Finding Winning Stocks in a Tough Environment

Stocks featured in this article are: Amedisys, Inc. (AMED - Snapshot Report), Amerigas Partners, L.P. (APU - Snapshot Report), Cephalon, Inc. (CEPH - Analyst Report), Frontier Oil (FTO - Snapshot Report) and McCormick & Company, Inc. (MCK - Snapshot Report).

In doing some research on S&P 500 companies that have recently reported 4th quarter earnings (as of last Friday, 2/6/09), I was a bit startled with what I found.

Of the over 300 companies that had reported so far, 55% of them beat expectations while only 34% of them missed. (The rest were inline with expectations.)

But of those companies that reported, 65% of them actually lost money while only 32% of them saw any growth.

And what's worse, over 87% of those companies have already seen negative earnings estimate revisions for the current quarter within just the last 4 weeks.

Very discouraging.

But if you turn your attention to the 20%-30% of the winners out there, you can still find good stocks with real growth potential.

I'm careful to stress 'real' growth potential because there have been plenty of stocks that have gone up recently for no other reason than they weren't the complete and utter disaster that some people had been expecting. Like a lot of the financials.

I'm not saying all the financials are bad because they're not.

But if a company loses nearly 80% of its value and is expected to report even more losses, but somehow showed a slightly smaller loss and posts a 7% positive surprise because of it, that's hardly a sound company to be in.

And that's a real example I'm giving. That stock was counted amongst the 55% of companies that reported better-than-expected earnings.

I should also note that it's also counted amongst the 87% of companies that have already received negative earnings estimate revisions over the last 4 weeks.

So how do you find the potential winners in all this mess?

I find myself looking for a few things more and more these days:

1. I want to see actual growth for the last quarter and for the whole of last year.

   (I know things are tough out there. But the ones that can still figure out how to generate profits are the ones I want to stick with.)

2. I also want to see positive growth projections.

   (I know a company can go up if it doesn't lose as much money as was expected. But that's not the kind of real growth I'm looking for right now. I'm talking about real growth. Actual profits.)

3. And presently, I'd prefer to see a low P/E.

   (In this environment, investors are very reluctant to pay up for growth. And even good stocks can see its price get whacked if investors decide a company's earnings might not be worth the higher multiples it is selling at.

   In tough times, lots of investors turn into value guys. But if the stock is generating good earnings and the P/E has already been beaten down, you've just taken away two big downside risk pressures.)

These are some of the key ingredients right now.

And you can execute this strategy on Zacks.com's free screener.

• Positive Growth Rates for last Quarter and last Year
  
• Positive Projected Growth Rates for next Year
  
• Low P/Es (under 15 or lower)

You can also step it up a notch by adding additional criteria within the Research Wizard screener, such as the top 50% of the Zacks Ranked Industries, or even better still, the top 10% of the Zacks Ranked Industries.

Focusing on the best industries can give an added boost to a stock's price performance since 50% of a stock's price move can be linked to the group that it's in.

Here are 5 stocks that made it thru this week's screen:

AMED - Snapshot Report Amedisys, Inc.
APU - Snapshot Report Amerigas Partners, L.P.
CEPH - Analyst Report Cephalon, Inc.
FTO - Snapshot Report Frontier Oil
MKC - Snapshot Report McCormick & Company, Inc.

Get the rest of the stocks on this list and start finding winning stocks today. You can do it. Sign up now for your free trial to the Research Wizard and start picking better stocks.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.