After a September loss for the S&P 500 and yesterday’s major selloff, investors are concerned. And I believe investors should be cautious as we head into the election, amid rising coronavirus infection rates. However, I have four stocks that I rigorously analyzed that should withstand any long-term market bearishness.
Not long ago, I was bullish about the market in Q4 2020 and Q1 2021, but after yesterday’s session, you can count me in the cautious crowd. The Dow dropped 943 points, or 3.4%. What makes the sell-off so concerning is that it wasn’t just 1 sector in the market that fell yesterday. All of the major stock indices dropped, gold prices fell $35 per ounce, crude oil prices were down nearly 6%, and even Bitcoin was down. Nobel-winning economist Robert Shiller said in a NY Times op-ed that not only is investor confidence down, but stock prices are “trading at very high levels.”
While this may not turn into a significant downturn, as stocks are trading up today, it is good to be prepared for the worst. That’s why I put on my analyst cap and looked for companies I believe are best suited for a market crash. These companies have strong balance sheets and pass a strict selection of criteria, including a Piotroski F Score over 7. The Piotroski score, which was named after Chicago Accounting Professor Joseph Piotroski, is a score between 0-9 that reflects nine criteria used to determine the strength of a firm’s financial health.
The following four stocks not only had a Piotroski F Score of 8 or 9 but also met my proprietary list of profitability and debt measurements, including net profit margin and long term debt to total capital: Adobe Inc. (ADBE), Procter & Gamble Co (PG), SolarEdge Technologies (SEDG), and ITT Inc. (ITT).
Adobe Inc. (ADBE)
You wouldn’t think a technology company would fit my strict criteria due to the sector’s high-flying growth model’s nature, but ADBE fits the bill. The company has a Piotroski F Score of 8, a current ratio of 1.4, long-term debt to total capital ratio of 0.3, and a net profit margin of 31.3%. In addition to its sound financials, it’s a strong growth stock that reported year over year revenue growth of 13.8% and earnings growth of 22.4% last month.
ADBE has benefited from the mass digitization wave that started this year and is likely to continue for the foreseeable future. The company has gained from strong demand for its creative products, which are driving revenue growth. It also sees rising subscription revenues across its mobile apps, growth in emerging markets, and online video creation.
Plus, ADBE should continue to grow over the next few quarters due to a rebound in discretionary enterprise spending as consumer behavior and economic activity normalize. The stock is rated a “Buy” in our POWR Ratings system. It has grades of “B” for Trade Grade, Buy & Hold Grade, and Industry Rank, which are three out of the four components that make up the POWR Ratings. The company is also ranked #11 out of 96 stocks in the Software – Application industry.
Procter & Gamble Co (PG)
Here is a stock that you would probably think would be in a list such as this. PG has given investors consistent growth, income, and returns for a very long time. Its products were in high demand at the beginning of the pandemic, as consumers cleared the shelves of paper towels, toilet paper, and cleaning supplies. Since the pandemic doesn’t seem to be going anywhere as cases are on the rise, these products will be in high demand once again.
PG has a Piotroski F Score of 8, debt to equity ratio of 0.7, long-term debt to total capital ratio of 0.3, and a return on equity of 27.9%. The company reported its latest earnings results last week and posted revenue of $19.32 billion, which beat the consensus analyst expectation of $18.38 billion. Earnings per share came in at $1.63, which also beat analyst estimates. Its home care sales, which include home cleaning products, grew 30% in the quarter.
The company also issued positive guidance for fiscal 2021 as it expects sales growth of 3% to 4%, up from its prior forecast of 1% to 3%. It also expects core earnings growth of 5% to 8%, plus it intends to buy back more stock in the fiscal year. The stock is rated a “Strong Buy” with straight “A” s in every POWR grade. It is also ranked #1 in the Consumer Goods industry.
SolarEdge Technologies (SEDG)
SEDG is a company I like a lot. It has solid growth numbers, as sales growth has averaged 33.6% over the last five years and is expected to grow 22% next year. It has a return on invested capital of 20.5% and a return on equity of 18.7%, very little debt, and, most importantly, a strong balance sheet with a Piotroski F Score of 8.
The company is known in the solar energy community as the investor of the DC optimized inverter solution, which changed how power is collected and managed in solar PV systems. It maximizes power and lowers costs. The company has faced pressure from the pandemic but has seen strong growth in Europe and Australia. In Europe alone, it saw a $122 million increase in revenue from the previous quarter.
The company reports its latest results on Monday, November 2nd, and analysts have revised their annual earnings estimates for the company. The stock is rated a “Buy” in our POWR Ratings with a grade of “A” for Trade Grade. It is also the #2 ranked stock in the Solar industry.
ITT Inc. (ITT)
ITT is a diversified industrial conglomerate with nearly $3 billion in annual sales. The company’s products include brake pads, shock absorbers, pumps, valves, connectors, and switches and its customers include original-equipment and Tier 1 manufacturers and aftermarket customers. ITT might not be as familiar to many of you as the other companies on this list, but it is quite sound financially.
The company has a Piotroski F Score of 8, a current ratio of 1.9, and only $70 million in long-term debt as of the end of the last quarter. Its net profit margin of 12.3% is considerably higher than the industry average of 5.5%, and its P/E is quite attractive at 17.4. ITT is poised to gain from its diversified business operations and supply-chain adjustments in the upcoming quarters. Its cost-cutting measures and strong liquidity bodes well for its bottom line.
Investors should be happy to hear that the company plans to continue to pay dividends, despite suspending its share buybacks during the pandemic. The company plans on reporting its latest financial results tomorrow morning before the bell, so keep an eye on that. The stock is rated a “Buy” in our POWR Ratings system. It holds grades of “A” for Trade Grade and Industry Rank.
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ADBE shares were trading at $462.20 per share on Thursday afternoon, up $5.23 (+1.14%). Year-to-date, ADBE has gained 40.14%, versus a 4.97% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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