A Guide to Value: What's in the IU25 Index

Investor Uprising aims to tell you about great growth stories and reasonably priced stocks. That's why we've come up with our Investor Uprising 25 Index, which is a guide to successful, profitable companies whose stock valuations are quite reasonable.

The Index is always listed in the lower right corner of our home page, or you can always find all of the components of the Index listed here. Every day it will track the fortunes of those high-quality companies we have identified as reasonably priced, according to the principles we outlined in our Guide to Investment Metrics.

So, what kind of list is this -- a GARP (Growth at a Reasonable Price) list? A Value list? It's a bit of a hybrid of both. Really what we aim to do is find cheap stocks, whether they are growth stocks or value stocks. I'll tell you what's not in it: overpriced speculative stocks, or any stocks without revenue, earnings, or positive book value. We don't like to go fishing in the sewer.

The list originates from hundreds of stocks that we screen regularly. We started in January, compiling an aggregate screen of about 100 stocks. Then we went through every single one of them, looking for companies that met the following criteria:

• Profitable
• PEG (price/earnings/growth) below 1.25 or P/E below 15 -- preferably both
• Return on equity greater than 10%
• Preferably an ROE greater than the P/E ratio
• Industry leader or potential to improve leadership position

In many cases, we screened out lots of companies that we didn't like upon further qualitative analysis. We also tried to balance the index with companies from several industries, especially industries that appear to have long-term prospects, such as technology and energy. When possible, we focused on finding companies that are innovation leaders yet don't have extravagant valuations, which isn't always easy in the technology sector.

I have been performing this exercise for nearly six years. Here's an interesting thing that I've found: The number of stocks that comes out in the initial screen varies wildly from year to year. Some years, there are hundreds of candidates. Some years, the pickings are very slim, and it's hard to find five stocks that meet my criteria, let alone 25. This year, there were more candidates than usual.

Why is this so? Well, the market vacillates, as we all know, and it floats between periods of relative overvaluation and relative undervaluation. At extremes such as 2000 (overvaluation) and 2009 (undervaluation), this is sometimes very clear, but often the market is in the middle, with dozens of stocks that are overvalued and dozens that are undervalued. Right now, we appear to be at a period of time in which there are many reasonably priced stocks.

Here are a few stocks from the IU25 Index to watch in the next couple of weeks, and why:

• Apple Inc. (Nasdaq: AAPL) -- well, duh. The reasons are obvious. And Apple's still cheap, at 12x forward earnings estimates.

• SanDisk Corp. (Nasdaq: SNDK) earnings come tonight. Flash memory is a growing industry. I feel good about this stock.

• Qualcomm Inc. (Nasdaq: QCOM) just had a good earnings report. The stock is up 2% today. It's a good play on growth in the smartphone and tablet markets.

• Priceline.com Inc. (Nasdaq: PCLN) has been regularly hitting 52-week highs. In the stock business, we call that a breakout. With earnings growth of 70%, a ROE of 33%, and a PEG of 1.25, it's still not terribly expensive.

• Cephalon Inc. (Nasdaq: CEPH) has rejected a bid from Valeant at $73 per share for the company. Will a higher bid emerge?

How does one use our index? You could use it to find good investment ideas. Or maybe places to work. I personally use it to build a portfolio. I believe a market-beating portfolio starts with a list of solid, profitable companies with reasonable valuation metrics. It then involves a strategy for deploying cash into the portfolio (dollar-cost averaging over time). I plan to write more on strategies for doing this next week.

At the moment, I do not personally own any of these stocks. The reason for this is that I plan to build a model portfolio, which will be published on this site. I will be personally invested in this model portfolio so that the readers can see what I'm doing and think about how it relates to their own investment strategies. More on that later!