Interesting article from MSN writer Jon Markman. The whole article may be enjoyable to fellow tech investors; 2nd to last paragraph may be especially nice to read for fellow DELL investors.
The Investor SuperModels By Jon D. Markman
Since the start of 1998, the Investor editorial team has created and published a set of strictly mechanical stock portfolios derived from Investment Finder screens. We modestly called them the SuperModels. To monitor our efforts, and learn how you can build and benefit from your own versions, check our regular progress reports and the links to individual SuperModels below.
Flare-Out Growth
10 stocks that have rocketed in the past 12 months but faltered recently
• Portfolio
Today's Picks
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Redwood Growth
10 high-quality growth stocks
• Portfolio
Today's Picks
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Defensive Growth
10 stocks with consistent growth, profitability and dividend yield plus market-beating price gains
• Portfolio
Today's Picks
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About the SuperModels
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Volatility
Momentum stocks can be rewarding but also present great risks. Consider them only for the aggressive growth portion of your portfolio.
Rebalancing
The portfolios will be rebalanced each quarter in 1999.
Returns
Returns for each quarter are calculated by totaling gains and losses of each portfolio's stocks and dividing by the number of stocks. The models' total annual returns are the sum of the quarters' changes.
The Investor 30
To round out The Investor 30, some models feature more than the recommended 10 stocks to compensate for the securities that appear in more than one model.
Rebalancing Schedule
Qtr. Buy Sell
1 12/30/98 3/26/99
2 3/29/99 6/25/99
3 6/28/99 9/24/99
4 9/27/99 12/31/99
Web Sites
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LIM Research
Q-Analytics
SuperModels Archive
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Recent articles:
• Our no-brainer stock picks zoom straight past the averages, 3/3/99
• Our Flare-Out momentum stocks soar 33% in January 2/3/99
• SuperModels ride CMGI and MindSpring to big gain, 1/13/99
more by Jon Markman ...
March 31, 1999: Our SuperModel momentum stocks zoom 40%+ in '99
Flare-Out, Redwood and Defensive growth stocks
It was touch and go for a while last week, but sharp rebounds in New Era of Networks, Metromedia Fiber Network and Amazon.com gave us the number we had been hoping for: a 40%-plus gain in the Flare-Out Growth portfolio for the first quarter.
Let's savor that a minute. If it were a mutual fund, our main momentum portfolio's advance would place in the top five among the 8,800 funds in our database. Of course, we had to stomach serious volatility along the way. At one point in early February, the portfolio was up just 3% after being ahead as much as 32% in mid-January. But our stocks clawed back primarily on the strength of a monster rally in CMGI Inc. (CMGI) and a nice surge in Metromedia Fiber (MFNX).
While 41% sounds good all by itself, consider that it came on the heels of a 176% compound gain in 1998 and the math really gets interesting. If you had invested $100,000 in the first Flare portfolio we built on Jan. 2, 1998 and reinvested along with us each quarter, today you'd have a compound total return after 15 months of 286% -- and a portfolio value of around $386,000. Enjoy it now, because history makes it clear that no style works exactly the same every year.
That's one reason why we include other styles in our Investor 30 portfolio, which also fared well in the first quarter -- gaining 17.4%, or more than four times the advance of the Standard & Poor's 500 Index ($INX). As you may recall, we launched the I-30 on Dec. 30 to hold three types of stocks for a well-rounded portfolio: the Flares (price-momentum stocks taking a breather); the Redwoods (blue-chip stocks with earnings momentum); and the Defenders (blue-haired stocks with good growth, quality and dividends). The Redwoods met their goal of doubling the S&P 500 by gaining 13.1% in the quarter; the Defenders met their goal of tracking the S&P 500 by gaining a respectable 5.4%.
So who says private investors can't beat the market? Someone trying to sell you a mutual fund, I guess. And those tweedy finance professors, armed with efficient-market hokum, who have never met our Investment Finder, the stock-screening engine at MSN MoneyCentral that levels the playing field between us and the pros.
Many of those pros, by the way, would have you believe that poor breadth (jargon that means most of the market's gains are concentrated in just a few stocks) will doom the current bull run. But Laszlo Birinyi, a leading market historian and money manager in Connecticut, bashed that idea in a recent Barron's magazine interview, stating: "Lack of breadth is not of great concern. It's just the latest thing for those who have missed the market to be concerned about. The stock market isn't democratic. It doesn't matter how many stocks are up. It matters which ones. All it's describing when it's narrow is that you have to be very careful about which stocks to buy."
That neatly captures our experience of the past 15 months. Disciplined screening techniques have led us to buy the right stocks at the right time. While acknowledging that our portfolios could well be at historical peaks, for the moment we'll leave bad breadth for someone else to fret about.
A new screen: the Volume Flares
Before listing the new stocks for our rebalanced portfolios in the second quarter, let me share results of some historical back-testing on the Flare-Out Growth screen. These results are not official yet, as I'm still working on confirming the results with multiple data and back-testing-software vendors. But here are some clues:
Our Flare screen builds 10-stock portfolios that have scooped up a 28% average annual gain since 1986. That's 14 percentage points better than the S&P 500. You had to endure a lot of volatility to achieve that result -- a standard deviation of 44%. But the reward for those who can stand the risk is significant: $10,000 invested on Jan. 1, 1986 turns into $270,000 by Dec. 31, 1998, vs. $57,266 for the S&P 500 Index.
However, after spending many hours hunched in front of my laptop scouring the back-test results from LIM Research in Austin, Texas, and running new back-testing software from a Colorado company called Q-Analytics, I may have determined a few ways to improve on those strong results:
It seems that changing the current criteria in this order successively jacks up the results: Run the portfolio an entire year without quarterly rebalancing; cut the number of stocks down to five from 10; require the stocks to trade at least 1 million shares daily over the past quarter, reduce the market cap limit to $750 million and require the current price to be greater than the 50-day moving average. Here's an Investment Finder link that will automatically build the Volume Flares screen. Anyone who has done time in a statistics course knows the potential folly of getting this granular: You run the risk of curve-fitting the results. Still, if it works -- and of course you know I'm going to test this in a live account -- the results could be awesome.
The new screen -- let's call them the Volume Flares -- posts two losing years in the past 13 and underperforms the S&P 500 in both of those years (1987 and 1990). The result: It gains 64% on average, turning $10,000 invested on Jan. 1, 1986 into $1.7 million by Dec. 31, 1998 (vs. $57,266 for an S&P 500 Index fund). The standard deviation, a measure of volatility, is extremely high at 86% -- which essentially means that one year out of 20 you could lose 86% of your money. Definitely not an account for the student loan money. (If you take the number of stocks back up to 10, you reduce the number of losing years to one and cut the standard deviation to 50%; the tradeoff is that the model only gains 50% a year, to $1.1 million).
The details for the five-stock model: After posting a flat 1987, the screen went on to gain 34%, 58% and lose 20% before gaining steam in 1991 and posting gains of 158%, 14%, 101%, 12%, 71%, 28%, 64% and 302% in subsequent years. Each of the good years was anywhere from 7 to 276 percentage points better than the S&P 500. In many years there were no losing stocks; in 1992, the worst year for losers, three stocks lost ground but the screen still posted a market-beating 13% gain on the strength of a 137% gain in International Game Technology (IGT) and a 46% gain in Conseco (CNC).
Will it work this year? I'll track it privately starting this quarter, but there's a big caveat: According to Q-Analytics' software, if you start this portfolio in April the return drops to a modestly more pedestrian 30% per year, though that's still far better than the S&P 500. (Historically, according to the software, the best five months to start any Flare portfolio are January, December, March and April, in that order.)
Introducing the new SuperModels
Here are the new SuperModel portfolios, figured the old-fashioned way. According to our rules, we closed out our first-quarter portfolios last Friday; the new ones started trading Monday. Because many of our stocks gapped higher on Monday -- Amazon.com (AMZN), for instance, opened 10 points above its Friday close price -- the percentage gains showing on our portfolio page will be lower than you would have in a real portfolio that simply held the stock over the weekend.
If you want to take on a bit more risk for potentially more reward, buy only the first five Flares rather than all 10.
Q2 1999 Flare-Out Growth: CMGI, Amazon.com, Yahoo! (YHOO), Network Solutions (NSOL), Metromedia Fiber Networks, America Online (AOL), New Era of Networks (NEON), MindSpring Enterprises (MSPG), Go2Net (GNET) and Dell Computer (DELL).
Q2 1999 Redwood Growth: Best Buy (BBY), Charles Schwab (SCH), EMC Corp. (EMC), Tellabs (TLAB), Providian Financial (PVN), The Gap (GPS), Microsoft (MSFT), Home Depot (HD), Lucent Technologies (LU) and Safeway (SWY). (Cisco and Dell dropped out because both reported earnings in the last quarter that were merely in line with expectations; our screen requires a surprise.)
Q3 1999 Defensive Growth: Pfizer (PFE), Merck (MRK), Schering-Plough (SGP), Carnival (CCL), Wal-Mart Stores (WMT), Cintas (CTAS), McDonald's (MCD), American International Group (AIG) and Tyco International (TYC).
Finally, here are the new Volume Flares, which we are tracking only on the side and not as an official SuperModel:
Q2 1999 Volume Flares: Amazon.com, CMGI, Yahoo!, America Online, Ameritrade Holding (AMTD).
A reminder: The SuperModels are for aggressive-growth accounts only. We recommend purchase of all five or 10 names in each model because we believe it's nearly impossible to determine which of the group will do best, and if you skip the one or two most outstanding performers, you lose the entire value of the model.
However, since many readers ignore this advice and every quarter ask me to help them put together a list of just 10 out of the entire Investor 30, here's my attempt at stock-picking under protest. This list is not completely random. I've used my special stock-seasonality system to choose the names on the list that have, over the course of their histories, done much better than average in the second quarter. I've included at least two names from each group. Here's a spreadsheet of my work, Inv30Q2.xls (444k), and the top stocks:
Investor 30 Pick 'Em: CMGI, Amazon.com, MindSpring, Dell, Best Buy, Tellabs, Lucent, EMC, Schering-Plough and Wal-Mart.
Speaking of seasonality, by the way, I believe that wintertime rumors of the demise of Dell are greatly exaggerated. The decade's premier and most reliable growth stock now trades at a forward price-to-earnings ratio that's almost even with its growth rate (compare that to Coca-Cola (KO) and Colgate-Palmolive (CL), which are trading at forward P/E ratios more than twice their growth rates). And the stock has traditionally had terrific Aprils after mediocre Marches. In the past four years, Dell's price change in March looked like this: -3%, -5%, -3%, +6%. The succeeding Aprils: +19%, +24%, +37%, +25%. This March, Dell shares have sunk 5%. I think anyone who believes in buying low and selling high ought to consider this a good moment to step up to the plate. If my scenario is correct, the March 23 intraday low of 35 3/8 will stand as the bottom for Dell stock this year, barring a general market meltdown.
Jon D. Markman, managing editor of MSN MoneyCentral's Investor section, owns many SuperModel stocks in his own account. He is currently long Amazon.com, Yahoo!, Metromedia Fiber, America Online, New Era of Networks, Dell, Best Buy, Charles Schwab, EMC Corp., The Gap, Microsoft, Home Depot, Lucent Technologies and American International Group.
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