How would you like to achieve, or even surpass Nasdaq returns with less risk?  

Why would you want to do that? Because most of the money made in the stock market in recent years came from Nasdaq traded stocks. The Nasdaq composite index soared more than 85 percent just last year. But stomach-churning volatility goes hand-in-hand with those astonishing returns. For instance, this year the Nasdaq plummeted 40 percent from its peak on March 24 to its May 24 low. 

The PaceSetters Database, a monthly portfolio of recommended stocks, has outperformed the Nasdaq, and even better, without the huge downdrafts. Since its inception in March 1988, the PaceSetters portfolio has rocketed 973 percent, compared to 926 percent for the Nasdaq, and more than double the S&P 500 Index’s 472 percent gain.

Humble Beginnings 
The PaceSetters Database was started as a hobby by Henry Grinde back in the 1980s. Grinde’s day job was running the Public Register’s Annual Report Service. PRARS distributes free annual reports from more than 3,500 public corporations to anyone who asks. Grinde also publishes "The Public Register," a subscription newspaper for the investment industry.

Grinde, a former trader and market maker, hated to see all the financial information in the annual reports go to waste. He designed special software to sift through the data to pinpoint stocks with strong upside potential.

He started publishing his list of selected stocks, dubbed the PaceSetters Database, in his Public Register newspaper in March 1988. When PRARS established a Web site in 1996 (www.prars.com), primarily to take requests for free annual reports, they added the Pacesetters Database as an extra, no charge feature. You’ll find the link to the PaceSetters Database on PRARS’ homepage.

A Family Affair 
Grinde’s son, Erik, maintains the database. Erik Grinde selects companies with real earnings, positive cash flow, and growing sales and profit margins for processing by Henry Grande’s original program. Any new stocks passing Grinde’s requirements are added to the PaceSetters Database.

Stocks are deleted from the portfolio "when their earnings growth slows, they issue an earnings warning, or their profit margin falls," says Erik Grinde. The list is updated monthly, around the 20th, and reflects data as of the 15th of the month.

There is no fixed number of stocks on the list. I’ve seen as few as 15, and as many as 29. There isn’t a lot of turnover. On average, there is, probably, two changes per month. Of the 23 companies included on the August 15 list, twelve stocks were added this year, six in 1999, three were added in 1998, and two were from 1997.

The portfolio includes both growth and value-priced stocks. About half are tech or biotech names. Grinde’s selection formula rules out companies without earnings, so you’ll only see well-established tech names such as EMC or Broadcom on the list. The August portfolio also included companies from a variety of non-tech industries such as recreational vehicle makers, construction companies, and retailers. Stocks in the financial and insurance industries, along with real estate investment trusts (REITS), are excluded because they cannot be analyzed by Grinde’s program.

Smooth Ride 
The PaceSetters Database achieves its Nasdaq-beating returns without the Nasdaq’s volatility. The results so far this year are a good example.

Despite the Nasdaq’s roller coaster ride this year, the PaceSetters Database has seen only one down month; it lost 12.5 percent from March 15 through April 15. The Nasdaq sunk 28 percent in the same period. Erik Grinde measures the PaceSetters’ performance by monthly periods ending the 15th of each month. Here are the returns he tabulated for the periods ending January 15, 2000 through September 15, 2000, respectively: +5.4 percent, +6.9 percent, + 5.7 percent, -12.5 percent, + 6.6 percent, +3.9 percent, +13.0 percent, + 3.9 percent, and + 4.4 percent.

That’s impressive, especially considering that the Nasdaq is down about five percent for the year, and the broader S&P 500 Index is about even. According to Grinde, "the largest monthly loss ever was 19 percent in July 1996.

The Clunker Problem 
The PaceSetters Database uses a formula, or model, to pick stocks. Nobody analyzes a company’s products, competitive position, or other business and economic trends to choose the stocks. Although the PaceSetters’ formula produces remarkable results on average, it, like all models, can come up with some real clunkers. For instance, August’s number three pick was Jakks Pacific. The toy maker’s stock recently dropped 39 percent in three days when the company said current quarter earnings would come in below analysts’ forecasts.

The clunker problem is magnified when, as in this case, the model produces a long buy list. Many of us are not in a position to buy 23 stocks. Cutting the list down to a manageable size without increasing the risk to unacceptable levels is a challenge. Grinde suggests picking stocks starting from the bottom of the list.

He says the PaceSetters’ list is sorted by price/earnings ratio. The stocks with the lowest PEs are listed at the top. Conventional wisdom says lower PE stocks are safer, and therefore, better investments than overpriced, high PE stocks. According to Grinde, that timeworn cliché doesn’t work. He says stocks at the bottom of the list, the high PE stocks, have outperformed the list as a whole, especially in recent years.