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Northrop Grumman: Ken Fisher-Style Buy

 March 23, 2012 04:57 PM

by John Reese, editor Validea

We select stocks for our portfolio based on finding those that meet the investment criteria of a variety of legendary investors. In this case, Northrop Grumman (NOC) scores a 100% rating on my Kenneth Fisher-based model.

Northrop Grumman provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers.

The company conducts most of its business with the U.S. Government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign governments and commercial customers.

Under my Fisher model, the prospective company should have a low Price/Sales ratio. Non-cyclical (non-Smokestack) companies with Price/Sales ratios below 0.75 are tremendous values and should be sought.

NOC's P/S of 0.59 based on trailing 12 month sales, is below 0.75 which is considered quite attractive. It passes this methodology's P/S ratio test with flying colors.

Less debt equals less risk according to this methodology. NOC's Debt/Equity of 38.20% is acceptable, thus passing the test.

The prospective company should have a low Price/Sales ratio. Non-cyclical(non-Smokestack) companies with Price/Sales ratios below .75 are tremendous values and should be sought.

NOC's P/S ratio of 0.59 is below .75 which is considered extremely attractive. It passes this methodology's P/S ratio test with flying colors.

This methodology also looks for companies that have an inflation adjusted EPS growth rate greater than 15%. NOC's inflation adjusted EPS growth rate of 16.28% passes the test.

This methodology looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses.

This is based on the premise that companies without cash will soon be out of business. NOC's free cash per share of 3.85 passes this criterion.

Finally, this methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. NOC, whose three year net profit margin averages 7.14%, passes this evaluation.
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