Here's something for you swing traders that can't daytrade. It also gives a methodology for doing your own screens.
http://dai.multexinvestor.com/article.asp?docid=10786&nd=0914
No bear market here 2002-09-13
From February 2000 through August 2002, the Multex Relative Value screen was up 87
percent.
by Marc H. Gerstein, Director of Investment Research
Where's the bear?
How's the market? Normally, you'd think of a standard index, such as the SP 500 or the
NASDQ 100, and answer that it's "rotten"--or something perhaps less printable. But
there's more to the market than the headline indexes.
I recently penned an article entitled "Screening with a safety net." It was posted on 9/4/02
article. In it, I described Multex Select, a collection of all the tickers appearing in all of our
stock screens. I suggested that your assessment of the stock market could be less
gloomy if you learned to see this collection of shares as a "designer market," one you
could use as a source for investment ideas in place of the indexes.
If you you'd been doing this, you'd have been putting your stock selection skills to work in
the context of a market that rose 2.77 percent from 1/28/00 through 8/30/02. That's hardly
a great bull market. But consider two popular alternatives. Had you used the SP 500 or
NASDQ 100 rosters as a source of ideas, you'd have been putting your stock selection
skills to work in the context of markets that plunged 32.05 percent or 66.51 percent,
respectively. I don't know how good a stock picker you are, but I know I'm not nearly good
enough to be willing to carry the kind of handicaps posed by the SP 500 or NASDQ 100.
No matter what my skills may be in individual-company analysis, I'd rather put them to
work in the Multex Select market.
Turning it up
It's easy to learn to think of Multex Select as a designer market. After all, it usually
numbers about 400-500 stocks that appeal to a variety of investment goals. These are
things you expect a stock market to offer. The biggest difference between Multex Select
and, say, the SP 500, is that the Multex Select roster is not intended to be in any way,
shape or form representative of a cross-section of U.S. business. It is intended to be a
list of superior companies (with superiority defined according to the screens). Given that
goal, it isn't surprising to see that the list of names turns over frequently, while index lists
tend to stagnate.
But you don't have to stop at Multex Select. If you have conviction regarding a particular
philosophy, you can narrow the list of names to only those stocks appearing in one or a
small number of screens that are compatible with your goals. Strictly speaking, each of
these screens is also a designer market. But I'll admit it is much harder to see them in
that light because we're now confined to a single style and are dealing with a much
smaller, and more frequently changing, list of names. But in a key sense, a screen really
is a stock market in that it represents an inventory of investment ideas form which you'll
make decisions.
Had you been using our Relative Values screen as a designer market between 1/28/00
and 8/30/02, you'd have been applying your stock-selection skills in the context of a
market that rose 86.99 percent. That's equivalent to an annualized rate of 27.1 percent.
Now that's what I call a bull market! And it occurred while the conventional indexes were
careening downward.
During the 1/28/00 through 8/30/02 measuring period, the Relative Values screen was
not our only winner. Of the 19 that are maintained in our Screen Center, 15 were better
than the SP 500 and all beat the NASDQ 100. But at present, Relative Value stands tall
as the one that produced the best results.
The Relative Value screen
If you download the weekly Relative Value stock lists from our Screen Center, you'll notice
that in quite a few cases, the projected growth rates are higher than the P/E ratios (i.e.
PEG ratios are above 1.00). My 8/30/02 article on PEG ratios explained that you need not
worry about this because the PEG ratio is not supported by any sort of hard-core
mathematical reasoning.
Ultimately, valuation is based on supply and demand. In the legal world, it's described as
a price that would be acceptable to a willing buyer and willing seller assuming both are
free to trade (or not trade) as they see fit. This definition is even more important than the
classic one we get in the field of finance, which refers to the present value of a stream of
future cash flows. There's so much subjectivity in deriving cash flow assumptions, it's
easy to conclude that all investors have their own projections and that if the price of a
particular asset is less than the price of comparable assets, there's a good chance
buyers will notice and come up with present value calculations that suggest the asset
ought to be bought. That's the idea of the Relative Value style. We see how individual
stocks are priced compared to comparable stocks.
There are many ways to implement this strategy. Here's how I did it using Multex's
fee-based NetScreen Pro application.
I start with three valuation metrics: Price/Earnings, Price/Sales and Price/Free Cash
Flow. In all cases, company metrics are compared to their respective industry averages.
That part sounds pretty basic. Here's the surprise. In each case, I allow the company
metric to be as much as 10 percent above the industry average (most value-oriented
screens require metrics to be lower than a particular threshold).
Next, I control for crazy situations (i.e., situations where everything in an industry is
overvalued) by looking at PEG ratio, but I set the threshold at 2.00, rather than the
traditional 1.00 used by most others. My admittedly unscientific efforts to get a sense of
what mathematically proper PEG ratios might resemble brought me closer to 2.00 than
1.00 (See the 8/30/02 article on PEG ratios.)
At this point, we have a list of reasonably valued stocks. But we'd also be exposed to
financial danger if we stopped here. Many cheap stocks deserve to be cheap because
they're dogs. And we have to take the word "cheap" with a grain of salt. After all, I'm letting
PEG rise to 2.00 and allowing other calculation ratios to be as much as 10 percent above
industry averages. So let's go on.
We guard against dogs by adding tests that point us toward companies that deserve to
be highly valued. The Street focuses heavily on EPS growth, so I'll look there too. The
screen requires that each company's trailing 12 month and three-year rate of EPS growth
be at least 25 percent better than its respective industry average. Do you see what I'm
doing here? I allowed a 10 percent margin for error with the valuation metrics, but in
return for that generosity, I demanded a 25 percent cushion of excellence with EPS
growth.
Naturally, my growth tests deal with the past, and we all know past performance does not
assure future success. The future is a murky thing, but can tap into the subjective
judgments of "experts" regarding how things will go. We do this with a behavioral test--a
test that examines how investors behave in such a way as to infer what they believe. This
sort of thing is very easy. In this screen, I did it by requiring that stock prices outperform
their respective industry averages over the past four weeks. We wouldn't encounter an
occurrence like this unless investors saw something in the company that made it stand
out, in a positive way, from its industry peers.
By the way, you may be wondering about my having strayed from basic value tests. That
is a central part of my approach to screening. No single investment theme can give you
everything you need. In my recent book, Screening The Market, the EPS growth tests are
examples of what Chapter 7 refers to as "secondary" themes, and the share price test is
an example of an "alternative" theme. For those who don't have the book, recognize that
since stock prices are set by supply and demand, chances of higher prices are better if
more investors will demand it, and chances of that happening are better if the stock has
appeal to investors who pursue a variety of styles. In other words, all else being equal,
demand is likely to be higher for a stock that appeals to both value and growth investors
than one that appeals only to the value crowd.
Using the screen
Because this screen was created with our premium product, you will not be able to
replicate it using the free screener. But if you like this approach, you can go to the Screen
Center every Wednesday (click on the link for Value Category screens) and download a
free Excel spreadsheet showing the stocks on the screen this week. (Don't worry about
updating daily. Overkill is not necessarily a good idea. The performance record referred
to above was calculated based on re-running the screen only once per month.)
Ticker Company Industry
ATU Actuant Corporation Misc. Capital Goods
ATAC Aftermarket Technology Co Auto + Truck Parts
ARG Airgas, Inc. Chemical Manufacturing
AXL American Axle + Manufact. Auto + Truck Parts
ABC AmerisourceBergen Corp. Biotechnology + Drugs
AME Ametek, Inc. Electronic Instr. + Controls
ATH Anthem, Inc. Insurance (Accident + Health)
AGY Argosy Gaming Company Casinos + Gaming
AZR Aztar Corporation Casinos + Gaming
OZRK Bank of the Ozarks Regional Banks
BEC Beckman Coulter, Inc. Scientific + Technical Instr.
BBY Best Buy Company, Inc. Retail (Technology)
CSG Cadbury Schweppes plc (AD Beverages (Nonalcoholic)
COF Capital One Financial Regional Banks
CMX Caremark Rx, Inc. Retail (Drugs)
FLYA CHC Helicopter Corp. Misc. Transportation
CINF Cincinnati Financial Corp Insurance (Prop. + Casualty)
CTXS Citrix Systems, Inc. Software + Programming
CFBX Community First Bankshare Regional Banks
CVG Convergys Corporation Computer Networks
CBE Cooper Industries, Ltd. Electronic Instr. + Controls
DRI Darden Restaurants, Inc. Restaurants
DVA DaVita Inc. Healthcare Facilities
ESE ESCO Technologies, Inc. Scientific + Technical Instr.
FB FBR Asset Investment Corp Real Estate Operations
AGM Federal Agricultural Mort Consumer Financial Services
FNF Fidelity Nat'l Financial Insurance (Prop. + Casualty)
FAB FirstFed America Bancorp, S&Ls/Savings Banks
FRX Forest Laboratories, Inc. Biotechnology + Drugs
FRE Freddie Mac Consumer Financial Services
FBN Furniture Brands Internat Furniture + Fixtures
GNSS Genesis Microchip Inc. Semiconductors
GFBVY Grupo Financiero BBVA (AD Regional Banks
IMY Grupo IMSA, S.A. DE C.V. Iron & Steel
HHS Harte-Hanks, Inc. Printing + Publishing
HSIC Henry Schein, Inc. Medical Equipment + Supplies
HNI HON INDUSTRIES, Inc. Furniture + Fixtures
HU Hudson United Bancorp Regional Banks
IBCP Independent Bank Corporat Regional Banks
INTL Inter-Tel, Inc. Communications Equipment
KFS Kingsway Financial Insurance (Prop. + Casualty)
LLL L-3 Communications Hldgs. Communications Equipment
LNY Landry's Restaurants, Inc Restaurants
LEG Leggett + Platt, Inc. Furniture + Fixtures
MSO Martha Stewart Living Printing + Publishing
MTD Mettler-Toledo Int'l Misc. Capital Goods
MME Mid Atlantic Medical Svcs Insurance (Accident + Health)
MTX Minerals Technologies Inc Chemical Manufacturing
MYL Mylan Laboratories Inc. Biotechnology + Drugs
NTAI Nam Tai Electronics, Inc. Office Equipment
GAS Nicor Inc. Natural Gas Utilities
OII Oceaneering International Oil Well Services + Equipment
ORI Old Republic Int'l Corp. Insurance (Prop. + Casualty)
PRGO Perrigo Company Biotechnology + Drugs
PKX POSCO (ADR) Iron + Steel
PVTB PrivateBancorp, Inc. Regional Banks
PGR Progressive Corp., The Insurance (Prop. + Casualty)
RLRN Renaissance Learning Inc. Software + Programming
RMCI Right Mgt. Consultants Business Services
RLI RLI Corporation Insurance (Prop. + Casualty)
RPM RPM Incorporated Chemical Manufacturing
SEE Sealed Air Corp. Containers + Packaging
SECD Second Bancorp, Inc. Regional Banks
SIGY Signet Group plc (ADR) Retail (Specialty)
SAH Sonic Automotive, Inc. Retail (Specialty)
STW Standard Commercial Corp Tobacco
SFSW State Financial Services Regional Banks
STC Stewart Information Svcs. Insurance (Prop. + Casualty)
STRT Strattec Security Corp. Auto & Truck Parts
SYK Stryker Corporation Medical Equipment + Supplies
TTC Toro Company, The Misc. Capital Goods
TP TPG N.V. (ADR) Trucking
TUES Tuesday Morning Corp. Retail (Department + Discount)
TSN Tyson Foods, Inc Food Processing
UGI UGI Corporation Natural Gas Utilities
UAG United Auto Group, Inc. Retail (Specialty)
UFCS United Fire + Casualty Insurance (Prop. + Casualty)
UFPI Universal Forest Products Forestry + Wood Products
WBCO Washington Banking Co. Regional Banks
WLP WellPoint Health Networks Insurance (Accident + Health)
Marc H. Gerstein joined Market Guide in 1999 as Director of Investment Research.
He started working as an equity analyst in 1980 and covered stocks spanning a wide
variety of groups including Household Products, Retail, Restaurant, Hotel/Gaming,
Media, Natural Resources, Homebuilding, Conglomerates, and Transportation. He also
managed a high-yield bond mutual fund and conducted seminars teaching investors
how to select stocks using screening software.
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