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Is your point that all the big growth potential or potential for the "under-valuedness" to be recognized is gone so take the profits and move on to greener pastures?

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Yes. Owners of RBK stocks will receive $59/share when this formally goes through. You already got the big boost. I would sell this as soon as you have something else in mind to buy.

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1. A member of the S&P500
2. Debt-to-Equity Ratio less than or equal to 0.5
3. Current Ratio of more than 2
4. Interest Coverage of more than 2
5. Some Cash Flow from Operations
6. Some Earnings
7. Price to Sales ratio of less than 1

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1. There's really no reason to limit your search to the S&P500. There is a strain of efficient-market theory that says that the bigger and more-analyzed a stock is, the more efficiently it will be priced. Thus, the S&P500 stocks, which are covered by many analysts, are much less likely to represent huge bargains than smaller stocks. I don't agree with it totally. For example, I think WMT is significantly undervalued right now. Certainly you should avoid penny stocks and anything with a market cap under, say, $100 million. Those stocks will be thinly traded and difficult to research. But there are thousands of other mid-cap companies that, IMO, represent your best opportunities.

2&3. The level of acceptable debt varies a lot from industry to industry. Utilities, for example, almost always have a lot of debt. These ratios are factors I would take into consideration, but I wouldn't automatically rule out a company with a low current ratio (e.g. WMT's is 0.83).

4. Do you mean analyst ratings of 2 or better on a scale from 1 to 5? I pay no attention to analysts' opinions. Many of them are still influenced by corrupt investment banking relationships, and in any case analysts are universally too optimistic (less than 2% of stocks have a "sell" rating). Also, stocks tend to get small bumps up or down when analysts change their ratings. If a stock has low or mediocre ratings, it has more room to improve than a stock with a 5.0 rating.

5&6. Yes, absolutely.

7. Similar to your debt screens, the acceptable price/sales ratio varies a lot in different industries. Using a screen of less than 1 will rule out just about any growth-type stock. This part of the screen is probably why you ended up so into heavy industry.


Generally, I look for stocks that are leaders in growing industries but are still priced cheaply. When I screen, I look for low PE, high long-term growth, and a strong balance sheet (low debt, positive cash flow). From there, I try to decide whether the market has fully priced in the company's and industry's growth prospects.

Some small stocks I like that fit this approach are CREE and PRAA. Both are leaders in industries that I expect to grow very rapidly in the next decade (LEDs and debt collection, respectively), and still have low PEs despite this growth potential.

More mature stocks include WMT and MMM. These guys aren't going to grow as fast as the other two, but they're less risky, and they're pretty clearly undervalued.