Weekend Reads

Jeremy Grantham’s always anticipated quarterly letter is available at GMO with free registration to their site. This quarter’s article is titled “Pavlov’s Bulls”.

2011 Investment Strategies: 9 Buys, 9 Sells -Gary Shilling, via Johns Mauldin’s Outside the Box

The Power of Dividends – Advisor Perspectives, C. Thomas Howard

Is There a Muni Selling Climax? David Kotok, Cumberland Advisors

Common Only McClellan Oscillator – Tom McClellan

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Tough Doesn’t Quit, Except at Breakfast
Read more on Mandarin Entmt, Lingui Development at Wikinvest

Creating Your Own Stock Ranking System (Update)

In December I wrote an article (here) detailing how to create your own stock ranking system using Excel (or Open Office) and a free data source such as Finviz.

I used one fundamental factor, Price to Earnings Growth ratio (PEG), and two technical factors, 1 and 3 month returns, to rank all available stocks which trade at least 50k shares per day and a price over $1.  For fun, I decided to track the returns of the top stocks on this list on the right hand side of the blog in the spreadsheet titled “Example of a Stock Ranking System”.

Below are the returns of the top 10 stocks in the list.  The top 10 returned an average of 13.62%, the top 50 10.68%, and the top 100 8.14%.  Not too shabby!  I have also include returns for some popular ETFs over the same period.  All returns excludes dividends, commissions, and taxes and are strictly hypothetical.

Question for readers: Any requests on a system to try and track for the next month or so? Keep it relatively simple, using data available on the Finviz screener page.

Symbol Company 12/20/10 Open 1/27/11 Close Return
RAS RAIT Financial Trust Stock Picks 2.22 2.73 22.97%
THC Tenet Healthcare Corp. Stock Picks 6.66 6.74 1.20%
CBPO China Biologic Products, Inc. Stock Picks 15.91 16.05 0.88%
CHBT China-Biotics, Inc. Stock Picks 14.18 14.47 2.05%
ASYS Amtech Systems Inc. Stock Picks 24.69 26.75 8.34%
NCT Newcastle Investment Corp. Stock Picks 5.81 7.05 21.34%
KLIC Kulicke & Soffa Industries Inc. Stock Picks 7.45 9.98 33.96%
ARIA Ariad Pharmaceuticals Inc. Stock Picks 4.62 6.63 43.51%
NOR Noranda Aluminum Holding Corp. Stock Picks 12.7 14.45 13.78%
ICGE Internet Capital Group Inc. Stock Picks 13.83 12.2 -11.79%

System ETFs
Top 10 Avg: SPY
13.62% 4.29%
Top 50 Avg: VBR
10.68% 1.77%
Top 100 Avg: GTAA
8.14% 2.15%

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Video Analysis for Dollar, Gold, or S&P Followers

Chris Vermeulen gives us a free video analysis of the dollar, gold and SPY.  In general I am finding his analysis good for short to intermediate analysis of equities, gold, silver, oil, and the dollar so will continue to post his free articles/videos. He also offers a reasonably priced trading service here.

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19 Low PEG Momentum Trades

I update the following portfolio/screen on a monthly basis on Scott’s Investments. December’s list of 19 stocks is here and returned an average of 3.47% for the top 5 stocks on the list versus 3.63% for SPY. The entire list of 19 stocks last month returned an average of 2.59%, led by Varian Semiconductor (VSEA) at 13.73% and InterDigital (IDCC) at 13.45%.  The previous month IDCC was the leader of the pack, returning 26.58%.

The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio 
  • low debt 
  • a history of high return on equity and investment, and 
  • price momentum as gauged by the percentage the stock is trading to its 250 day high. 
  • The stocks are then ranked based on fundamental factors as compiled by stockscreen123.

This strategy of screening stocks has produced stellar returns since this summer. For example, August’s list returned a whopping 16.17% versus 7.87% for SPY and July’s top 5 stocks returned over 19%.

The rational for this screen is based on backtests showing stocks with low PEG ratios, debt, and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either a) abandon this type of strategy entirely when the SP 500 or another major index is below a long term moving average, or b) hedge positions with a position in SH or write a short option strategy on an equity index or ETF like SPY.

Below are 1 and 5 year test results if an investor were to invest in the top 5 stocks in this screen every 4 weeks. Test results exclude commissions and dividends but include .5% slippage. Returns calculated by stockscreen123:

Once again Metropolitan Health Networks, MDF, is near the top of the list but is no longer ranked first, supplanted by Applied Industrial Technologies (AIT). Apple, AAPL, remains on this month’s list. Two new additions of note for this month are three well known companies, Mastercard (MA), Google (GOOG), and First Solar (FSLR).

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123. For the full list of stocks and real-time results, please see the right hand side of Scott’s Investments.

No positions in stocks mentioned

Ticker Name Trend Rank PEGLT ROE%5YAvg ROI%5YAvg
AIT Applied Industrial Technologi Here 99.45 0.98 15.4 12.47
MDF Metropolitan Health Networks, Here 99.31 0.76 19.21 19.01
LRCX Lam Research Corporation Here 98.42 0.91 20.8 17.78
AMAT Applied Materials, Inc. Here 98.3 0.83 12.91 12.11
FCFS First Cash Financial Services Here 95.85 0.95 17.74 14.63
VSEA Varian Semiconductor Here 94.22 0.61 15.09 13.83
NTES NetEase.com, Inc. (ADR) Here 93.47 0.82 36.62 32.93
AAPL Apple Inc. Here 92.82 0.74 31.92 28.48
JOSB Jos. A. Bank Clothiers, Inc. Here 89.2 0.91 21.54 17.83
TSRA Tessera Technologies, Inc. Here 88.45 0.74 12.46 12.27
AZO AutoZone, Inc. Here 87.84 0.98 646.25 24.99
IDCC InterDigital, Inc. Here 85.23 0.77 50.36 23.34
SNHY Sun Hydraulics Corporation Here 84.1 0.18 19.58 18.03
QCOR Questcor Pharmaceuticals, Inc Here 82.22 0.95 48.3 45.63
NVEC NVE Corporation Here 80.95 0.82 23.98 23.98
CTCM CTC Media, Inc. Here 76.86 0.37 17.27 16.96
FSLR First Solar, Inc. Here 75.87 0.85 25.72 22.83
GOOG Google Inc. Here 72.65 0.8 20.13 19.46
MA MasterCard Incorporated Here 67.82 0.96 24.18 16.42

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The State of the Markets

David Bansiter of The Market Trend Forecast has written his “The State of the Markets” report here.  It includes a summary of his views on equity markets, gold, silver, copper, and Elliot Wave theory. Of note, he has been forecasting a mid January top in US equity markets for some time and sees small caps taking the worst of it.

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10 Small Cap Value Stocks With Big Potential

I am a member of AAII (American Association of Individual Investors) and one of their more popular screens is the Shadow Stock Screen.  I conduct a close replication of this screen on a monthly basis.  This is a very simple screen that seeks out small/microcap value stocks.  The screen criteria I use within stockscreen123 are:

  • No over-the-counter stocks
  • No financial stocks
  • Market cap > $20 Million and < $200 million
  • Previous EBITDA quarter and trailing twelve months are positive
  • Share price > $1
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns
  • Minimum average daily volume > 5k shares

This is the ninth month of performing the screen.  Last month’s results averaged 12.29% for the 10 stocks, led by Silverleaf Resorts’ (SVLF) return of over 38% in 4 weeks and Fuwei Films (FFHL) 34% 4 week return (returns are hypothetical and exclude commissions and taxes). The previous month this strategy returned 8.77% led by FFHL’s incredible 72.76% for the month. FFHL is headquarter in China and develops and manufactures plastic film.  A strong earnings report in mid-November has helped spurred the strong returns.  

The strategy tends to be high beta – it performs very well in bullish markets and may underperform in bear markets. You can see on the 5 year return chart below that the screen struggled most in 2008 along with the rest of the market (returns on the charts assume .5% slippage but do not account for commissions or taxes; however, free trades are always one option to avoid commissions). I said previously that this is not a strategy I am investing in but it can lead to some under the radar investment ideas with additional due diligence.  

One option is to abandon this type of strategy or move to cash when an underlying index such as the Russell 2000 is trading below a long term moving average such as the 200 day moving average.  Currently the Russell 2000 is above its 200 day moving average.  Another consideration is to hedge the strategy by shorting a small cap ETF or purchasing an inverse small cap ETF. Given that the market rally is beginning to look a little tired as of last week, now may be a time to consider a hedge if also considering a high beta strategy such as this one.

The current top 10 stocks are also below.  FFHL tops this months list for the second consecutive month.  I update the screen once per month on my site and track the results for free on the right hand side of the site. Full results for all months can be viewed on the right side of Scott’s Investments under “Micro Value Screen”. The tool used for the screen is stockscreen123. No positions in stocks mentioned

Ticker Name Trend SS123 Rank MktCap Pr2SalesTTM Pr2BookQ
FFHL Fuwei Films (Holdings) Co., L Here 99.7 61.28 0.98 0.77
ESCA Escalade, Inc. Here 96.77 68.41 0.58 0.79
IMOS ChipMOS Technologies (Bermuda Here 95.69 180.11 0.32 0.56
COBR Cobra Electronics Corporation Here 94.24 20.38 0.19 0.63
GFN General Finance Corporation Here 93.19 57.23 0.35 0.53
SVLF Silverleaf Resorts, Inc. Here 89.63 52.88 0.24 0.26
JAX J. Alexander’s Corporation Here 85.32 32.44 0.22 0.68
TGX Theragenics Corporation Here 70.6 58.53 0.73 0.73
DFR Deerfield Capital Corp. Here 69.67 68.21 0.53 0.17
RCKY Rocky Brands, Inc. Here 68.8 80.99 0.33 0.8

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Market Readings

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Below are some market related readings for this week:

The Coming Flattening in U.S. Profit Margins – Investment Postcards from Cape Town

Market Capitalization as a % of Nominal GDP – The Big Picture

U.S. Stocks Near ‘Significant’ Top, Tom DeMark Says – Bloomberg

The Unsustainable Meets the Irresistible (pdf) – John Mauldin

Europe’s Communicable Debt Disease – Satyajit Das

I’m Hedging My Stocks By Going Long Volatility – Investment Postcards from Cape Town

More on this topic (What's this?) Read more on European Union at Wikinvest

10 Top Ranked Dividend Champions Yielding At Least 3%

I have published a new article exclusive on Seeking Alpha, 10 Top Ranked Dividend Champions Yielding At Least 3%

I will be writing around 1-4 articles per month exclusive on Seeking Alpha but will post links on my blog to these exclusive articles.

Free Stock Trade. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

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