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StockScouter's hedge-your-bets portfolio up 30%
Over the last year, our stock screener's picks of 10 longs, 10 shorts meant you won whichever way the market winds blew. See what StockScouter likes for the coming year.
By Jon D. Markman
A year ago this week, investors were depressed and angry. World markets careened out of control in the wake of the Sept. 11 terror attacks, and the Dow Jones Industrials ($INDU) stormed to their worst one-week decline since the 1930s.
The surprising 20% surge in the market that followed then came as a shot from the blue, facilitated in part by what I came to consider a defiance dividend as Americans relieved their anxiety by hitting the mall and buying battered stocks. Faced with extreme visions of our mortality, combined with revulsion toward a vicious foe, we collectively decided to shop our way back to mental health -- and both the economy and stocks were temporarily the better for it.
Twelve months later, we are at a similar crossroads in the market, but the psycho-social outlook has changed. No longer unified in defiance, we are divided in distress. Only half the public, according to polls, has the stomach to ring Saddam Husseins doorbell with cruise missiles -- an ominous sign for energy and defense stocks, which are priced for war. And back-to-school retail reports suggest that we dont have much interest in ringing cash registers at stores either, an ominous sign for retail and technology stocks -- which, lousy as they are, were priced over the summer for a solid Christmas.
The landscape thus merits a cautious investment stance, despite hopeful signals on the horizon:- On Sunday, world political news reports focused on Italian Prime Minister Silvio Berlusconis comment that he believed Bush might move against Iraq as soon as January. But the reports failed to put much emphasis on the second part of Berlusconis remarks: That he believed the Iraqi dictator would ultimately pursue a pragmatic path to stay in power, and avoid war by admitting the U.N. weapons inspectors.
- On Friday, the Weekly Leading Index published by the Economic Cycle Research Institute showed that the U.S. economy still shows no signs of turning down in a persistent, pervasive way and entering the double-dip scenario predicted by so many gloomy brokerage and think-tank analysts.
During times that merit neither optimism nor pessimism, a hedged portfolio makes a lot of sense: Buy a group of stocks that are likely to go up in case things work out well, and short a group of stocks that are likely to go down in case things go poorly.
A year ago, at a time of near-equal confusion, I published a column that leveraged MSN Money's StockScouter rating system to offer 10 high-ranked stocks to go long and 10 low-ranked stocks to go short. The combined portfolio gained 29.75% over the past 12 months, not including transaction costs, as shorts fell 47.1% and the longs gained 15.8%. Both sides outperformed the S&P 500 ($INX), which fell 12% over the same period. Here are the stocks, ranked by the value they added to our profit and loss statement:
| StockScouter Long-Short Sept 25 01 | | Name | Symbol | Long/short | 9/25/2001 | 9/12/2002 | Gain/loss | | Riverstone Networks | RSTN | Short | $7.70 | $0.72 | 90.6% | | Meridian Gold | MDG | Long | $10.85 | $20.43 | 88.3% | | Proxim | PROX | Short | $3.25 | $2.36 | 27.38% | | Vignette | VIGN | Short | $3.93 | $0.92 | 76.6% | | Pivotal | PVTL | Short | $4.85 | $1.76 | 63.7% | | PMC-Sierra | PMCS | Short | $13.53 | $5.92 | 56.3% | | Powerwave Technologies | PWAV | Short | $12.65 | $5.61 | 55.7% | | AeroFlex | ARXX | Short | $9.72 | $5.12 | 47.3% | | Annaly Mortgage Mgmt. | NLY | Long | $13.99 | $19.53 | 39.6% | | ONI Systems | ONIS | Short | $4.57 | $2.80 | 38.7% | | TJX Companies | TJX | Long | $15.38 | $20.35 | 32.3% | | Air Products and Chemicals | APD | Long | $36.51 | $45.50 | 24.6% | | Golden State Bancorp | GSB | Long | $28.80 | $32.41 | 12.5% | | Quest Software | QSFT | Short | $12.44 | $10.94 | 12.1% | | McCormick & Co | MKC | Long | $21.33 | $22.19 | 4.0% | | Freddie Mac | FRE | Long | $62.17 | $62.13 | -0.1% | | Sunoco | SUN | Long | $34.30 | $33.28 | -3.0% | | Senior Housing Properties | SNH | Long | $13.49 | $12.49 | -7.4% | | OTG Software | OTGS | Short | $5.40 | $7.05 | -30.5% | | IDACorp | IDA | Long | $35.98 | $23.84 | -33.7% | | | | | | TOTAL | 29.75% | | S&P 500 INDEX | $INX | | 1,012.27 | 886.91 | -12% | | NASDAQ COMPOSITE | $COMPX | | 1,501.64 | 1,279.68 | -15% |
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The success of the StockScouter long/short portfolio validates the robustness of the system, which is accessible at MSN Money either through individual stock pages or through the Screener.
There were certainly some surprises in the group: - Not long after the list was published, Riverstone Networks (RSTN, news, msgs) tripled in value as many high-beta but low-quality technology stocks went along for the defiance dividend ride. In the fullness of time, however, StockScouters jaundiced view of the shares was realized, as the stock sank 90% from our initial price.
- The emerging success of gold stocks did not become apparent to most investors until early in 2002, but StockScouter was an early believer in Meridian Gold (MDG, news, msgs), and rode it for an 88% gain in a year.
- The value of real-estate investment trusts was pooh-poohed during most of 2001 and also only became a big story in 2002. Yet StockScouter had glommed onto Annaly Mortgage Management (NLY, news, msgs) in September and held on for a nice 40% gain.
- In the loss column, StockScouters view of OTG Software was interrupted by a buyout offer from Legato Systems (LGTO, news, msgs) at a premium. The other subpar performances came from the purchase of IDACorp (IDA, news, msgs), which sank in sync with investors diminished confidence in the power-trading business following Enrons demise.
Now Ill offer another long/short portfolio for the coming 12 months. They are all generated by the StockScouter system in the same manner as the last portfolio. For the longs, I used my Scouter Top Rated screen (click here), which seeks equities with the highest StockScouter ratings; the greatest number of favorable market-cap, sector and investment-style tailwinds;prices over $5 and average daily volume greater than 100,000 shares. For the shorts, all metrics are reversed, though the minimum price is raised to $7 (click here.)
| StockScouters longs | | Company name | Rating | Sector | Style/size | Avg. vol. | 9/13 close | | Mohawk Industries (MHK) | 10 | Consumer durables | Mid-cap value | 872,000 | $51.00 | | Diagnostic Products (DP) | 10 | Health care | Mid-cap growth | 194,700 | $42.15 | | Brookline Bancorp (BRKL) | 10 | Finance | Small-cap growth | 1,726,300 | $12.20 | | Impac Mortgage (IMH) | 10 | Finance | Small-cap growth | 518,100 | $12.24 | | Mylan Laboratories (MYL) | 10 | Health care | Mid-cap growth | 808,600 | $32.80 | | Devon Energy (DVN) | 10 | Energy | Large-cap growth | 1,015,000 | $48.41 | | AmerisourceBergen (ABC) | 10 | Consumer services | Large-cap value | 1,276,700 | $71.95 | | Ball (BLL) | 10 | Basic industries | Mid-cap value | 645,400 | $53.90 | | First Data (FDC) | 10 | Technology | Large-cap growth | 3,772,600 | $33.98 | | Intl Game Tech (IGT) | 10 | Consumer durables | Mid-cap growth | 945,700 | $65.90 |
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The longs, frankly, are an uninspiring bunch, but who ever thought wed get 40% in capital appreciation out of a REIT in the past year? Weve got a carpet maker, a slot-machine maker, a drug maker, two drug distributors, a container maker, a mortgage maker, a loan maker, a check processor and an oil and gas driller. The names tilted more toward growth than value and are biased a bit more toward mid-caps than small- and large-caps. If anything, the list tells me that companies with firm control of their niches can at least keep trudging doggedly along in the next year, with the growth names potentially gaining market share on their peers, and the value names potentially seeing a bump in their price-to-earnings multiples. Unless the economy completely melts down over the next year, I dont see why we shouldnt get another 10%-15% advance out of this crew.
| StockScouters shorts | | Company name | Rating | Sector | Size/style | Avg. vol. | 9/13 close | | AMR Corp. (AMR) | 3 | Transportation | Mid-cap value | 1,871,900 | $7.36 | | Daisytek Intl (DZTK) | 3 | Consumer services | Small-cap value | 117,700 | $13.00 | | Sierra Pacific Resources (SRP) | 3 | Public utilities | Small-cap value | 554,300 | $7.28 | | Wilsons The Leather Experts (WLSN) | 3 | Consumer services | Small-cap value | 109,900 | $7.69 | | Celestica (CLS) | 3 | Technology | Mid-cap value | 2,344,900 | $21.60 | | Deutsche Telekom (DT) | 3 | Public utilities | Large-cap value | 961,100 | $10.35 | | Genta (GNTA) | 3 | Health care | Small-cap value | 451,000 | $7.299 | | Footstar (FTS) | 3 | Consumer services | Small-cap value | 321,300 | $10.60 | | Veeco Instruments (VECO) | 3 | Technology | Small-cap value | 831,400 | $13.55 | | Crown Cork & Seal (CCK) | 2 | Basic industries | Mid-cap value | 1,784,600 | $6.99 |
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The shorts already look like a list of the walking wounded. AMR Corp. (AMR, news, msgs), the parent of American Airlines, has been hobbled by the decline in both leisure and business flying in the wake of the terror attacks; Sierra Pacific Resources (SRP, news, msgs) has been afflicted by investors distaste for all energy providers, even though it serves all the casinos in Nevada; Deutsche Telekom (DT, news, msgs), the largest telecommunications company in Europe, has been unwired by sinking prices and the high prices paid for wireless licenses. The rest are largely decent companies in unpopular businesses. And that is what makes short-selling so hard; with one turn of the economic wheel, these losers can be winners again.
Lakshman Acuthan, managing director of Economic Cycle Research Institute, believes the economy is going through a tug of war now: On one side are positives in monetary policy, commodity prices and the manufacturing economy; on the other are negatives in the lack of business and investor confidence. If business spenders and investors can't get off the mat, he says, the dark side will start to win the war -- and a few months from now well be talking about a renewed recession. But, for now, he believes real strength in hard-to-ignore economic pillars such as mortgage applications and factory orders argue for continued consumption by consumers.
Basically, it comes down to this: If low interest rates continue to inspire consumers to buy and refinance homes and cars, they will continue to spend scads of money to furnish and accessorize them. And if manufacturers havent made enough stuff and retailers havent stocked enough stuff, Acuthan said, consumers will tug businesses to the table and make them rebuild their inventories. That increase in inventory-building will lead to renewed hiring, lengthening of the work week and still more money in consumers pockets. In turn, those nice numbers would be noted by investors in economic reports, and surface in a renewed ardor for the shares of retailers and durables makers.
All of which would supply a virtuous mirror image to the dreadful results of this week a year ago. This time, I hope the longs in my hedged portfolio far outperform the shorts.
Catch live commentary with Jon Markman on WebFN on Mondays at 2:40 p.m. (PT).
While Jon cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jmarkman@microsoft.com.
At the time of publication, Jon Markman owned no stocks mentioned in this column.
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