As you might expect from the worst January in stock market history, the portfolio did not fare so well this month. The portfolio fell 9% for the month. However, this was 1 percent better performance than the S&P 500 over the same period. So its hard to complain. Is this just beginner’s luck? Well perhaps, though this outperformance was fairly common during the heady days of the bull market. As they say, “we shall see” — which is the whole point of this exercise.

According to the portfolio rules, we must dump stocks that fall 15% or more from our purchase price. Emerson Electric (EMR) just barely stays in the game this month rallying back today to close with a 14.9% loss for the month. However, our property and casualty insurance company Employers Holdings (EIG) is a goner with a dismal -18.3% return last month. So the rules say we must turn our back on this guy and never look back — at least for a year. We will sell EIG tomorrow at halfway between the daily low and high, paying a commision of 1%. Likewise with employment agency Robert Half International (RFI) which fell 15.4%. Same pricing and commision rules will apply. The other selling rule — a stock who’s timeliness rank falls below 7 — didn’t take anyone out this month.

Replacing EIG will be Deckers Outdoor (DECK) which is an outdoor footwear company. The stock screener now returns 15 possibilities out of 7000-odd stocks of which DECK is rated highest for timeliness. We will buy it on the same basis as we sell EIG — a price halfway between the daily high and low with transaction costs will be 1% per trade. Replacing RFI will be Knightsbridge Tankers (VLCCF) a crude oil shipper. I swear that this stock screen has a masochistic tendency. Oh well, ours is not to reason why….

So that’s it until next month. Hopefully it will be warmer in Vero Beach at that point. Its freezing (almost literally) in Vero currently. Hasta la vista!

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.

I am just a clueless investor just like you, blindly stumbling around in the dark. I am most definately not a certified investment advisor. So if you want to use some of these ideas you are welcome to them. And I’m sure it will be worth at least as much as you paid for it. Enjoy!

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!

Anthracite Capital, Amphenol Corp, Community Bank System, Ciena Corp, Canadian Solar, Gerdau SA, Golar LNG, Jet Blue, Legacy Reserves LP, Linn Energy, Netease, Nutrisystem, North American Palladium, Syngenta

Keep ‘em coming, boys!