Finding good companies to invest in from the FTSE 100 index is a challenging task. There are multiple elements to consider.
For example, what would I expect if I were to buy a company with solid growth metrics but currently at an all-time high in share price? Well, I wouldn’t always expect it to keep going up.
The prime reason is that shares can be overpriced or underpriced, depending on how the market reacts to the financial reports and operational changes.
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The share price can then come tumbling down if investors have edged the price up beyond what the financial statements realistically suppose a company is worth.
How I search for shares
My favourite investments are deeply underpriced (for example, at 52-week share price lows) and have fantastic financial statements. Some places where I look for sweet spots in the financials are margins, revenue growth, and the company’s liabilities.
Using a stock market screener honed in on only companies listed in the FTSE 100 index, I’ve scouted shares 30% or more below their 52-week highs. I’ve also looked for 10-year revenue growth rates of over 10%. And I’ve looked for a 10-year operating margin median of 10% or more.
Only three companies came up. Of these, I only think one is an investment worth my time.
The three companies are:
- Spirax-Sarco Engineering (LSE:SPX)
- Entain
- Ocado Group
I quickly wrote off Entain and Ocado.
Entain had too much debt for me. Over the past three years, it’s issued £754m in debt!
Ocado had the same problem, issuing £1.3bn of debt in the past three years. Also, the company hasn’t been profitable over the same period.
These are significant reasons why both companies could be ‘value traps’. That means the share prices are low but could be low for a reason. Several other factors contribute to that conclusion for me, but the ones I mentioned are my main ones.
Spirax-Sacro Engineering
Now, the golden goose.
This is why I love searching for stocks.
Spirax-Sacro is a worldwide manufacturer of industrial and commercial projects focused on steam, thermal and pumps.
The company has a gross margin of 75%, which I find beautiful. While that significantly reduces its operating margin to 20%, that’s still better than 90% of 2,920 industrial product companies!
For those who don’t know, gross margin is the total revenue minus the cost of manufacturing, divided by total revenue again to get a percentage.
Operating margin is the total revenue minus the cost of manufacturing and the operational expenses, like salaries, workshop rents, travel and transport costs, etc. That’s then divided by the total revenue as well to get the percentage.
One of the downsides of this company is it also has some debt to consider. Total liabilities are currently 58% of the balance sheet. That’s up from 46% in December 2021. However, this is not as severe as my first two contenders, and in my opinion, the company’s strengths far outweigh this.
Going further
This is just a short introduction to how I find shares. I’m looking for great companies, and screening is one of the tools I use to do this.
I could see myself buying Spirax-Sarco in the future. But right now, it’s just going on my watchlist for further research.
