006, but its return on equity is so-so at just 11.37. However, if the EPS continue to grow strongly, the ROE will increase accordingly. So the question becomes, can this growth in earnings continue?

Score Media has a phenomenal return on equity as well as very strong growth in earnings per share. Just on a quick analysis, Score looks to be the better buy. But we need to look deeper.

Analyzing the Stock Further

What we would look for are the EPS growth in the most recent quarter over the same quarter the year before and at whether revenue growth is also strong. If revenue growth is weak to non-existent, it means the EPS growth was derived from cost cutting. There is only so much you can cut in costs, so growth may be limited. In the case of Score Media, revenue growth has also been good. The most recent quarter shows EPS actually declined slightly though the quarter is historically the company's poorest.

The chart tells another story. The stock had been declining after peaking at around $2.25, falling to $1.60. Then it soared in the space of a few days to new highs. This is an unusual move and a look at the news tells us that the majority shareholder is looking to sell his stake and is shopping it to potential buyers. He is speculating on an asking price of $2.90 a share. Speculation has pushed the stock up big time.

Is this a stock worth investing in? My take is no. The price movement is erratic. True, if he finds a buyer, there is an upside of 23.93% if the target price of $2.90 is reached. But no deal has been made. The stock could just as easily fall if no deal materializes. This is a good stock to watch and see what happens after the dust settles.

What is a good buy from our tables? I'll leave that as an exercise for you to do.

Disclaimer