Shrinking P/E Ratio Screen for February

(Watch "The Incredible Shrinking Man" in its entirety here.)

As I promised back in January I'm going to revisit my Shrinking P/E Ratio Screen at the beginning of each month in 2008. That being the case, the purpose of this post is to share the results of the screen as of the beginning of February.

For more information on this screen, you can check out my previous posts on the subject here. In short, this screen pulls companies with nicely growing earnings and revenues but with steadily declining P/E ratios over the previous year. My theory which I've yet to prove is that the stocks that are spit out of this screen may be attractive on average as "value plays". By running this screen each month of 2008 I'm hoping to amass some anecdotal evidence of whether my theory is correct or not. My ultimate goal with this study and with any screening or technical filtering I do is to figure out if I can trade based on my theory.

Click on the image below for the results as of the beginning of February. The screening parameters are shown at the top.

Having run this screen semi-regularly for over a year, the first thing that pops out at me is that Genentech (DNA) is absent from the list for the first time since I created the filter. A tiny bit of research revealed that DNA's P/E ratio actually increased in the past month from 26 to 27, thus knocking it off the list. DNA's rise in P/E ratio was due to an increase in stock price as opposed to a decrease in earnings, by the way. This observation makes me wonder if a stock disappearing from the Shrinking P/E Ratio screen might actually be a sign of a stock bottoming. I'll have to keep an eye on that as well in the coming months.

Three stocks that showed up on the screen in January also appear on the list for February (INFY, TDW, and ZUMZ). The four stocks that fell off the list from January to February- DNA, MSNT, QSII, and AAI- each saw a bounce in its share price which resulted in a higher P/E ratio. I'll have to revisit each of these next month to see if their respective bounces continued.

Another thing I found interesting about the results for February is that the seven stocks on the list represent seven different industries. Often during 2007 when I ran the screen I would see a clump of stocks from the same industry, generally oil-related. This always made sense to me since you often see the stocks of an entire industry rise together or fall together.

For the record, I bought a bit of PSYS on Friday after doing some homework on it. The fundamentals look solid to me and the low $30s looks to be a decent support level for the stock. We'll see how it goes. I'm using a relatively tight stop to limit my losses.

As always, I welcome observations and opinions about what this screen might be telling us. Feel free to comment below.