Wednesday, June 13, 2012

Stock Screening Process: The 'Top-Down' Approach

Using the latest FT Global 500 rankings, I will demonstrate the screening process that I normally use to reduce the number of companies from 500 companies to 100 companies.

Step 1: First off, figure out different sectors that you believe will perform poorly in the next 3 to 5 years. In current economic times, I am bearish on the following industries:
i) Financials (these incl. Banks, financial & investment services, insurance providers, real estate investment & services)
ii) Retailers
iii) Media
iv) Tobacco
v) Gold miners
vi) Chemicals (I also eliminated this sector only because I do not have sufficient knowledge of the sector)
Step 2: Further exclude those companies that have a big chunk of their operations or customer base in countries that you are bearish of. Be careful, some companies may be based in a country, BUT that doesn't always mean that most of their businesses are also from the same country. Meanwhile, I am bearish on the following countries:
i) Japan - I believe that Japanese companies are becoming less and less competitive, and most of them also suffer from inconsistent earning numbers.
ii) USA - Many of the American companies have very well diversified business portfolio around the globe. Most of the companies that rely too heavily on domestic economy, however, are the oil & gas, utility, telecom, and homeland defense stocks.
Step 3: Reorganize these companies to be more useful by categorizing them into general categories. I like to reorganize them into 7 categories.
1)  Financials (incl. Banks, financial & investment services, insurance, real estate investment & services)
2) Consumers (3 types):
i) Non-cyclical products - beverages, food & drug retailers, food producers, general retailers, household goods & home construction, tobacco
ii) Luxury goods and services - automobiles & parts, leisure personal goods, travel & leisure
iii) Entertainment - media
3) Health care (incl. health care equipment & services, pharmaceuticals & biotechnology)
4) Industrials (4 types): i) Aerospace & homeland defense, ii) Industrial transportation, iii) General industrial and engineering, iv) Chemicals
5) Utilities (2 types): i) Electricity, gas, water & multiutilities, ii) Telecommunications
6) Energy (2 types): i) Metals & mining, ii) Oil & gas
7) Technology (incl. electronic & electrical equipment, software & computer services, support services, technology hardware & equipment)
Step 4: Only select companies that are consistently able to: i) raising their dividends over the past 5-10 years, and/or ii) increasing their revenues year-over-year

A) Consumer - Non-cyclical Products
1. Nestle (Switzerland)
2. Procter & Gamble (US)
3. Coca-Cola (US)
4. Anheuser-Busch InBev (Belgium)
5. PepsiCo (US)
6. McDonald's (US)
7. Unilever (Netherlands)
8. Kraft Foods (US)
9. SabMiller (UK)
10. Diageo (UK)
11. Nike (US)
12. Colgate-Palmolive (US)
13. Danone (France)
14. Monsanto (US)
15. Reckitt Benckiser (UK)
16. Yum! Brands (US)
17. Kweichow Moutai (China)
18. Kimberly-Clark (US)
19. General Mills (US)
20. Archer Daniels Midland (US)
21. Kellogg (US)
B) Consumer - Luxury Goods & Services
1. LVMH (France)
2. Volkswagen (Germany)
3. L'Oreal (France)
4. BMW (Germany)
5. Hyundai Motor (South Korea)
6. Starbucks (US)
7. Astra International (Indonesia)
8. Christian Dior (France)
9. Coach (US)
10. Johnson Controls (US)
11. MTR (Hong Kong)
12. Compass Group (UK)
C) Energy - Metals & Mining
1. BHP Billiton (Australia/UK)
2. China Shenhua Energy (China)
3. Freeport-McMoran Copper & Gold (US)
D) Energy - Oil & Gas
1. PetroChina (China)
2. Royal Dutch Shell (UK)
3. CNOOC (China)
4. Statoil (Norway)
5. BG Group (UK)
6. Suncor Energy (Canada)
7. Imperial Oil (Canada)
8. Canadian Natural Resources (Canada)
9. Enbridge (Canada)
10. Transcanada (Canada)
11. Cenovus Energy (Canada)
12. Tullow Oil (UK)
E) Healthcare
1. Johnson & Johnson (US)
2. Novartis (Switzerland)
3. GlaxoSmithKline (UK)
4. Sanofi (France)
5. Abbott Laboratories (US)
6. Novo Nordisk (Denmark)
7. Bristol Myers Squibb (US)
8. AstraZeneca (UK)
9. Eli Lily (US)
10. Teya Pharmaceuticals (Israel)
11. Medtronic (US)
12. Baxter International (US)
13. Stryker (France)
14. Essilor International (France)
15. Shire (UK)
F) Industrials - Aerospace & Homeland Defense
1. United Technologies (US)
2. Boeing (US)
3. EADS (France)
4. Lockheed Martin (US)
5. Rolls-Royce (UK)
G) Industrials - General Industrial & Engineering
1. Caterpillar (US)
2. 3M (US)
3. ABB (Switzerland)
4. Honeywell International (US)
5. Danaher (US)
6. Emerson Electric (US)
7. Deere (US)
H) Industrials - Transportation
1. United Parcel Service (US)
2. Union Pacific (US)
3. Canadian National Raiway (Canada)
4. Fedex (US)
5. Norfolk Southern (US)
6. CSX (US)
I) Technology
1. Microsoft (US)
2. IBM (US)
3. Intel (US)
4. Qualcomm (US)
5. Hewlett-Packard (US)
6. Texas Instruments (US)
7. Infosys Technologies (India)
8. Corning (US)
J) Utilities - Electricity, Gas, Water & Multiutilities
1. National Grid (UK)
2. Centrica (UK)
3. CLP Holdings (Hong Kong)
4. Hong Kong and China Gas (Hong Kong)
K) Utilities - Telecommunications
1. China Mobile (Hong Kong)
2. Vodafone Group (UK)
3. Telefonica (Spain)
4. Telstra (Australia)
5. BCE (Canada)
6. Rogers Communications (Canada)
7. Telus (Canada)

(Disclosure: I am long China Mobile, HSBC, and PepsiCo)

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