Portfolio Updates (Delayed)

I check each of the portfolio screens each weekend and add or delete stocks effective Monday morning. (The long term ports are only adjusted annually.)

Here are, delayed due to the internet access failure, the changes for this past weekend (week ending 1/9):

Rule of Ten

Adds

SPN
CAM
ENDP
SII
MTSC

PS/PE

Adds

ENDP
IVC
MTSP
NGPC
TXN
TCI

MagInv

No Adds or Deletes

Worry List

TTWO
ACN

Third Group of Portfolios

Finally overcame the evil internet giant and have returned, battered and bloody to the world of the blogs! Here is the third group of portfolios that I track. These are sort of bastard children, not necessarily small or large stocks, altho most of them run to smaller stocks. They look for certain factors and then select stocks regardless of size (unless otherwise noted.) Ignore the bottom portfolio for now; it was included by error and will be discussed in the fourth group, which I've added since the first of the year to track a couple of theories.

The first portfolio (Comp Rating) is one of my favorites. It does select for S&P 500 membership, so it runs towards larger stocks, but it appears to work as well for broader searches as well. I limit it to the S&P simply for manageability; open searches return 100+ stocks, whereas and S&P limiter keeps it to 10-25. It is value seeking system. It takes a series of value oriented measurements and compares it to industry averages; stocks that are better than the industry average are included- stocks that are worse are excluded. The criteria are: P/E LESS than industry average; Price to Cash Flow LESS than average; Price to Sales LESS than average;Price to Book LESS; Profit Margin (net seems better) GREATER than average;EPS Growth GREATER than average; Debt to Equity LESS. What these tend to find are stocks that are financially sound, are doing good to decent business, and are currently priced depressed for reasons other than rational pricing (the market is almost always rational in the long run, almost never in the short run.) I'm working to set this up for a long term backtest, but watching it over the last 2 years, it looks good.

The next portfolio (G+R1- dont ask) is one I'm testing out. It looks at more tradtional growth factors with some value factors tossed in to increase the potential for 'pop'. The Key factor are ROI and EPS growth, Year over Year, and long term, then it looks at financials, a proprietary pricing model, and finally requires and earnings estimate increase recently. Needless to say, that last one has eliminated about 99% of the market in recent days. The MA Cross variant requires that it have moved above it's 50d MA in the last week to be placed in the list.

The last, Rule of Ten, is an effort to systematize and tighten Phil Town's strategy from 'Rule #1". A list of factors must all be greater than 10% (EPS Growth, ROI, Revenue growth,Margin (I use Net and Gross), ROE. Then PEG must be less than 2 (to weed out overpriced stocks). There must be an increase in institutional ownership over the last year. I also screen for a price minimum ($5) and a market cap minimum ($250MM- in a total market search, this minimum only eliminated 6 stocks, so it's VERY optional). Stocks are added to the portfolio when they cross their 50d MA. The strict variant added a few additional restricters which pretty much eliminated everything, so I'm still tracking it, but not putting a lot of faith in it yet (it may surprise me!)

The last group I'll add tomorrow (God Lord willing and the crick don't rise....) is similar to the first group; aiming mainly at the Dow or S&P and using value criteria. They're in test mode, but the underlying theories are good, so we'll see how they develop.




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Second Portfolio Group

The second group of stock portfolio is aimed mainly at smaller cap stocks. While not specifically searching for small caps, the results tend to bring up smaller stocks, simply because the higher rates of return and growth are less available to huge companies due to the matter of scale.

These portfolios start with a search for X factors and then the survivors are compared to my proprietary ranking system. If one wanted to try and duplicate them on one's own, one could run the screens, then cross reference the results with a major 'rating' agency, such as S&P's STARS, MSN's StockScouter, or Motley Fool's CAPS ratings (although one of the systems uses CAPS ratings as a screen.)

To the portfolios. The first (CAPS) is run through www.fool.com and uses their screener in the CAPS section. I search for stocks currently rated 4 or 5 stars, then screen for ownership (both management and funds), and high rates of return and growth. I look for companies with EPS and revenue growth, gross margins, and ROE of at least 20-30 per cent. This will usually give 15-25 stocks. They are then culled as noted above. When stocks fail the initial screen, get a bad rating from the proprietary system, or drop a set percentage (I use 8-10% loss depending on the overall market performance), they are sold.

The second is based on Joel Greenblatt's The Little Book that Beats the Market. His formula involves finding stocks are that amongst the highest in both earnings growth and ROI. I run a screen for that and then cull as noted above. He recommends holding for a year then replacing if they no longer qualify or keeping if they still qualify. I'm using it a shorter term system and sell them under the same rules as the CAPS portfolio.

The third system is a value oriented system. I screen for low price to sales and price to earnings, relative to industry averages (not S&P). These are then run tracked until their 50 day MA crosses the 200 day then they are bought. They are held til no longer qualify or drop in price.

They're all pretty simple and straightforward. They are still in the testing phase (particularly the Greenblatt variant) so we'll see how they perform. These portfolios I update each weekend, so each Monday, I'll post new views of the ports and try to remember to note any adds or drops. (this is a hobby, and sometimes the trading side intervenes)



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(results as of 1/7/09)

Addendum to Previous Post

I was thinking about the post last night and realized I had not mentioned anything about dealing with dividends during the holding period. Since, with large cap value stocks, in a medium to long holding plan, dividends are perhaps the most important factor in profitability, this is sort of a major failing.

In a long term holding plan, dividend handling is very simple; just instruct your broker/mutual fund company to automatically re-invest the dividends. With the three portfolios discussed yesterday, though, we're looking at a medium term period (I define anything under a year as short, a year to 2-5 years as medium, and longer than that as long term.)

At this point in my investing career, I tend to think the best option is to have the dividend income placed into the cash/money management fund attached to the account, and then add it to your investment total when you rebalance the account each year-end. You could set it up to reinvest at each payout, but I'm not sure the shorter holding period for these fractions would be worth the effort or overcome any transaction costs.

One other note, on setting up the account and rebalancing. In long term accounts like this that rebalance annually at the New Year, I do all calculations and purchases on the last trading day of the old year, and all sales on the first trading day of the New Year. This will insure that your trades are always eligible for long term cap gain treatment. Needless to say, you must be eligible for margin, altho you'll only be in a margined position for a few days, minimizing any costs.

First Tranche of Portfolios

Okay, today we start with the model portfolios. This will be the first of three posts on these. We will begin with the large-cap portfolios.

Two of these I can claim no credit for. They are based on or are variants of Michael O’Higgins’ “Beat the Dow” portfolios, better known as the Dogs of the Dow. For very conservative investors, I can recommend no book more highly than O’Higgins’ “Beat the Dow with Bonds.”

These portfolios are variants of the small dog portfolio. For those unfamiliar with the concept, it is very simple. One takes the 30 Dow stocks, on Dec 31 of each year, and ranks them yield. One then buys the ten highest yielding stocks (or top five in the ‘small dog’ variant) on the first day of theyear, and holds them till the end of the year, when the process is repeated.

It is basically a contrarian approach. The highest yielders, since all are major operations are (likely to be) good companies that for one reason or another have had their prices beaten down. Most people will limit their choices to companies that actually have earnings (I don’t remember now if O’Higgins includes that in the book) so that any greatly troubled companies are excluded. This was key last year as it kicked out some major losers.

Altho both the ‘Dog’ portfolios I use lost money last year, they lost less than Dow. Small comfort when confronted with a 25-30% loss, but outperformance is outperformance. Indexers lost 35-45%, so a 10+% performance edge is a great thing. Sort of like being shot in the leg is better than being shot in both legs.

Various commentators, websites, and gurus, most notably The Motley Fool, have given up on the Dogs. I think this is a mistake. The system has a long track record of outperforming the market as a whole, and the abandonment and castigation of the Dogs in the mid to late nineties strikes me as lunacy brought on by the insanity of that market.

Yes, the Dogs were not outperforming the bubble. But they’ve held up pretty well over the years, In this decade, they’ve outperformed the markets (and the major large-cap/index funds) every year, except 2005, and they were close that year. If history holds, this year should be excellent for them; IF (diclaimer: IF IF IF IF IF) we’ve hit the bottom and the market starts up again, these undervalued, beaten up dog should zoom. If the market doesn’t behave the way we want, they’re already discounted. Of course, they can go lower, but they have less excess to squeeze out than their higher valued cousins in the Dow.

The variant I like best is the four dog version. It’s a variant of a variant of a variant at this point, but it’s very simple. You take the five Small Dog and kick out the lowest priced stock. Then buy equal amounts of the survivors. This version USUALLY outperforms the basic Small Dog portfolio and last year was no exception. The four dog port lost around 25% to the five dog port’s 28%. Not astounding, but 3% is 3%; over 20, 30, 50 years, whatever your investing horizon is, it’s thousands and thousands of extra dollars.
The third portfolio is based on a similar approach, but takes an even more value oriented approach. It’s also very simple. On the last day of the year, run a list of the top ten yielding stocks in the Dow. Then run a list of the ten lowest P/E stocks. Compare the list and note the ones that are on both lists (usually 3-5 stocks.) Then buy an equal amount of each (but no more than 50% of the portfolio in any one stock- in other words, if there’s only one stock that qualifies, put 50% in a one year T-bill or CD.) Wait for the following Dec 31st , then repeat. I have NOT tracked this system recently, but used it during the early nineties when I was doing serious stock investing. During that period, during which the Dow grew by about 25% (or around 8% a year), this approach yielded growth of about 12-15% (sorry, but those records are lost in the mists of time and I’m winging that from memory- but they did more or less double the Dow return each year; DISCLAIMER: Past performance is no indicator of future results… do not try this at home without medical supervision!)

Again, not to overdisclaim this, but these are NOT recommendations to buy/sell/trade any of these stocks. These are model portfolios presented for informational purposes only. Use the portfolios and the ideas presented here to stimulate your thought processes, do your own research and investigation, and then, and ONLY then, make your own investment decisions. If you try to blindly emulate these portfolios, all you’ll get from me is some mild sympathy and maybe a drink if you corner me in a bar!

All that said, here are the three portfolios for today (with YTD (whee) results):





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