Well, the first go around did not do as well as hoped. Yes, these are trying times in the U.S. markets and economy. However, the stocks that matched my selection criteria provided too much of a swing for me to stomach. Therefore, after some backtesting, I believe I have developed both a more consistent and higher return set of selection criteria.
My overall plan remains unchanged. To recap, I will rebalance monthly, sell on 8-10% drop from entry price and hold the fast movers (to see all my original rules see http://learnedinvestor.com/2008/06/24/no-more-talk-the-plan/). Its what I am choosing to purchase that has changed.
My stock selection criteria incorporates 3 screening methods that blend and balance some traditional value attributes with growth and momentum. I will continue to hold 5 stocks in my portfolio, allowing for minimal diversification, but the holdings really are meant to hopefully balance any weakness that one screen may be experience at a given time.
The first screen is based on the James O’Shaughnessy Small Cap Value and Growth. It looks for stocks that are experience current and long-term price appreciation as reflected in a high relative strength rating and couples a low Price/Sales ratio as a value attribute. Some dispute Low P/S as a quality value indicator, but the argument remains that earnings are easily massaged, but sales are either realized or not.
Screen two looks for stocks that are beating the street. This is a Navallier-esque approach to stock selection. The screen returns those stocks whose analysts have raised their most recent quarterly estimates. There are some additional tweaks that apply a value indicator based on a company’s price/cash flow ratio. Again, this finds value companies with a growth bias.
Finally, I balance the growth and momentum screens above with a more pure value selection. The final crop of stocks are smallcaps that whose P/E is less than their sector (remember P/Es cannot be compared across the universe of stocks) and gives additional preference to those companies’ free cash flow beats the sectors. This helps to find companies which can endure today’s difficult economic conditions.
The first month, was not spectacular. Overall the portfolio was down 8%. However, excluding one investment that gapped down 20% one day in July and continued its collapse before I could get out of the position, the portfolio did ok. Without that one investment, the remaining four holdings returned over 2% last month. With three providing positive returns. Sure, its not great when compared to the S&P 600 which returned about 6% in the same period; however, without the outlier that punished the portfolio, it did outperform the S&P 500. I expect to significantly outperform the market on a year-over-year basis.
I will publish round two selections in the next couple of days and am also working on a portfolio and performance tracking backend for the site. Stay tuned.
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I am an amateur trader and investor with over 15 years experience in the stock market. I was bred to be a fundamentalist and followed fundamental analysis until 2009. Following the 2007-2008 bear market, I began to shift from a buy-and-hold strategy to trend-following techniques.