Key

     With the long-running bull market a distant memory, many once comfortable investors are suddenly wary; some are even beginning to panic. Value investing is the old stand-by. Value investing concentrates on unappreciated stocks trading at attractive prices-bargain stocks. Value investors most often look for solid companies whose stocks are trading at low multiples of price relative to book value, cash flow, earnings, dividends, or sales. This is the investment philosophy adhered to by John Templeton, one of the best-known investment advisors today. A benevolent and religious man, with his own foundation dedicated to religious and spiritual progress, Templeton puts his faith in the prospects of the companies he chooses and takes profits before any multiple can over-inflate the stock's value. Oftentimes he sells before the peak, but Templeton prefers to be on the safe side-especially when it is someone else's money. Founder of the Templeton Mutual Fund Organization, he considers managing money a sacred trust.  Templeton had a long-standing strict contrarian nature: "To buy when others are despondently selling and sell when others are avidly buying requires the greatest fortitude and pays the greatest potential reward."  The tock screen focuses solely on domestic listed issues.

     When screening for value in the form of attractively priced stocks, however, the foundation is often low price-earnings ratios.  In some cases, stock screens with low price-earnings ratios are supported by solid estimated earnings and sales growth. Other times the above combination of criteria includes a strong dividend yield. The dividend-adjusted price-earnings relative to growth ratio, or PEG ratio, is also frequently used in value screens. Separating the good firms requires some additional, supportive filtering factors. For Templeton, such support and confirmation comes from what he calls future probable earnings, or forecasted earnings growth. From Templeton's viewpoint, for any stock selection to be considered worthy, future probable earnings need to be strongly favorable.

     Templeton likes to compare current price-earnings ratios to five-year average annual price-earnings figures when looking for the lowest multiple stocks. Not only does it require the current price-earnings ratio of the stock to be lower than its five-year average, but in addition any passing company must have been traded for at least five years and had positive annual earnings per share for each of the last five fiscal years.

     When screening against five-year averages, useless numbers can sometimes slip through the cracks in a screening technique. Beyond negative earnings, which lead to meaningless price-earnings ratios, unusually low earnings may also throw off standard price-earnings ratio screens. Short-term drops in earnings due to extraordinary events may lead to unusually high price-earnings ratios. As long as the market interprets the earnings decrease as temporary, the high price-earnings ratio will be supported.     To eliminate companies with these extreme price-earnings ratios, an additional filter was applied to the Templeton approach that excluded any stocks with ratios above 40 for any of the last five fiscal years.

     Templeton believes the income statement should show consistent earnings growth as well. The Templeton screen looks for stocks with positive earnings growth over the last 12 months and over the last five-year period. Beyond an overall growth figure, individual investors should look at the year-to-year trends, since long-term growth rates can easily mask the variability and risk of the underlying figures.

     Examining the expected five-year growth estimate captures Templeton's future probable earnings prerequisite. His desire for consistent growth in the future is portrayed by a positive earnings growth estimate filter.

     Templeton also seeks companies with competitive advantages. This can be detected by comparing a stock's forecasted earnings growth figures to the forecasted growth of its industry; firms with earnings growth estimates greater than or equal to the industry median more than likely have a competitive advantage.

    Five years were used to remain consistent with the low price-earnings ratio provision.  Operating margin, or gross profit margin, paints a picture of how efficiently the company's management is operating within the framework of the company's generated profits.  The screen requires positive operating margins over the last 12 months and for the latest fiscal year.The screen required the recent 12-month and current-year operating margins to be greater than or equal to industry medians for the respective periods. An additional filter requires current operating margins to be greater than the five-year historical average operating margin.  Screening for the most recent 12-month timeframe reduces the probability of ADR stocks passing the filter, as ADRs are not required by the Securities Exchange Commission (SEC) to post or file quarterly or monthly figures.

    Templeton also monitored the balance sheet, looking for companies showing good financial strength. Acceptable levels of debt vary from industry to industry, and for that reason the last criterion screens for companies with total liabilities relative to assets in the current quarter that are below their industry norms.

     "Be prepared emotionally and financially for bear markets," warns Templeton. "If you are really a long-term investor, you will view a bear market as an opportunity to make money." Remember that fundamental stock screening is only a starting-point, and the results of any screen are simply a list of companies that meet a set of objective criteria. Before any investment decisions are made about any passing stock, additional research and further analysis are necessary.

     In this implementation of Templeton's screen, as of 1/2/08 stocks are removed from the list when the PE exceeds 1.2 times the 5 year average, PE High exceeds 75, the 12 month EPS growth turns negative, the 12 month operating margin turns negative or becomes less than the median industry value or the total liabilities to assets Q1 exceeds that for the industry.