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Robot
Stocks .
a
Simple Stock Selection Strategy With Big Returns
.
Here’s a
simple stock selection strategy that reportedly returned 63 percent in
2003 (including dividends), compared to the overall market’s 29
percent return, as measured by the S&P 500 index. What’s more,
this strategy is no flash in the pan. It outperformed the S&P 500 by
at least 19 percentage points in each of the past five years.
Here’s the
best part. You can use almost any Web stock screener to pick the stocks,
and you don’t have to do any complicated analysis.
It’s called
the Robot Portfolio, and it comes from John Dorfman, whose investing
columns run twice weekly on Bloomberg’s financial site (www.Bloomberg.com).
Dorfman, who runs Dorfman Investments, a money management firm
headquartered in Boston, practices the value style of stock picking.
Value
investors look for stocks the market doesn’t like. Maybe they are
facing slowing growth, or confronting new competition or changing
economic conditions that casts doubt on the their future viability. But
value investors know that stocks move higher when the underlying
company’s results exceed the market’s expectations. So they seek out
these unpopular beaten down stocks because, in their view, the
market’s low expectations for those stocks are easy to beat.
One thing I
like about Dorfman’s Bloomberg column is that every so often he
describes a relatively simple stock selection strategy, uses it to pick
a 10 stock portfolio, and then reports on the portfolio’s performance
one-year later. If the strategy produced worthwhile results, he picks
another 10 stocks and tracks it for another year.
Robot
Portfolio
A few weeks ago, Dorfman updated readers on the performance of his Robot
Portfolio, the same numbers I related to you earlier, and listed this
year’s Robot stocks.
The Robot
strategy finds the 10 cheapest stocks, based on price/earnings ratio
(P/E), that meet just three simple qualifications. I’ll go into more
detail in a minute when I’ll show you how to come up with your own
list of Robot stocks.
In this
year’s Robot Stocks column, Dorfman was less than enthusiastic about
four of the picks. They were title insurance companies, an industry that
he thinks will be hurt by rising interest rates.
You can see
Dorfman’s most recent column by selecting News & Commentary on
Bloomberg’s homepage, clicking on Commentary
(left-menu), and then selecting John
Dorfman from the All Columnists list. To see older columns, scroll
to the bottom of that column and click on “More John Dorfman.”
Create
Your Own Robot Portfolio
Bloomberg only archives Dorfman’s columns for about a month, so his
January 2 Robot Stocks column will probably be gone by the time you read
this. But that’s not a problem because you can run your own Robot
screen. There are two advantages to running your own screen.
For starters,
you can create a new list anytime during the year, but more important,
you can tailor your list to avoid stocks in industries you think are
cheap for a good reason, and still come up with 10 stocks that fit
Dorfman’s Robot philosophy.
Quicken's
Stock Screener
Here’s how to find Robot picks using Quicken’s stock screener. From
Quicken’s homepage (www.quicken.com)
select Investing and
then click on Quotes
& Research. Then select Stock
Screener and finally pick the Full
Search option.
Dorfman likes
small stocks, but not too small. So he requires stocks with at least a
$500 million market capitalization. Enter $500 million as the minimum
acceptable Market Cap in the Valuation section of the screen.
Dorfman only
wants profitable companies, that is, firms with positive net income. You
can’t search for net income directly on Quicken, but you can
accomplish the same result using its Net Profit Margin parameter (NPM).
Since NPM is net income divided by sales, NPM will only be positive if
the firm’s net income is also positive. Consequently, you can avoid
money-losing firms by specifying a minimum 1 percent NPM (Financial
Strength section).
For his final
qualifying requirement, Dorfman requires that passing stocks have a
maximum debt to equity ratio of 1, meaning that the firm’s debt cannot
exceed its shareholder’s equity (book value). You can satisfy that
test by requiring a maximum long-term debt to equity ratio of 1
(Financial Strength).
Click on Show
Results to run the screen after you’ve entered the three search
conditions. Quicken listed more than 1,300 stocks when I ran the screen
last week. The Robot stocks are the 10 cheapest stocks, meaning the 10
with the lowest P/E ratios.
You can sort
the screen results with the lowest P/E stocks at the top by selecting
P/E Ratio from the Sort dropdown menu above the stock list, and then
clicking the Show button.
Add Common
Sense
Inspired by Dorfman’s lack of enthusiasm for the industry, I
eliminated all stocks involved in the residential real estate market. I
also deleted stocks not headquartered in the U.S. or Canada because, in
my experience, financial information on foreign stocks can be seriously
out of date.
After those
cuts, the 10 cheapest stocks were: Winn-Dixie Stores (supermarkets),
Flagstar Bancorp (savings bank), Fresh Del Monte Produce (produce
marketer), Odyssey RE Holding (reinsurance), Montepelier RE Holdings
(reinsurance), Renaissancere Holdings (reinsurance), Canadian Natural
Resources (oil & gas), Invision Technologies (luggage screening
devices), Partnerre (reinsurance), and Marathon Oil (oil & gas).
The list was
reasonably diverse except for the four reinsurance firms, which are
companies that share insurance risks with the policy originators. Given
all that’s going on in the world today, it’s understandable that the
market is doesn’t like that industry.
Dorfman’s
Robot Stock’s returns are impressive, but, alas, as we all know, past
performance is no guarantee of future results. So only put you play
money, not funds you’re going to need for retirement, into Robot
stocks.
published 2/8/04 |
