Monday December 05, 2011
by John Reese, editor Validea
We select stocks based on the investment trategies of well known investors; Forest Laboratories (FRX) scores 100% on our P/E/Growth Investor screen based on Peter Lynch.
Forest Laboratories develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription.
The company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro.
FRX is considered a "True Stalwart", according to this methodology, as its earnings growth of 14.50% lies within a moderate 10%-19% range and its annual sales of $4,586 million are greater than the multi billion dollar level.
This methodology looks for the "Stalwart" securities to gain 30%-50% in value over a two year period if they can be purchased at an attractive price based on the P/E to Growth ratio. FRX is attractive if FRX can hold its own during a recession.
When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive.
Inventory to sales for FRX was 11.16% last year, while for this year it is 10.21%. Since inventory to sales has decreased from last year by -0.94%, FRX passes this test.
The Yield-adjusted P/E/G ratio for FRX (0.49), based on the average of the 3, 4 and 5 year historical eps growth rates, is excellent.
The EPS for a stalwart company must be positive. FRX's EPS ($4.04) would satisfy this criterion.
A bonus for a company is having a Net Cash/Price ratio above 30%. Lynch defines net cash as cash and marketable securities minus long term debt.
According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security. The Net Cash/Price ratio for FRX (48.85%) is considered favorable.
Learn more about this financial newsletter at John Reese's Validea.