Momentum is once again positive as we kick off the second week of earnings season. With that said, I wanted to take a moment to talk about the companies with very attractive balance sheets. Remember, I’m not one for speculation around earnings season. I prefer to actively “trade” stocks that I already know are succeeding in this economy. If you’ve followed me on this before, you know I’m looking at three metrics to find these perfect companies. Some publications charge money for this type of analysis.
But this is the ultimate Do-It-Yourself lesson. So, use these three metrics:
- The Piotroski F-Score
- The Altman Z-Score
- A Valuation Rank
Let’s Talk About the Numbers
We want a story of positive growth – and the F Score tells it. 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 hate surprises, so I prefer to target companies with a Z score of 3 or higher. Remember, stocks with solid F and Z scores tell us RIGHT NOW what is working in the U.S. economy. You can’t fake performance when using forensic analysis.
Here are the perfect companies this month.
|Stock||F Score||Z Score|
|SEI Investments (NASDAQ:SEIC)||9||18.43|
|Quest Diagnostics (NYSE:DGX)||9||4.34|
|Credit Acceptance Corp. (NASDAQ:CACC)||9||3.34|
|Smith & Wesson Brands (NASDAQ:SWBI)||9||9.41|
|SIGA Technologies (NASDAQ:SIGA)||9||20.94|
|Natural Alternatives (NASDAQ:NAII)||9||4.48|
These are the types of stocks that I like to sell covered calls on. I want to trade Poor Man’s Covered Calls. And I like to dollar cost average them should they drop in price. You might also want to consider a cash-secured put as well to pick your entry price and generate some income in the process.
You can’t fake performance. That’s why I love this strategy.