According to the Historical Data Screen, a Premium Plus feature of GuruFocus, three high-quality stocks with high price valuations and an operating margin of at least 15% each year over the past five years include Alphabet Inc. (GOOG, Financial)(GOOGL, Financial), Monster Beverage Corp. (MNST, Financial) and Check Point Software Technologies Ltd. (CHKP, Financial). Despite this, the stocks are still considered fairly valued based on the GF Value Line, a website-exclusive way to measure stock valuations.
Historical Data Screen seeks high-quality, high-margin companies
The High Quality Screen lists companies with high financial strength and profitability, based on ratios like return on equity, return on capital and operating margin.
GuruFocus' Historical Data Screen allows Premium Plus users to take the next step and seek companies that have high profit margins over multiple years. Figure 1 illustrates the "Historical Data Screen" feature for operating margin.
Figure 1
The filter illustrated in Figure 1 screens for stocks where the operating margin is greater than 15% each year from 2015 to the current year.
GuruFocus Filter Ranking shows strong positive correlation between valuation and return
Figure 2 illustrates a snapshot of the Screener's "Valuation Ratio" tab.
Figure 2
As Figure 2 illustrates, the Screener contains a "green thumbs up" icon next to certain filters, including the price-earnings ratio and the price-to-free cash flow ratio. Although common belief suggests that one should invest in stocks with lower price valuations, GuruFocus' correlation research suggests otherwise.
For both of these filters, GuruFocus correlation research using September backtesting data showed a strong positive correlation between the filter's value and 12-month stock returns. In other words, stocks with higher price-earnings ratios and price-to-free cash flow ratios tend to have higher returns than do stocks with lower price-earnings ratios.
The Price-to-Graham Number ratio also showed a strong positive correlation with stock returns, with an efficiency rank of 9. GuruFocus computes the Graham Number as the square root of the product of 22.5, the company's tangible book value per share and the company's earnings per share.
Thus, we will discuss high-quality stocks with price-earnings and price-to-free cash flow ratios of at least 15 and a price-to-Graham Number ratio of at least 1, yet are still considered fairly valued according to the GuruFocus Value Line.
Google, whose parent company is Alphabet, made the High-Quality Screen as a new stock according to Figures 3 and 4. Figure 3 highlights the number of new stocks for each of GuruFocus' screens, while Figure 4 highlights the new stock.
Figure 3
Figure 4
GuruFocus ranks the Mountain View, California-based online media giant's financial strength and profitability 9 out of 10 on several positive investing signs, which include a four-star business predictability rank, a double-digit Altman Z-score and an interest coverage ratio in the triple digits that is outperforming 73.44% of global competitors.
Class A shares of Alphabet closed at $1,483.43, while Class C shares closed at $1,485.93. The stock of both share classes are fairly valued with a price-to-GF-Value ratio of 1.03.
Gurus with holdings in Google include Bill Nygren (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
Monster Beverage
Shares of Monster Beverage closed at $79.17, showing they are fairly valued with a price-to-GF Value ratio of 1.06.
GuruFocus ranks the California-based beverage company's financial strength and profitability 9 out of 10 on several positive investing signs, which include a double-digit Altman Z-score, interest coverage and debt ratios that are outperforming over 89% of global competitors and an operating margin that has increased approximately 3.4% per year on average over the past five years.
Check Point Software
Shares of Check Point Software closed at $123.33, showing they are fairly valued with a price-to-GF Value ratio of 0.95.
GuruFocus ranks the Israeli software company's financial strength and profitability 9 out of 10 on several positive investing signs, which include no long-term debt and profit margins that outperform over 97% of global competitors.
Disclosure: The author has no positions in the stocks mentioned. The correlation research only gives a rough understanding of how the Screener filters were correlated with stock returns over a specific period. GuruFocus updates the filter rankings monthly.
Past performance does not indicate future results and thus should be used with caution. Further, investors should conduct their own careful research before investing in the stocks mentioned.
Read more here:
- 5 Peter Lynch Stalwarts With Expanding Profit Margins
- 4 Interactive Media Companies With High Financial Strength
- 5 Defensive Retail Stocks With Good Profitability
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
