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5 Stocks Selected From the Toughest Screening Process

The Auer Growth Fund has three strict criteria in its stock-selection process, and once in the portfolio, if a company fails to continue to meet them, they're out — fast.

The criteria are: A 25 percent increase in earnings per share each quarter; 20 percent revenue growth per quarter; and trade below 12 times earnings.

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Wall Street

"If they stop doing that, we sell them, or if they double (in price), we sell them," said Bob Auer, founder and manager of the $136 million fund.

"We've been doing this for 25 years," he said of the investing style. He brought the fund out as a retail mutual fund about three years ago.

Auer said the premise was spawned in 1986 when he was a broker in Indianapolis for Dean Witter, a long-gone national brokerage, and helping his father invest his $100,000 individual retirement account. By strictly sticking to that simple investing strategy, and the addition of another $10,000, the account grew to $34 million by the end of 2007.

Auer admits that his Growth Fund's performance "zigs and zags, since it's so different from the market. We're now about 18 percent behind the market (this year, and market conditions are) similar to 1989," when traditional fundamentals lose their importance.

"Every 10 years or so we have a period where we fall flat on our face," but Auer swears by the success of his approach.

The fund is down 13 percent this year versus the S&P 500's 2.3 percent gain. It has a three-year average annual gain of 14 percent versus the benchmark index's 15.4 percent.

Auer said that from 1999 to the end of 2009, in the so-called "lost decade," when the S&P 500 lost 1 percent per year, his fund went up 10-fold — and that includes a 53 percent down year.

Here are five stocks that Bob Auer says are representative of his fund:

1. Mosaic is a major producer of phosphate and potash, two of the three primary crop nutrients, with a $23 billion market value.

Auer said 80 percent of the company had been owned by a Cargill family trust, and when a key family member died, the trustees decided to start selling shares quickly and the price plunged, qualifying it for the Auer fund.

"The fundamentals have been fantastic and look to continue to be fantastic," said Auer, as analysts estimate earnings growth of about 38 percent next year, to $5.54 per share. It has a forward P/E of 8.3. The company recently announced a $1.2 billion buyback program.

JP Morgan lowered its stock-investment rating on Mosaic today to "neutral" from "overweight" and cut its 2012 earnings-per-share forecast to reflect lower estimates for phosphate prices and potash volumes.

2. Cliffs Natural Resources is the largest producer of iron ore in North America, operating mines that supply nearly 50 percent of North American blast furnace demand.

It is trading at about $68 per share and has a market value of $10 billion. It has a projected 1.57 percent dividend yield.

With a forward P/E of 5.3, Auer said "it is probably the cheapest stock in our portfolio."

And he raves about its earnings prospects, noting that it earned $4.07 per share in its most recent quarter and analysts estimate it will earn $12.80 per share next year, up from $7.49 per share this year.

Goldman Sachs added Cliffs to its "convictions buy" list of most favored stocks this week.

3. Goodyear Tire and Rubber is one of the largest manufacturers of tires and other rubber products in the world. It has a market value of $3.4 billion and its shares are up 21 percent this year.

Auer said that the company set all sorts of performance records in its most recent quarter, including sales growth of 22 percent, operating income up 98 percent, and it posted a third-quarter profit of $211 million — "and the company is 108 years old."

It has a forward P/E of 5.6.

4. Barrick Gold is the world's largest gold miner with a $50 billion market value.

It has a forward P/E of 8.3, which fits in the Auer fund's criteria allowing it to buy a gold stock "for the first time in 25 years."

Auer said the company is unhedged, that is it hasn't locked in a floor price bet, so it's taking gold out of the ground for about $428 an ounce and the current market price is about $1,745 an ounce, which gives it a huge profit margin.

Barrick executives recently said at a conference that each $100 increase in gold prices adds $500 million in earnings to their company's profit potential and that is not being recognized by the market.

Its shares are down 2.8 percent this year, but up 28 percent annually over three years.

5. C&J Energy Services is riding the oil-shale boom as a provider of a wide range of premium hydraulic fracturing services for oil-shale drillers.

The company has a market value of $1 billion and a forward P/E of 5.1.

Auer said the company has been in the business for at least 10 years and went public in June. "They have had eight consecutive quarters of year-over-year triple-digit sales and earnings growth."

Auer said analysts' consensus estimate is for 2011 sales of $784 million, growing to $1.2 billion in 2012, or up 55 percent, and earnings of $3.19 per share this year, growing to $4.24 per share in 2012.

"Yet the stock is at $21 and it is in the hottest thing going," he said of oil-shale production.

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Additional Views: Goodyear Tire One of Fortune's Top Stocks for 2012 ______________________________

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