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High-Quality Stocks With Price Momentum - 14189 views
The following commentary comes from an independent investor or market observer as part of TheStreet’s guest contributor program, which is separate from the company’s news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.
NEW YORK (Scott's Investments) -- I update the following portfolio/screen on a monthly basis on Scott's Investments. March's list included 35 stocks, and the 10 top-rated stocks returned an average of 2.23% compared with -1.57% for SPY. The entire list of 35 stocks last month returned an average of 5.4%, led by Select Comfort (SCSS) at 38.19%.
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The screen looks for the following:
• earnings growers still reasonably priced as judged by the PEG ratio
• low debt
• a history of high return on equity and investment, and
• price momentum as gauged by the percentage the stock is trading to its 250 day high.
• The stocks are then ranked based on fundamental factors as compiled by stockscreen123.
35 stocks qualified for this month's list. As with last month's list, this tells us that individual stock momentum still exists in the market and the fundamental factors on the list are easy to find among the high-momentum stocks.
Some popular names made this month's list, including Apple (AAPL) and Intel (INTC). AAPL has struggled to breach its high set in February, even after another blowout quarter. It is priced at a reasonable forward projected price-to-earnings of 12.48 and P/E-to-growth of 0.84. However, keep in mind that these are forward projections and are predicated on Apple's continuing to show strong earnings growth. It also has a return on equity and return on investment in excess of 30% and no long-term debt.
Intel is slowly transforming itself into a favorite among dividend investors. It currently yields 3.3% and has little debt. It also has a return on equity and return on investment in excess of 20%. Finally, it has a forward P/E of 9.1 and a PEG of .91. The projected PEG and P/E of Intel are based on much lower earnings growth than a high-growth stock such as AAPL, which has shown significant and consistent earnings growth in recent years. However, for investors seeking a combination of yield, price momentum, a clean balance sheet and reasonable valuation, Intel is worth consideration.
The rationale for this screen is based on back-tests showing that stocks with low PEG ratios, low debt and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either abandon this type of strategy entirely when the S&P 500 or another major index is below a long-term moving average, or hedge positions using one of the methods I profiled here .
Below are the back-test results for this strategy starting on March 31, 2001. Returns exclude commissions and taxes and assume 0.25% slippage. No position accounts for more than 25% of the portfolio (relevant in cases when the screen produces less than four results), and it was equally rebalanced every 4 weeks. The test was conducted using stockscreen123:
Two possible tools an investor could use to conduct this screen on his/her own are
stockscreen123 or Finviz. This screen was conducted using stockscreen123. For the full list of stocks and real-time results, please see the right hand side of Scott's Investments.
Scott's Investments focuses on consolidating and tracking free online investment resources for the public with an emphasis on ETFs, portfolio/trading strategies and macroeconomics. Follow Scott's Investments on Twitter.