The Stock Screen as a Reality Check

No matter how skeptical I get about the market's level and direction, I always run my stock screens each and every week. There are many reasons for this, but chief among them is that I am well aware that I could easily be wrong about general market conditions.

In addition, I always want to have a list of potential inventory if prices do fall, and on occasion I find stocks that are so cheap I want to own them no matter what. It has been my experience that there will always be some stocks around that are undervalued no matter what is going on in the broad markets.

Yesterday, with all of this in mind, I sat down and ran my basic Ben Graham screen of stocks selling at low earnings multiples with strong balance sheets. On of my first observations was that there were a lot of Chinese stocks on the list. When I checked, I found that the iShares China Index (FXI - commentary - Trade Now) is up 17% in the last month. I have resisted buying Chinese shares because I really am not comfortable with the political risk, but if they continue to be this cheap, I may have to rethink that position.

I am in basic agreement with Jim Rogers and others who feel that this will be the Chinese century. Much of the world's economic growth in the 20th century was driven by the creation of the middle class in the U.S. It is reasonable to assume that the continued creation of a middle class in the most populous nation on earth could have a similar effect.

The second observation was that there was not one single bank stock on the list. Six months ago, they composed well over half the list. The sharp rally in bank stocks has caused many of them to reach double-digit earnings multiples. Given the troubles that banks have faced and still have ahead of them, this confirms my belief that they are overvalued right now. I agree that JPMorgan Chase (JPM - commentary - Trade Now) is the best of the bunch, but the stock trades at 31 times trailing and 13 times forward earnings. Well Fargo (WFC - commentary - Trade Now) is at 32 times trailing earnings and 16 times estimates. That is too high, in my opinion.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider PSEC and SPAR to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.