Every month, I discuss market momentum and the strongest stocks to start the month. This is the ultimate Do-It-Yourself lesson. Use these three metrics to find stocks that are performing well in any market…
- The Piotroski F-Score
- The Altman Z-Score
- A valuation rank
I like to trade covered calls and cash-secured puts on these stocks.
Let’s Talk About the Market
As we kick off February, markets remain under a strain of pressure from the last few weeks of selling. I remain concerned that we are in a bit of a Bull Trap, where institutions use short-term bumps in stocks as an opportunity to sell off some assets.
So, I do urge caution. However, after we see some strength and capital flows return, these are the stocks that I’d be actively trading. Now, let’s get into the numbers of February’s perfect stocks. Remember, stocks with solid F and Z-Scores tell us RIGHT NOW what is working in the U.S. economy.
Let’s start by finding positive financial growth and low debt exposure – and the F-Score tells both. The F-Score is a NINE-POINT system that rewards each company for meeting a certain criterion on its balance sheet. If the company meets all nine criteria, it has an F-score of 9.
The Z-Score is a weighted average of five metrics to determine whether a company might go out of business. For example, if a company falls below 2.5, it has a risky balance sheet – typically due to large debt loads or weak cash flow. I prefer to target companies with a Z-Score of 3 or higher.
Finally, we look at valuation. We’re looking for a stock that looks historically cheap compared to the rest of its industry… or compared to its historical valuations (be it price-to-earnings, price-to-sales, or cash flow metrics). And that brings us to this month’s list of top F and Z-Score stocks.
February’s Perfect Stocks:
| Stock | F-Score | Z-Score |
| Hologic Inc. (HOLX) | 9 | 4.08 |
| SEI Investments (SEIC) | 9 | 16.40 |
| Quest Diagnostics (DGX) | 9 | 3.79 |
| Laboratory Corp. (LH) | 9 | 3.81 |
| Quidel Corp. (QDEL) | 9 | 9.46 |
| Weyco (WEYS) | 9 | 4.53 |
| USA Truck (USAK) | 9 | 3.03 |
| Bath & Body Works (BBWI) | 9 | 4.84 |
Again, at the height of this Omicron spread, blood diagnostic companies look like attractive trades. We’re seeing strength in undervalued retail stocks and supply chain providers in trucking. And medical technology is starting to rotate into value areas with strong balance sheets and lower debt.
We can look to sell cash-secured puts on February’s perfect stocks… and build a slow position over time. Remember, momentum is negative right now, so once we have a positive signal, a solid watchlist is right in front of your eyes.
There’s another stock that just joined this world of strong balance sheets that we’ll discuss tomorrow. I think the valuation on tomorrow’s play is fair, but we want to ensure that we have the right pick for the right trade.
