It’s that time again. We start the first trading day of every month with a quick dive into strong balance sheet stocks that perform well in every market. From a momentum perspective, you want companies that tackle three metrics…
- The Piotroski F-Score
- The Altman Z-Score
- A valuation rank
Now, with broader market momentum squarely in the Red and concerns about Russia-Ukraine weighing on markets, you’ll want to be conservative here. But, I stress that these stocks could break out in day trades and show us that they can weather this storm as investors look for new opportunities.
These stocks are candidates for conservative trades like covered calls and cash-secured puts. Still, I do stress the importance of keeping stops tight.
The State of the Market
The start of March coincides with a wealth of geopolitical uncertainty and broader worries about high valuations in the tech and communications sectors. The Russia-Ukraine situation is extremely volatile. We likely won’t have any significant resolution for weeks – if not months.
But if you’re going to trade – or learn how to trade – we want to focus on strong fundamentals in this market. Companies that have cheap valuations, strong balance sheets, and low debt concerns make for intriguing trades this month. So, let’s talk numbers…
The Three Point System
We start each screen by focusing on improving financial growth and low debt exposure – and the F-Score tells both. With the Fed ready to raise interest rates, we don’t want companies paying more money for debt… we want them to be returning its cash flow to investors.
The F-Score (or Piotroski 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.
Then, there’s the Altman Z-Score. This is a weighted average of five metrics to determine whether a company might go out of business. So, if a company falls below 2.5, it has a risky balance sheet – typically due to large debt loads or weak cash flow. I always target stocks that have a Z-Score of 3 or higher. That drastically reduces any worries about debt loads when and if a major credit event transpires.
I have long said that stocks with a perfect F and high Z-Score are safe. They tell us RIGHT NOW what is working in the U.S. economy. Finally, I add on a quick valuation score. I’m looking for a stock that’s trading at a discount to its rivals or to its own historical valuations (be it price-to-earnings, price-to-sales, or price-to-cash flow metrics). Okay… enough typing. Let’s get to the list of March’s perfect stocks.
March’s Perfect Stocks of 2022
And the winners are…
|Stock||F-Score||Z-Score||Wall Street Target Upside|
|Abbott Laboratories (ABT)||9||5.03||18.3%|
|Cognizant Technologies (CTSH)||9||7.48||12.1%|
|Rocky Mountain Chocolate Factory (RMCF)||9||5.84||19.2%|
This is a pretty surprising list to be honest. Everyone of our companies from February have dropped off the list during earnings season, but in this environment, it’s not surprising.
Abbott Labs is currently recovering from oversold conditions in recent weeks. Diodes is an under-the-radar semiconductor play in a sector that may experience further tightness on supply in the months ahead. Rocky Mountain Chocolate Factory (seriously) remains in an ongoing activist dispute and could become a takeover target due to its strong balance sheet (via a leveraged buyout).
And Cognizant is a strong tech firm that has shown impressive price momentum since experiencing a broad selloff last summer. It recently hit 52-week highs and maintains double-digit upside for the months ahead.
Tomorrow, I’ll be back to discuss new ideas in the energy space (it’s the only sector that continues to outperform). I’ll explain the number that investors must know about oil prices for the months ahead. That figure will dictate the future of this economy heading into an election.