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  • Home>Research & Insights>Stock Screen>Safety Picks for the Many Moods of Mr. Market

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    Safety Picks for the Many Moods of Mr. Market

    Use this screen to find low-risk picks with nice potential.

    David Krempa, 02/02/2012

    European troubles have dominated the financial media for months now, with no end in sight. With all this uncertainty constantly making the front page and sending the market on a spree of volatility, it’s no surprise that many investors have been concerned about putting money to work in the stock market. With interest rates remaining near record lows, however, cash and fixed-income assets do not look particularly attractive, either. With this issue’s stock screen, we will try to find low-risk investments that still offer potential attractive returns, through both income and appreciation.

    Domestic = Yes

    Our first criterion will help us eliminate Europe-based firms, because they are experiencing significantly more uncertainty and volatility than businesses in the United States. In today’s globally connected economy, it is hard to avoid all European exposure because the majority of large corporations are going to derive some portion of their sales from Europe. However, on average, U.S. firms rely on Europe for a smaller portion of revenue than European firms do. More significantly, U.S. firms will likely see less of a direct impact from new regulations or austerity measures that may be imposed on European companies. This domestic-only restriction isn’t perfect, but when combined with other criteria, it should help isolate some solid investment opportunities.

    And Fair Value Uncertainty = Low

    Next, we search for companies with a low fair value uncertainty rating. Morningstar’s equity analysts assign each firm we cover an uncertainty rating, which assesses how much uncertainty there is in estimating the intrinsic value of the business. Lowuncertainty firms should have lower sales and earnings volatility and should be less susceptible to external factors that could significantly impact the firm’s value, such as regulation, pending litigation, or a rapidly changing competitive environment. We would prefer to find firms with reliable revenue and earnings streams and that compete in industries that are slow to change.

    And Economic Moat = Wide

    Stocks with economic moats possess significant competitive advantages over competitors. Firms with wide moats should have the most-durable moats. Barriers to entry, patents, scale advantages, or high switching costs may help insulate these firms from competition.

    And Dividend > 3%

    David Krempa is an associate analyst with Morningstar.