Coverage Ratio Scan: Companies With Debt That Can Survive the Recession

Wanted to pass along this interesting scan I saw on Seeking Alpha. Basically, it takes the cash flow to debt coverage ratio to show a company's ability to cover total debt with operational cash flow. Thus, the higher the ratio is, the more likely a company can carry its total debt.

They scanned for companies with a ratio of 0.75 or more and cross-referenced it with the S&P500 for a final result of 23 stocks. In no particular order:

1. Aflac (AFL)
2. Bard (BCR)
3. CF Industries (CF)
4. Coach (COH)
5. Gap (GPS)
6. Jacobs Engineering (JEC)
7. Altria Group (MO)
8. Occidental Petroleum (OXY)
9. Robert Half (RHI)
10. Southwestern Energy (SWN)
11. Stryker (SYK)
12. Titanium Metals Corp (TIE)
13. MEMC Electronic (WFR)
14. Exxon Mobil (XOM)
15. Adobe (ADBE)
16. Amazon (AMZN)
17. Apollo Group (APOL)
18. Autodesk (ADSK)
19. Citrix Systems (CTXS)
20. Juniper Networks (JNPR)
21. Microsoft (MSFT)
22. Qualcomm (QCOM)
23. Yahoo (YHOO)
    

A lot of companies on the list are very cash-rich. Companies with large cash stock piles and no debt, like Apple (AAPL), do not make the list because they have no debt to service. So, you could run an additional scan for companies with high cash levels and no significant debt in order to find some more gems. OXY is interesting because we have seen a ton of hedge fund buying in that name over the past few quarters. It is easily one of the most popular oil names among hedge funds. QCOM is another hedge fund favorite and is easily one of the most widely held stocks. Additionally, we know that Carl Icahn and many others have been rabblerousing in YHOO. Lastly, we see that WFR makes the list. David Einhorn has recently been buying this one as he thinks it is cheap (and they have a ton of cash too). The underlying theme here is to find companies that have an abundance of cash in an environment where cash and liquidity is king. And conversely, you could even put on a pairs trade by shorting companies that will have problems servicing their debt due to overleverage or lack of capital. Long deleveraging, short leverage.

Fundamentals / My Quick Value Scan

One thing that's bothered is me is I've come across blogs that post up "Oh I ran my scan yesterday..." but they fail to tell us what the scan actually is, as if its some huge protected secret. So, thought I would go over one of the main scans I run to get a quick glance at possibly undervalued equities.

This is a quick fundamental scan I run on yahoo finance, just to keep up to date weekly on what equities are nearing tempting levels. This is a value based scan, but I am NOT a deep value investor. So, the various banks or retailers that come up in this scan I'll take a quick look at, but I rarely invest in or trade those names. You have to weed through the garbage, because more often than not, there's some garbage that shows up. I'll call this scan "QuickValue". This scan has provided me with past beauties such as Ensco drilling (ESV) and more. Let's get to it, here's what you want to run in your scan:

PE < 15 (<25 if you want to loosen up the restrictions)
Return on Equity > 20%
PEG ratio < 1 (< 0.5 for extremely undervalued companies)
Price to book < 2.5 (< 1.2 if you wish to be like Benjamin Graham)
CurrentRatio > 1.5
Price to sales < 5

A few additional categories you can add:
Strong dividend growth
Low debt to equity
EPS growth of 3.3% of more year over year for a 5 year period
Strong Insider Ownership
Strong Institutional/Hedge Fund Presence

Now, as you can see, you can tweak a whole bunch of different things within that scan (omit a few categories, add a few categories, etc). I run the loose scan first and then fiddle around a little bit. Please note that I do NOT find all my companies through this scan. Companies like Apple (AAPL) and some of the fertilizer plays Potash (POT) and Mosaic (MOS) would never show up on these scans, and yet I'm invested in them. This is just one of the starting places I look for ideas in terms of value. Remember, this is a quick, loose VALUE scan.

Typically, the main things I look for in my companies not necessarily found in this scan are operating margins between 15-20%, a return on equity greater than 15%, strong (accelerating) quarterly revenue growth on a year over year basis, strong (accelerating) quarterly earnings growth on a year over year basis, a PEG ratio of under 1, a price to sales of under 5, insider/institutional/hedge fund ownership.

This is just an idea of fundamental things to look at when you're starting your research on any stock. This is literally just the tip of the iceberg in terms of fundamentals. But, I've found it to be a good starting place to generate some ideas and find some value for the value side of the portfolio. Fiddle around with some of the constraints and see what you come up with. Anyone have any other favorite scans they use pretty often?