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| The Basics | A top blogger's market-beating strategy
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Charles Kirk consistently scores far above the market by finding fundamentally strong stocks with weak, but improving, stock charts. Here's how to try that approach yourself.
By Harry Domash
Last week, the weekly investing magazine Barrons ran a story about Charles Kirk, who publishes The Kirk Report, one of the most widely read investment blogs on the Internet.
If youre not familiar with the term, blogs are like diaries, a person's stream-of-consciousness musings posted on the Internet. Blogs are easy to publish with readily available, free software, and thousands of them populate the Web.
Kirks blog caught Barrons attention because his picks have soundly beaten the market since he started blogging in 2000.
Kirks blog includes a record of his trades dating back to 2003, and the results are indeed impressive.
| The Kirk Report's calendar-year returns | | Year | Kirk | S&P 500 | | 2000 | 36.7% | -10.1% | | 2001 | 4.9% | -13.0% | | 2002 | 29.7% | -23.4% | | 2003 | 85.2% | 26.4% | | 2004 | 65.3% | 9.0% | | 2005 | 16.6% | 3.0% |
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Source: Barron's
Kirk relies mostly on screens to find his stock candidates. One of his favorites, according to Barron's, is a screen that looks for poor performing shares with good fundamentals, strong earnings and improving relative price performance, among other factors.
Inspired by Kirks idea, and his returns, heres a screen for finding fundamentally strong stocks with weak, but improving, stock charts.
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Strong fundamentals
Ill start with the fundamentally strong part.
Profitability
Many investors use the terms "earnings" and "profitability" interchangeably, but they are not the same thing. Profitability measures how efficiently a company uses its assets to generate earnings. At first this might seem like an arcane point, but it isnt.
Return on equity (ROE), the most-frequently used profitability gauge, compares net income to shareholders' equity (book value).
The way the math works, a firm cant grow earnings faster than its ROE without raising additional cash. For example, if its ROE is 15%, it cant grow earnings faster than 15% annually without borrowing or selling more shares. Both of those options reduce profits to existing shareholders.
If a firm borrows to fund expansion, the loan-repayment costs subtract from earnings. Similarly, selling more shares dilutes earnings per share, which is the bottom-line number that most influences share prices.
ROE is, in effect, a speed limit on earnings growth. Many money managers Ive talked to wont consider stocks with ROEs below 15%, and higher is better.
For this screen, Ive specified a minimum 15% ROE. Try increasing the minimum to 18% or 20% if you get too many hits or want to limit your results to the most-profitable stocks.
Screening parameter: Return on Equity >= 15
Solid balance sheet
Strong fundamentals imply a solid balance sheet, which means low debt. While working with borrowed money is not necessarily a bad thing if a firm can use the funds productively, firms carrying minimal long-term debt are inherently less problematic than those dealing with high debt-repayment costs. That is especially true in a rising-interest-rate environment, because increasing interest expense cuts into earnings.
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Fund data provided by Morningstar, Inc. © 2008. All rights reserved.Quotes supplied by Interactive DataMSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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