Use This Simple Screener to Find High Quality Stocks with Great Value and Performance The market may have dodged its worst month of the year, but we aren’t out of the woods just yet. Historically, September has been the worst market month of the year – but after a stock swoon during the first week, last month passed by without any market damage. In fact, this past September marked a decisive win for the market: Bolstered by the Federal Reserve finally cutting interest rates, the S&P 500 was up 2.1% last month, notching record highs along the way. However, with the upcoming election, volatility could rise in October and November. In my last issue, I pointed out that October brings an unusually high number of days where the S&P 500 is projected to move 1% or more – higher or lower – in the lead up to Election Day on Nov. 5. And as you can see below, that forecast matches the historical tendency of the CBOE Market Volatility Index (VIX) to surge higher during the second half of an election year: 
Typically, VIX peaks in October or November – meaning that the best time to prepare your portfolio for the end-of-year volatility is right about… now. Longtime readers of Inside TradeSmith know that quality stocks offer the best protection in volatile markets. And the two best ways I know of to measure the quality of a stock are to check the Free Cash Flow (FCF) Yield and TradeSmith’s proprietary Business Quality Score (BQS). For our newer readers, here’s the breakdown: At times of heightened uncertainty, cash is king. Or, more specifically for your investment choices, Free Cash Flow is king. Put simply, Free Cash Flow is all the cash that a business has left over after paying all its operating expenses and capital investments. Divide it by a stock’s enterprise value (EV), which is simply its stock market capitalization and debt, and you’ve got the Free Cash Flow Yield. This metric is not only a key measure of quality – it’s also the single-best yardstick for judging valuation: 
But there’s more to a business than just its FCF Yield. That’s where our Business Quality Scores come in. Even among stocks with high FCF Yields, there are different degrees of quality. But digging into each stock’s financials can be incredibly time-consuming… and it can be difficult to compare companies in different sectors, or with vastly different business models. Here at TradeSmith, we’ve found a way to grade each of the stocks we track on a level playing field. And we’ve boiled it down to a single score for each of those stocks, ranging from 100 (marking the highest quality) down to zero (the lowest), showing you how any stock measures up at a glance. It’s called the Business Quality Score (BQS). TradeSmith’s go-to metrics that help you find stocks likely to outperform the market. It’s based on four key factors – growth, profitability, safety, and payout. TradeSmith members can easily find the BQS and FCF Yields for any stock we track in our database. And when you use both metrics in a stock screener, it’s a winning combination. But you can power up those results even further by adding one more winning factor to the mix: Price Performance, another time-honored antidote to market volatility. By studying this factor, you can easily find the sectors and stocks outperforming the S&P 500. And these true market leaders hold up best in turbulent markets. So, with that in mind, let’s take a closer look at what sectors are performing. Here are the best-performing sectors in September, according to TradeSmith Analytics: 
This chart displays the top five sectors of the S&P 500 over two different time frames: one-month performance (at left) and six-month performance (at right). What’s remarkable is how consistent the returns are over these very different time frames. The Consumer Discretionary, Utilities, Communications Services, and Real Estate sectors are all at the top of the leaderboard – for both September and the past six months of 2024. Plus, I’ll give an honorable mention to Industrials; the sector placed No. 4 on the performance derby last month, and also No. 4 year-to-date over the last nine months. Clearly, these sectors are leading the market higher at this point – while the mega-cap tech stocks that used to dominate headlines have taken a breather. That means these are the sectors and stocks to be prospecting for when we look for new buy opportunities ahead of October volatility. Let’s take our analysis one step further, with a simple-but-powerful TradeSmith stock screener, using BQS, FCF Yield, and recent price performance as our key filters – and focusing on these top sectors. Here are the filters I selected to find the winning mix of performance, value, and quality: 
- The top five sectors in price performance over both the one-month and six-month periods.
- Average Volatility Quotient (VQ) scores less than 30%: This filters for only medium- and low-risk stocks.
- One-month changes of more than 2% – above the S&P 500 return for September.
- BQS more than 75 – which gives me only the top 25% of stocks by quality.
- FCF yield more than 5% – above the S&P 500 average of about 3.5%.
Finally, I display and sort my results by FCF Yield in DESC (descending) order, so the highest-yielding stocks are at the top of my results. I got 18 results in all – and here are the top 10: 
Several of these stocks are in the Health Indicator Red Zone and stopped out. These are still high-quality stocks (undervalued ones at that), but they are out of favor now. So, you can consider buying at a big discount, or more conservatively, wait for an early entry signal from our Health Indicator before entering a new position. Mike Burnick’s Bottom Line: When markets are volatile, quality – and free cash flow – are king, but it doesn’t take a royal effort to find new opportunities. Instead, the screener I’ve provided is a great example of how just five of TradeSmith’s powerful filters can find stocks with high quality, valuation, and performance metrics – all proven components of a winning opportunity, regardless of market conditions. Be sure to save this screener and return to it frequently, especially when markets are volatile: You can quickly change the sectors depending on which are performing best, and even make this screener your own by adding additional filters if you wish. It may be easy to put together, but it’s still a powerful asset in your TradeSmith toolbelt. Good investing,  Mike Burnick
Senior Analyst, TradeSmith P.S. We just went scanning for some of the best opportunities in the market, but there is one sector that didn’t make it onto our “top five” list of six-month outperformers – a sector that’s right on the verge of an explosive breakthrough... It’s no secret that the AI space has been on fire for several years. But we’ve only seen the beginning. Luke Lango, Senior Investment Analyst – and tech legend – at our corporate partner InvestorPlace, has kept a sharp eye on AI for quite a while – since long before it became an investing buzzword. And he’s convinced we’re on the brink of a paradigm shift. On Thursday, Oct. 10, Elon Musk is expected to unveil his latest groundbreaking endeavor: the AI-operated “Robotaxi.” And it could be bigger than PayPal, Tesla, Neuralink, and SpaceX… combined. But you don’t have to wait until then to take advantage of the massive opportunity this breakthrough represents. And here’s a hint: you won’t need to buy Tesla stock to do it, either. Three days ahead of Musk’s conference, on Monday, Oct. 7, Luke Lango will go live with an exclusive strategy session – offering insights to help give you a head-start on the opportunities to come. Luke’s convinced that next week will change everything… and now’s your chance to get ahead of the curve. Click here to secure your spot for Luke’s event. Don’t miss out – this is a chance to position yourself for major gains as the next AI revolution unfolds. | 
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