It all seems so long ago… that wonderful time when we all (or at least most of us) had positive stock market returns. During those great days I developed a stock screen that performed very well for me. Unfortunately, I also discovered that it doesn’t give you much of an advantage in a bear market. But in preparation for happier times ahead, I thought I might share the methodology with y’all and track the progress of this idea on a monthly basis. I do know that while this strategy was working, every time I strayed from my rules, my returns suffered. If I stayed with my plan I prospered.
You can run the screen yourself using the free “deluxe” stock screener at http://moneycentral.msn.com/investor/finder/customstocks.asp. You will need to use a browser that support ActiveX controls. Although I have all the major browsers I use Internet Explorer for this purpose. Here are the rules for the screen along with the current results:
The reasoning behind this screen is fairly simple. First, I want a high return on equity as my primary objective; a company making great use of its shareholder’s investment. Second, I don’t want to pay through the teeth for it. The PEG ratio (PE ratio divided by anticipated growth rate) is used to insure good value. I also want to look at how much cash flow my share price is buying. Too little cash flow or too dear a price are to be avoided. I want to avoid companies that are over leveraged. So I’ve set the maximum at half of the equity. I’m also leary of flash-in-the-pan business. I want a 5 year history of ROE at or above 20% – a lofty benchmark. Lastly I want my purchase to be timely — ha, don’t we all! For this I simply use MSN Money’s black box – its Rating system — which is a rank from 1 to 10, 10 being best. I don’t know how (or even if) it works. But I really don’t have any better ideas on how to measure this, so…. So I’ll limit my consideration to stocks rated 9 or 10 by MSN Money.
Happily this screen currently returns 10 selections. I’ll fictionally invest $1000 in each of these issues which gives us a nice $10,000 portfolio to start out with. The portfolio will adjust itself at the close of the first trading day on or after the 6th day of each month. The portfolio will always hold 10 stocks unless no additional stocks are available to be bought. Stocks that decline by 15% from our purchase price will be sold and shunned for 1 year, replaced by a new selection from the screen if available. When a stock’s MSN rating falls below 7 we will also sell. If a company reports a loss on its quarterly report we will sell. We will assume a commission of $10 per trade. Dividends will be retained in cash and will be added to the next purchase in the portfolio. Interest on cash balances will be ignored. So let’s see how we do…
Who knows… if I can get some good vibes from this over the next few months I might decide to start steering my tattered portfolio back to this system from its current defensive stance. Wish me luck!