785: Vox Screens Stocks: John & Justin pick two stocks from the Falling Knives Screener


Manage episode 333656907 series 2936804
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In this episode of Vox Screens Stocks, John Hughman & Justin Waite pick two stocks from the Fallen Knives Screener.
There are lots of ways of finding investment opportunities, but one of the most fruitful is to start your search by crunching stock market data. With thousands of listed companies, using tools to filter for certain financial characteristics can whittle the market down to a manageable number that you can use to focus your research efforts.
Each week we'll use a variety of stock screening approaches to come up with a list of stocks which fit the criteria of this week’s stock screener, then John & Justin will pick a stock from the list, explain what they like about it.
We're calling this week's screen the 'Falling Knives Screen', because we're looking for companies whose shares have fallen a lot, but which may have been judged too harshly by the market.
It’s often said that you shouldn’t try to catch a falling knife in investing. Tempting though it is to assume a company whose shares have sold off can’t fall any further, evidence shows that negative momentum is a powerful force. A share that’s fallen 90% can, mathematically, always fall another 90%, and there are plenty of nervous investors right now to force them down.
Nevertheless, when selling becomes indiscriminate, as it often does in a brutal bear market, babies sometimes get thrown out with the bathwater. And they’re the stocks we’re trying to find with this screen.
In theory there will be lots to choose from. Of just over 2,000 companies listed on the stock market, 1,385 of them are in bear market territory, down by a fifth or more from their 1-year high. Within that, 488 – roughly a quarter - are down more than 50%. And 20 companies are members of the unenviable 90% club.
The reality, of course, is that a simultaneous bear market and economic recession will make it hard for many of them to recover – and for some, survival could be problematic too; run out of money in today’s market and raising more may prove tricky.
So rather than looking only at share price performance, we’ve added some criteria to this screen that should help us identify companies with better than average financial stability, and weed out those that might run out of cash, or whose earnings are going obviously backwards. Here are the full criteria.
  • Share price down by a fifth or more from 1-year high
  • Positive EPS growth last year and forecast
  • Positive sales growth last year
  • A PE ratio of between 5 and 15, to weed out true basket cases or those too richly priced
  • Turning more than 90% of their operating profit into cash
  • Net debt to market capitalisation of less than 25%
  • A market cap of less than £250m
You should also look at the numbers in the context of recent commentary from the company, particularly the latest outlook statements - and a profit warning hidden in Supreme's results outlook statement today shows we need to be especially cautious over forecasts at the moment. Always remember, numbers alone can mislead.
John's Pick: UP Global Sourcing #UPGS

Retail shares have been hit hard by the prospect of recession, and homeware products provider
UP Global Sourcing (UPGS) is no exception. But it's strategy of breathing life into well-known but unloved brands is reminiscent of the succesful approach of Sports Direct - now Frasers - and it's got huge scope to increase its more efficient online channels, with plans to double the proportion of e-commerce sales to 30%. Operating margins in the high single digits aren't especially attractive, but returns on capital are good and the company - which has significant director ownership and pays a chunky dividend - has managed to navigate both Covid and the supply chain crisis without issuing any profit warnings.
Justin's Pick: K3 Capital #K3C

K3 Capital Group (AIM:K3C) is a multi-disciplinary and complementary professional services group advising UK SMEs, with operations throughout the UK and overseas. Services provided by the Group fall into three key operating divisions: M&A Division, Tax Division & Restructuring Division. In a sense it's 'recession-proof', with its focus on corporate insolvencies likely to stand it in good stead as more companies run into financial difficulties, as recent research from peer Begbies Traynor suggests is likely. Growth forecasts are attractive, and it's quality metrics already look good, with mid-teens margins operating and ROCE above 20, and a decent dividend yield to boot.

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