Can New Screener Recession Proof Your Portfolio?

If you're looking for stocks that can weather the current market storm, a professor at the University of Virginia's Darden School of Business could have a screener worth your while.

Ed Hess, a Batten Executive-in-Residence at the university, has put together screens to "illuminate" companies with high organic growth. According to Hess, the screener identifies companies that do well in good economies and in bad. So far, he's identified 24 publicly traded organic growth "all-stars." These stocks increased 1,368 percent between 1996 and 2006 compared to the S&P's 130 percent rise.

“Once you get past the ‘noise’ that’s in most companies’ reported numbers, there is an incredible correlation between what I call real value-added, and the recognition of that value in the stock market,” says Prof. Hess. “These companies have shown that they can grow in good times and bad. It’s not about the economic cycle. It’s about the business model.”

What makes these companies, like American Eagle , Best Buy , Brinker International , and Columbia Sportswear , different is that they grow business the old fashioned way, Hess said — through more customers, increased sales and better execution. Hess’s OGI strips away accounting adjustments, one time charges, and all the other financial engineering tools companies use to finesse their quarterly earnings — until he’s left with what he considers a true picture of the value the company has built for shareholders and its other stakeholders.

"It’s very hard for investors to find this organic growth but it shouldn’t be," Hess said. "It should be transparency."

Hess screens for the following traits:

  • Very simple strategies, simple focused disciplined strategies.
  • High employee engagement: high employee productivity and loyalty, low turnover
  • Execution champions. They use tech to drive efficiency.
  • Leadership is generally homegrown. They are humble, passionate operators. CEO’s tend to be there for an average of 10 years.

Hess's screen eliminates companies through:

  • Serial acquisitions
  • Producing substantial cash flow from operations and non organic growth
  • Not growing faster than competition from revenue or cash flow perspective.

Fifty percent of the stocks are in the retail or restaurant sectors with an average market cap of $9.72 billion. None of the stock are mega caps.