SuperModels Community
Join the discussion in the MSN Money SuperModels Community.
Purchase
Jon's new book.
SuperModels
Recent articles:
• 20 top stocks for 2003s second half, 7/9/2003
• Invest in the greatest thing since the bar code, 6/25/2003
• 3 ways to profit when the rally falters, 6/18/2003
More...
| | SuperModels
After two seasons, Scouter is 2 for 2
On its second birthday, StockScouter has a lot to celebrate: Its beaten the market each year by adapting to whatever trends are currently working.
By Jon D. Markman
Despite winning the most valuable player award in 2001 and topping the American League in hits and steals this year, Seattle Mariners right-fielder Ichiro Suzuki remains undervalued by major league baseball. One reason is his consistency. Ichiro doesnt just hit for average or routinely make long throws home from deep right to nail runners. He does it all, adapting to the needs of each game with a grace and humility rare in any human endeavor, but particularly in professional sports.
In the stock market there are few, if any, Ichiro-style strategies that work consistently from year to year. As soon as one tactic dominates so clearly that its early adherents begin to crow -- large-company growth stocks, small-company value, bonds, emerging markets, technology, whatever -- a great horde of other investors race in, and its strength dilutes and fades.
One idea that has worked consistently well since its debut in the same year as Ichiro, however, is the StockScouter rating system. Developed by MSN Money with Camelback Research Alliance (a company affiliated with my hedge fund), StockScouter was designed not to adhere to any single investment style, but rather to sense and adapt to any investment style in vogue.
The secret of Scouters success
Since its launch in July 2001, a benchmark portfolio of 50 stocks top-rated by StockScouter, rebalanced monthly, advanced 36.3% through the end of June (not including dividends, transaction fees or taxes). Over the same period, the S&P 500 Index ($INX) declined 20.4%.
Remarkably, the Scouter portfolio has achieved this result with no short-selling whatsoever. It has simply leveraged what quantitative analysts call a multi-factor model to find an underground current of successful companies, and stuck with them through market crests and troughs. The model seeks companies with strong fundamental growth whose shares are the subject of insider buying, show reasonable valuation and decent price action -- and are members of market-cap, sector and growth or value groups favored by investors at the time.
Since its earliest months, StockScouter has, without human intervention, repeatedly focused on undervalued regional banks, energy and services companies, though virtually every sector and capitalization group has been represented among its monthly picks. Today the top 50 picks, the top 10 of which are listed below, are still dominated by small-cap financial and business services firms.
| Ichiros Army -- StockScouter Top 10 for mid-July, 2003 | | July 14 price | Company Name | Scouter rating | | 15.11 | Grupo Aeroport del Sureste (ASR, news, msgs) | 10 | | 17.24 | Stelmar Shipping (SJH, news, msgs) | 8 | | 11.33 | AirTran Holdings (AAI, news, msgs) | 8 | | 22.55 | Alaska Air Group (ALK, news, msgs) | 9 | | 28.92 | Forward Air (FWRD, news, msgs) | 9 | | 21.95 | Genesee & Wyoming (GWR, news, msgs) | 9 | | 27.09 | Knight Transportation (KNGT, news, msgs) | 8 | | 18.80 | Advanced Medical Optics (AVO, news, msgs) | 10 | | 18.92 | Columbia Banking System (COLB, news, msgs) | 10 | | 27.26 | Dime Community Bancshares (DCOM, news, msgs) | 10 |
|
While readers regularly write in to profess their success with the rating system, MSN Money has purposely held back from regularly publishing results. Knowing that too much attention is deadly for any systematic market strategy, we have wanted to let StockScouter settle into a comfortable rhythm in real time without the distraction of a spotlight.
After two years of strong performance during a market period that has rewritten the record books of volatility, though, now seems an appropriate time to publicly register the systems performance. And although the top 50 stocks are available at any time with a click of the button in our new Lists and Trends page under the Ratings & Recommendations heading, well re-establish our original practice of publishing the top 50 list. Look for it in the closing Market Dispatches on the last trading day of each month.
Scouter stats
Not familiar with StockScouter? I provide a long explanation of how it works in my new book, Swing Trading, (see link at left) and a short explanation here. Its persistent success -- which could be fleeting, for all we know -- becomes more evident the deeper you dig into the details. A few stats:- In the 24 months since its launch, the benchmark portfolio has had just five down months while the S&P 500 has suffered 13 down months.
- In the past 12 months (June 2002 through June 2003), the benchmark portfolio advanced 7.3% while the S&P 500 fell 8.7%.
Investors did not need to rebalance a 50-stock portfolio monthly to take advantage of the system, however. - The first 50-stock Scouter portfolio we published, in July 2001, is up approximately 39% through July 14. That beats the results of the rebalanced portfolio hands down, not just because its a higher number but because it also required no work. The S&P 500 is down 18% in same period. We did nothing fancy to get that figure -- its just raw return, with no monthly turnover. And the figure is actually conservative, since five companies in the portfolio disappeared in mergers; their shares significant gains are not included. Top stocks were Coach (COH, news, msgs), +193%; Bank Mutual (BKMU, news, msgs), +153%; Allied Defense Group (ADG, news, msgs), +149%; and Cherokee (CHKE, news, msgs), +108%. The worst is MSC.Software (MNS, news, msgs), -57%.
- In August 2001, a month after launch, I published a 10-stock Scouter portfolio for readers in a column. That group is up 17% two years later through the end of June, versus -14.5% for the S&P 500. Top stocks are St. Jude Medical (STJ, news, msgs), +56%; UST Inc. (UST, news, msgs), +32%; and Energen (EGN, news, msgs), +33%.
- On Sept. 21, at the end of the first week of trading after the 9/11 terror attack, I created a list of 10 top-rated Scouter stocks for readers. Those 10 are collectively up 140%, versus +3% for the S&P 500. Best are NovaStar Financial (NFI, news, msgs), +675%; Royal Caribbean Cruises (RCL, news, msgs), +206%; and Pulte Homes (PHM, news, msgs), +133%.
- The 50-stock portfolio assembled for September 2001 (pre-attack), is collectively up 63%, versus -12% for the S&P 500. Best were NovaStar again, but also CNB Financial (CCNE, news, msgs), +142%, and Doral Financial (DRL, news, msgs), +131%.
- The 50-stock portfolio assembled for January 2003 is up 17%, versus 8% for the S&P 500.
Greater Bay Bancorp, Sandy Spring Bancorp, Colonial Bancorp and Hudson River Bancorp -- listed above in the top 10 of the current StockScouter list -- are typical of the kind of stocks that have provided StockScouter with an edge over the past two years. These could not possibly be duller ideas, on the surface: Four community banks in California, Maryland, Alabama and New York with uninspiring stock charts and the most basic of business plans. But all sport below-market price-to-earnings multiples, a bit of insider buying, growth rates of 8% to 14% and dividend yields of at least 1.8% to 3.8%.
These are the kinds of stocks that conservative growth investors buy during difficult times, and any could be swept up in a consolidation play by a major local player -- adding to the capital-gains potential. Its little wonder that StockScouter has ridden similar names to its success thus far, galloping along just under the radar and generally avoiding big mistakes.
Ill report more frequently from now about the progress of the StockScouter benchmark portfolios, and the sort of names the system likes. And if you have any stories about the way you use the system, for better or worse, let me know at jdm@oddpost.com.
Fine Print
Many thanks to all the readers who wrote to congratulate me on winning a 2003 Gerald Loeb award for financial journalism. The awards ceremony at the Plaza Hotel in New York was a real thrill. Manhattan was hellishly hot and a genuine madhouse. They say tourism is off a bit, but the streets were still packed and the energy at full blast. ... Speaking of momentum, check out the continuing strength in the high-risk stock all-star list we assembled on April 9. Our 15 Nasdaq League names are now up 76% as a group, while the 15 NYSE League names are up 38%. See my April 9 column (Investors swing for the fences ) for details. Top stocks are Sohu.com (SOHU, news, msgs), +247%, aQuantive (AQNT, news, msgs), +107%; and XM Satellite Radio (XMSR, news, msgs), +127%. At the bottom of that column, I offered five new Flare-Out Growth stocks. Theyre up 89% as a group, led by SINA Corp. (SINA, news, msgs), +241% and Select Comfort (SCSS, news, msgs), +100%. The top five names now are Microstrategy (MSTR, news, msgs), Able Laboratories (ABRX, news, msgs), Komag (KOMG, news, msgs), Avid Technology (AVID, news, msgs) and Packeteer (PKTR, news, msgs). Interesting to note that three stocks that fell apart not long after I blasted them last year over earnings quality missteps have still not joined much in the recovery party: PEC Solutions (PECS, news, msgs), Electronic Data Systems (EDS, news, msgs) and Toys R Us (TOY, news, msgs). Many readers have asked for more on Sirius Satellite Radio (SIRI, news, msgs), up about 72% from where it was when I wrote about it May 21 (Reality catches up with satellite-radio hype) but stalled recently. I visited the companys headquarters in New York in late June and interviewed the head honcho. Details and new thoughts on the stock later this month.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, neither he nor his fund had positions in any stocks mentioned in this column, but portfolios can change at any time.
|
