Hi Tuck,
Good Morning. I have come up with a few ideas. More Later. Just a way to improve this thread. For the moment...
How much play is there. Hmmm I see the hook in the bait...
Dow Correcting big time. NASDAQ full bore. A fellow on CNN Graphed this phenomana yesterday. Highs lows stuff. Yepper the trap is getting set. Overall Market Head & Shoulders Stuff. Second shoulder is said to have a few months of play... : ( ...Of course this means Gaps & volitility... : ) ...Cash shall rule June through August... : )
So what is the other half thinking...
moneycentral.msn.com
SuperModels
How to hunt the market's mighty mites
As smart investors bail out of slow-growth industrials for fast-growing small companies, upstarts quickly thrive. Here's a way to find the small caps destined for much bigger things.
By Jon D. Markman
The sharp decline in the Dow Jones industrials since the start of the year (the latest rally notwithstanding) seems to have come as a surprise to many casual investors. This is a shame, for there is abundant evidence that money flows -- the lifeblood of stocks -- have been seeping steadily from most slow-growth industrial stocks for months, if not years.
The diversion of money away from the nation's heavy-manufacturing core has only become more apparent now that the Federal Reserve's interest-rate campaign against inflation is delivering the final blow to companies whose success depends so much on both borrowing money and raising prices.
Ask questions and share advice in our MoneyCentral SuperModels Community.
And where are those flows going? Not principally to bonds, as we all know by now, not overseas and not under the mattress. Instead, they're mostly moving over to reward fast-growing companies -- some quite small, but doubling at least every year -- which are the most legitimate contenders to become Dow stocks themselves some day.
Dow's lows vs. Nasdaq's highs
One place to view this development in its starkest form is a table that shows new highs vs. new lows by exchange. For the past few months, even on days when the Dow Jones Industrial Average ($INDU) and S&P 500 Index ($INX) have closed higher, new lows have swamped new highs on the New York Stock Exchange, where most Old Economy stocks trade. At the same time, the ratio has been strongly in favor of new highs at the Nasdaq and the Bulletin Board. On the day the Dow sank below 10,000 on Feb. 25, for instance, the new high/new low ratio at the NYSE was a stunningly bad 53 to 243. On the Nasdaq, which also closed down, new highs outpaced new lows, 325 to 122. The contrast was even sharper among Bulletin Board stocks, where there were 137 new highs vs. 36 new lows.
Yet even on Feb. 28, when the Dow soared 178 points, the NYSE still witnessed only 34 new highs, compared to 217 new lows. Again, the ratios were reversed at the Nasdaq, even though its composite index ($COMPX) showed a decline on the day.
Why is this happening? Professional investors love nothing more than a trend, and the trend among the pros who rule the market is clearly to bail out of the likes of tractor-maker Caterpillar (CAT), down 40% in the six months ending Feb. 25, and pile into the likes of semiconductor maker PMC-Sierra (PMCS), up 280% in the same period. Among former microcaps that the pros are clearly piling into at light speed, the leaders on a percentage basis over the past six months are companies as varied as wireless superconductor-filter maker Conductus (CDTS), electric-battery maker Electrosource (ELSI) and biotech ARIAD Pharmaceuticals (ARIA). They're up 2,700%, 1,170% and 2,900%, respectively, over the past six months.
Hunting for the right microcaps
It's logical to assume that this trend will continue, though nothing is guaranteed. On one hand, the value investors who are needed to prop up the Caterpillars of the world simply have a lot less money left. On the other hand, the small-cap and microcap mutual-fund mangers who are among the best performers this year will see their success draw increasing attention -- and more money. Each of those small-cap managers has a list of 20 or 30 favorite stocks, and as new money floods in from former value and index investors, these managers don't go looking for their 31st-best idea. Instead, they generally plow money into the names that have been successful already. This is how valuations get out of whack, but many of these companies have been undervalued for so long that truly egregious overvaluation is still potentially a few months off.
To find these names using the Investment Finder stock-screening engine at MSN MoneyCentral, I have created the Mighty Microcap Checklist from the following criteria:
Company Basics / Market capitalization < $500 million. This seeks the market's smallest stocks.
Advisor FYI / SEC Filings / Beneficial Ownership Taken "since" In the Past Month. This seeks companies that recently have been the subject of a federal regulatory filing that disclosed a 1% to 5% or greater stake held by either a fund manager, a corporation or an individual.
Company Basics / Shares outstanding < 25 million. This excludes penny stocks that have issued hundreds of millions of shares.
Stock Price History / Previous day's closing price > $2. Ditto. You want to wait until stocks have climbed at least above the $2 level.
Trading & Volume / Avg. Daily Vol. Last 2 Weeks > Avg. Daily Vol. Last Qtr. This seeks stocks that are the subject of an increased amount of trading -- volume is the fuel of advances.
Stock Price History / % Chg. YTD > 50%. This excludes stocks that aren't participating in the rally for microcaps this year.
Stock Price History / % Chg. Last 6 Months "high as possible." This ranks your final list by the companies that have performed the best during the time that the broad market has faltered.
This screen has not been performance back-tested against historical data; rather, it's intended as a useful starting point for finding ideas. The top-ranked names on this list typically are advancing sharply under institutional accumulation. You must check each one carefully, however -- hence the name. Study the specific beneficial ownership statements filed on these companies (formally, it's Form 13G) at MoneyCentral or FreeEdgar.com to learn which institutions are buying. Most funds do an impressive amount of due diligence before they buy their 5% stakes, relieving you of some responsibility for determining whether or not the company is legitimate. Then read the companies' business plans in their latest Form 10Q, look at their earnings and revenue growth rates, read their Web sites and recent press releases and peruse their charts.
Once you've done your homework, sell off your Xerox (XRX) or Aetna (AET) -- down 60% and 50%, respectively, over the past six months -- and try one of these little guys. If you don't succeed at first, accept your mistake quickly (don't lose more than 10%) and try again. The results could surprise you and potentially could give your portfolio a new lease on life.
SuperModels on the ramp
The suffering of the Dow seems distant here at SuperModels headquarters, largely because our Year-Trader Portfolio has been performing astonishingly well -- up 27.7%% through Feb. 25, vs. a 12% advance for the Nasdaq Composite and a 7% decline for the S&P 500. If you had invested $10,000 in each of our names at the start of the year, you'd have boosted your $200,000 kitty to $255,318 -- a whopping $69,316 difference from the $186,002 you'd have left in an S&P 500 Index fund.
For the record, that's more than 50% better than the best portfolio over at that Web site where the guys wear funny hats; the Rule Breaker fund at The Motley Fool was up a nice 15.8% year to date through Feb. 25, while the Rule Maker portfolio was at break-even. Our Year-Trader Portfolio also tops all but a couple of mutual funds in our database.
Our success so far this year is all the sweeter because we started with the worst possible prices, getting the high of the day at the Jan. 3 open on almost all of our stocks. In the case of Puma Technology (PUMA), the first print of the year was $141.88 -- and the stock proceeded to plunge almost 50% to $72.50 by the end of the month. But the Year-Trader strategy is to hold all stocks for 12 months, and, sure enough, Puma already has come roaring back -- cresting at $176.56 by Feb. 29 on the strength of strong earnings, analyst upgrades and a stock split.
If you're just catching up with us, the Year-Trader Portfolio is composed of stocks netted from four different Investment Finder screens. The screens have been tested against historical data to yield top-ranked stocks that regularly outperform the market -- by as much as six times, in some cases. We call these subportfolios "models." They require no human intervention -- you can run the screens any time, and buy the top three to seven names in order without any further research.
Unlike the strategy described at the top of this column, results from model portfolios generally decline when you try to cherry-pick the lists on the basis of painstaking study. They're a great way for both new and experienced investors to create successful portfolios with very little time and effort.
The Year-Trader model that I'm the most enamored with lately is the newest: MVP Growth. This six-stock group was up 45.5% so far this year through Feb. 29, or four times the zippy Nasdaq, on the backs of powerful moves in PMC-Sierra, BEA Systems (BEAS) and Siebel Systems (SEBL). It took all of about 15 minutes to choose the names. To see the companies you'd buy today, click the screen link on the portfolio page. It's really that simple.
Our best performing strategy of 1999 -- the Flare-Out Growth Month-Trader Portfolio -- staged a valiant comeback in February. It was up 34% from Feb. 1 through Feb. 29, with an even distribution of returns from Conexant Systems (CNXT), up 16%; Harmonic (HLIT), up 38%; and SDL (SDLI), up 47%. Exhibiting how hard it is to climb out of a hole, however, the portfolio is still 8% below par for the year, due to its big drop in January. The new names for March are fiber-optic test-equipment maker Digital Lightwave (DIGL), wireless and satellite component maker TriQuint Semiconductor (TQNT) and fibre-channel data storage component maker Emulex (EMLX). If you're trading along at home, do not buy these or any other stocks with market orders at the open; wait for at least the second half-hour of trading, and use a limit order.
Meanwhile, our HiMARQ portfolio continues to tread water. It's beating the S&P 500, but only by being down 1.8% for the year to date through Feb. 29 vs. a 7% S&P drop. The February portfolio would have been up 6.7% if you'd stuck to my rule of limiting losses to 8%, but I still am not satisfied. I am determined to make this experimental concept wildly (rather than marginally) successful, so I'm switching to new tactics devised by SuperModels Web Community members who boast they're kicking my tush with their own twist on my strategy.
HiMARQ analysis (the acronym is short for Historical Monthly Average Return Quotient) tells us the individual months in which stocks and sectors regularly have enjoyed their best results. We originally decided to start with the sectors with the best expected returns each month, and then drill down to buy the stocks in those groups with the best expected return. But community members Nikhil Shah of California, as well as Taze and Pam Shepherd of Alabama, say they're getting terrific results by ignoring sectors and just running the HiMARQ analysis on the top-ranked Flare-Out Growth, Redwood and MVP Growth stocks.
So here's my take: We're going for broke this month, shooting for raw return in the best momentum names. The March HiMARQ portfolio will be VeriSign (VRSN), +55% and 2-0 in Marches; Qualcomm (QCOM), +21% and 8-0; BroadVision (BVSN), +23% and 2-1; Check Point Software Technologies (CHKP), +15% and 3-0; Network Solutions (NSOL), +50% and 2-0; Micromuse (MUSE), +35% and 2-0; Globix (GBIX), +36% and 3-1; UTI Energy (UTI), +22% and 5-1; Microcell Telecommunications (MICT), +26% and 2-0; and Cree (CREE), +15%, 5-2.
100x10y portfolio -- Superconductor revisited
In my last column, I surprised some readers by disclosing that I had purchased a stock not long before adding it to our portfolio of companies that potentially could advance 10,000% over a 10-year period. A few wrote e-mail or posted messages at the SuperModels Web Community to complain that they thought my pre-ownership of the issue was unethical -- especially since the stock, Superconductor Technologies (SCON), rose 134% on the day my column was published, on more than 10 times its normal trading volume. (A news release that day about a major new order presumably accounted for most, if not all, of the excitement.) By Feb. 29, it had risen 575% since the day before my column was published.
Some letter-writers went so far as to accuse me of calling attention to the stock so that I could sell into the rally -- a practice known as "pumping and dumping." Others said they didn't think I would do that, but nevertheless were troubled by my lack of sensitivity to the appearance of a conflict of interest. And of course, there were many who said they didn't care what the heck I owned -- and would I please let them know ahead of time what stocks I planned to mention in the column. (Now that would be unethical.)
I've spent quite a bit of time over the past two weeks answering all this mail. In case you've missed my replies and still care, here's the short version:
First, this issue never came up for me before, because until I got the crazy idea to combine quantitative screening methods with fundamental analysis, suggestions from the SuperModels Web Community and fortune-telling to develop our 100x10y Portfolio, my stock ideas were replicated easily by anyone with access to Investment Finder.
I originally bought 150 shares of Superconductor purely as a quantitative/technical trade, when I barely even knew what the company made. My strategy was exactly what I described in the first part of this column: It was a microcap with solid institutional backers, making new highs. Our MoneyCentral policy is that no staff member may trade in the securities of a company that he or she knows is going to be the subject of an upcoming story on the site. (The policy also requires our writers and columnists to wait at least two full trading days after publication of their stories to trade in the stock of companies about which they've written.) But at this point, I had no intention of either writing about or assigning a story about the company.
It was only later, after I started reading Superconductor's SEC documents, press releases and Web site -- and reviewing mail from a reader who had proposed it as a 100x10y stock back in the fall -- that I got very excited about its long-term prospects. I then talked to its executives and top shareholders, and decided it actually met all of my 100x10y criteria: huge potential market, fringe technology making the transition from development to production, great sponsorship, tiny capitalization and good current momentum.
Knowing that it had an important trade show coming up at which it would release new products that could potentially stimulate institutional investors, I decided to add it to our 100x team, and -- complying with our rules -- to disclose my ownership.
In retrospect, I realize now I should have sold the stock before adding it to my list to avoid even any suspicion of impropriety. Although my disclosure kept me in compliance with rules set by MoneyCentral and most other major financial Web sites, it was really too close for comfort. I have committed to holding my shares in Superconductor and any other 100x10y portfolio stocks I may buy subsequently for my personal account for at least six months.
SuperModels
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Fine print
Demand for shares of companies making filters for wireless base stations has hardly been limited to Superconductor. From the day before my column was published through Feb. 29, the stocks of competitors Illinois Superconductor (ISCO) and Conductus rose 488% and 187%, respectively. We live in interesting times. . . . Last take on Superconductor Technologies: Several years ago, an engineer passed around a petition that committed signers to shave their heads if their stock ever rose above $20. According to a company spokesperson, the firm now has 47 newly bald employees, including most of the executive staff. . . . You may have noticed that shares of another member of our 100x team was up a bunch over the past two weeks: Xcelera.com (XLA) jumped $61 on Feb. 17, $50 on Feb. 18, $30 on Feb. 22 and $68 on Feb. 28 after highly regarded telecommunications futurist George Gilder added it to his newsletter's portfolio. The stock is now up 197,540% over the past five years through Feb. 25.
BEST WISHES
Jeffrey
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