The Strongest Balance Sheets in S&P 500 are here… (Value….momentum)

AB Analytical Services writes:

The Strongest Balance Sheets in the S&P 500

I have written extensively over the past several months about the need to focus more on the balance sheet. I have explored several metrics to help identify companies with inferior financial strength or at risk of dividend cuts. With my expectation that we are now in a trading range with an upwards bias (730-880 on the S&P 500), I thought that it might make sense to use these same metrics to identify potential buys. If I am correct about further weakness later this year, it would seem as though we should be using the rally to upgrade the portfolio.

Comparing total liabilities (which include not only debt but also other obligations that can sometimes exceed debt quite significantly) to various components of the financial statements and also comparing the value of the stock to its accounting book value could allow us to identify companies better able to weather the storm. I constrained the universe to the S&P 500 and included the following parameters:

* Liabilities/Current Assets <1 * Liabilities/EBITDA <3 * Liabilities/FreeCashFlow <5 * Price/Tangible Book <4 While these are nice attributes and do suggest a potential margin of safety, they are no guarantee that the stock price won't decline. In fact, as you can see in the table below, many of these stocks have declined significantly this year (though the entire list is doing better on average than the market). It is worth remembering that using accounting statements implies relying upon historical events - EBITDA and FCF are backwards looking. Additionally, assets may become impaired, so CA could be overstated (AR, Inventory) and, consequently, Tangible Book too may be lower than the balance sheet indicates. With those caveats, here are the 28 names that made the cut: StrongBalanceSheetsSP500 While these are nice attributes and do suggest a potential margin of safety, they are no guarantee that the stock price won't decline. In fact, as you can see in the table below, many of these stocks have declined significantly this year (though the entire list is doing better on average than the market). It is worth remembering that using accounting statements implies relying upon historical events - EBITDA and FCF are backwards looking. Additionally, assets may become impaired, so CA could be overstated (AR, Inventory) and, consequently, Tangible Book too may be lower than the balance sheet indicates. With those caveats, here are the 28 names that made the cut: SPREADSHEET IS HERE: http://ab.typepad.com/ab_analytical_services/2009/03/the-strongest-balance-sheets-in-the-sp-500.html

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