WHAT ARE WE LOOKING FOR?

This week, we return to the Nasdaq Guru Screener, an online stock-screening tool we first profiled last winter.

The Nasdaq Guru Screener (www.nasdaq.com/reference/guru.stm) allows users to pick the brains of some of the best-known investing authors and commentators of the past 60 years, by offering a series of screens that mimic these gurus' investing theories. With a couple of clicks on the mouse, the screening engine quickly generates a list of U.S.-traded stocks that best match a given guru's favourite quantitative indicators for superior performance. Investors can even screen for stocks that fit several different gurus' strategies.

This week, we'll feature four of the more intriguing guru screens offered by the Nasdaq tool, and see how the shifting sands of the markets over the past several months have brought some new stocks into favour under these stock-picking models. Today, we kick off with Nasdaq's P/E Growth Investor screen, which emulates the teachings of famed fund manager Peter Lynch, author of 1989 book One Up on Wall Street.

PETER LYNCH – P/E GROWTH GURU

Mr. Lynch's success as manager of the Fidelity Magellan Fund speaks for itself: Under his hand from 1977 to 1990, the fund generated total returns of 2,510 per cent, beating the S&P 500 by fivefold.
The key to his stock-picking strategy is the relationship between price-to-earnings and earnings growth, as measured by the PEG (price/earnings-to-growth) ratio.

He generally favours stocks with low PEGs – in other words, high annual earnings growth relative to P/E. For example, a company whose P/E is 15 and has annual earnings growth of 15 per cent has a PEG ratio of 1; this is generally considered a stock that is fully and fairly valued. Top stocks by this measure typically have PEGs well below 1, meaning their percentage of annual earnings growth is considerably higher than their P/E – indicating they are undervalued.

Nasdaq's Lynch-inspired screen is heavily weighted toward PEG ratios, but it also considers other factors that Mr. Lynch considers significant indicators of future earnings-growth potential, such as the ratio of sales to P/E, the debt-to-equity ratio, earnings growth rate and free cash flow. The screening tool assigns a score for each factor, and adds them together to generate a total score.

WHAT DID WE FIND?

The top four names generated by the screen now – Bebe Stores Inc., Skechers USA Inc., Sonics & Materials Inc. and LoJack Corp. – didn't make the list of the top 20 stocks under this screen back in February, evidence that the market's roller-coaster ride over the past several months hasn't treated all stocks and sectors evenly.

Particularly noteworthy is the surfacing of several consumer-related names (including Bebe, Skechers, Adams Golf Inc. and even luxury-auto legend Rolls-Royce Group PLC) on the list. It suggests that some of the better-quality names in the consumer discretionary sector have been dragged down by investors' generalized fears of a consumer recession in the United States, and may present opportunities for patient investors willing to wait out the consumer slump.

• Table: View result set