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HOW MY STOCK PICKING MODEL WORKS
I developed a stock-picking model when I was in graduate school to take advantage of the bullishness the market was exhibiting at the time. The premise was to invest in high beta stocks while trying to limit my downside exposure in the event of a stall or downturn. By using the quantitative steps in the model, stocks are selected that are experiencing sustainable price momentum. Over the years, my model has evolved to make it more effective and easier and easier to use by anyone. The model is a multistep screening and high-grade process that goes something like this:
Screen #1: Low Priced Stocks: Stocks priced less than $8.00, trading less than 5% below their 52 week high, PE <20, EPS Growth TTM > 15%, Revenue Growth TTM > 10%
Screen #2: Cheapies: Stocks priced less than $3.00, trading less than 10% below their 52 week high, PE <50, EPS Growth TTM > 8%, Revenue Growth TTM > 5%
Screen #3: Stocks within 2% of their 52 week high with a 52 week price appreciation > 300%
Screen #4: Stocks within 5% of their 52 week high with a 52 week price appreciation > 150% and EPS growth of 25%
Screen #5: Stocks within 5% of their 52 week high with a 52 week price appreciation > 125% and P/E < 50
Screen #6: Stocks within 5% of their 52 week high with a 52 week price appreciation > 50% and P/E < 15
What this process is trying to do is to select a hot growth stock that has a little more juice left in it to get you that last 15% without being so hideously overvalued that it could drop like a rock. I don’t think I need to buy stocks with extended valuations to make a quick profit. There are stocks out there with good momentum that aren’t bad to hold if I make a wrong decision. I think my model finds them. My model has been successful in protecting me from real lemons. Preservation of capital is always important. Buying companies with real earnings protects me in the down markets. We all work hard for our money. It makes no sense to give it away. That’s why I believe it’s important to buy stock in companies with real earnings.
I developed a stock-picking model when I was in graduate school to take advantage of the bullishness the market was exhibiting at the time. The premise was to invest in high beta stocks while trying to limit my downside exposure in the event of a stall or downturn. By using the quantitative steps in the model, stocks are selected that are experiencing sustainable price momentum. Over the years, my model has evolved to make it more effective and easier and easier to use by anyone. The model is a multistep screening and high-grade process that goes something like this:
- First, create a universe of about 200 stocks that have demonstrated strong price appreciation and earnings growth in the last 12 months. You can find some pretty good free and easy to use screening tools on the Internet. I use Fidelity's screener. On the day I run my quantitative model, I use the following screening criteria to build my universe of stocks:
Screen #1: Low Priced Stocks: Stocks priced less than $8.00, trading less than 5% below their 52 week high, PE <20, EPS Growth TTM > 15%, Revenue Growth TTM > 10%
Screen #2: Cheapies: Stocks priced less than $3.00, trading less than 10% below their 52 week high, PE <50, EPS Growth TTM > 8%, Revenue Growth TTM > 5%
Screen #3: Stocks within 2% of their 52 week high with a 52 week price appreciation > 300%
Screen #4: Stocks within 5% of their 52 week high with a 52 week price appreciation > 150% and EPS growth of 25%
Screen #5: Stocks within 5% of their 52 week high with a 52 week price appreciation > 125% and P/E < 50
Screen #6: Stocks within 5% of their 52 week high with a 52 week price appreciation > 50% and P/E < 15
- Each screen will yield about 10 – 50 stocks. List the tickers of all of the stocks in an Excel database. Delete duplicates as there will be overlap between the 6 screening criteria.
- Copy and paste the ticker symbols into a Yahoo portfolio that you create (maximum 200 symbols). During bull markets, you'll have more than 200 symbols and you'll have to devise your own method to cull down to 200. During bear or sideways markets, you'll usually have fewer than 200 symbols.
- Rank these stocks separately on both of the following criteria: Price Appreciation, Price Appreciation divided by trailing 12 month P/E. Assign a ranking value (i.e. #1 stock gets a 100, #99 stock gets a 1) for each criteria. Sum the two criteria and re-rank the all of the sums. If you have 100 stocks in the database, the highest "score" any stock can have is "200". This process favors stocks with more reasonable valuations and strong price momentum and weeds out those with no earnings.
- Print out this list of stocks.
- Starting from the #1 ranked stock, check to see if it has 3 years of revenue growth and 3 consecutive years of earnings growth. Eliminate any stocks that do not pass this final screen. I need stocks that have earnings power. If a company is growing its earnings and revenues for 3 straight years, it is unlikely that its earnings will decline. If its valuation is still reasonable, its stock price has room to grow as well. Go down the list until you have 5 stocks. This is the Top 5 which I publish on my http://www.mrmarketishuge.com/ website.
- For each of the Top 5 stocks, go to the http://investing.quicken.com/research/ website and determine its numerical value on the Weiss and Hagstrom scales (assign a value of "1" for a "check" and a "-1" for an "x". Use a value of zero if the stock is not covered by one of them (it will be covered by at least Weiss or Hagstrom).
- For each of the Top 5 stocks, go to https://quotes.freerealtime.com/stock-scouter and assign the stock scouter score (value 1 to 10) to each one.
- For each of the Top 5 stocks, go to the Fidelity Equity Summary score website(example for Apple) https://eresearch.fidelity.com/erese...l?symbols=AAPL and determine its numerical value on the The Equity Summary Score (value of 1 to 10).
- For each of the Top 5 stocks, go to the Validea Guru Analysis website https://www.validea.com/guru-analysis/inmd and determine its numerical value for the Validea, Lynch, Fool, O'SHAUGHNESSY and Zwieg. Convert percentage value to value of 1 to 10 (eg if the Validea score is 75%, its value will be 7.5).
- Add up the 9 values for "Hagstrom", "Weiss", "Stock Scouter", “Fidelity Equity Summary", Validea, Lynch, Fool, O'SHAUGHNESSY and Zwieg for each stock and rank the Top 5 again. The maximum value any stock could have would be 7 for Hagstrom, 8 for Weiss, and 10 for each of the other 7 metrics. The maximum score would be 85. Any stock with a value over 60 is usually very good.
- Use your noodle. You've put all of these great stocks through the ringer to figure out which one is the best. Look at these Top 5 and decide which one you like the best, having taken all these factors into consideration, plus fundamental analysis associated with any events that may not be baked into these revenue, earnings or valuation numbers.
- Look at the charts of each stock to make sure they are trending upward with minimum volatility.
- Buy the stock you like best. In a typical bull market, the stock will, on average, achieve a 15% gain within 4 to 6 weeks. Sell the stock and repeat the process. Why sell so soon? Well there are ever changing phenomena going on in the market that could make your selection criteria quite different a month after the signals told you to buy this stock. The theory here is that you are selling a potentially "tired" stock and trading it for a "fresh" one.
What this process is trying to do is to select a hot growth stock that has a little more juice left in it to get you that last 15% without being so hideously overvalued that it could drop like a rock. I don’t think I need to buy stocks with extended valuations to make a quick profit. There are stocks out there with good momentum that aren’t bad to hold if I make a wrong decision. I think my model finds them. My model has been successful in protecting me from real lemons. Preservation of capital is always important. Buying companies with real earnings protects me in the down markets. We all work hard for our money. It makes no sense to give it away. That’s why I believe it’s important to buy stock in companies with real earnings.