2004: The Year That Was

TMF Edible takes a look in the rearview mirror

The Story of Nokia

TMF Bent relates his tale of Nokia

Great Companies

What Makes a Great Company Great?

When examining a company in which to possibly invest, make sure that the firm is a first-class operation. Here are some marks of great companies.

Powerful brands. Think of well-known brand names in America or, better yet, around the world. Brands such as Coca-Cola (NYSE: KO), General Electric (NYSE: GE), Nokia (NYSE: NOK), McDonald's (NYSE: MCD), Ford (NYSE: F), and Disney (NYSE: DIS) fit the bill. If most people don't yet know a company's name, then it still has a lot of work to do building its brand.

Significant products or services. Look for a company that's selling something people really need or really want. Pharmaceutical companies, for example, manufacture products that people will buy whether they're flush with funds or strapped for cash. Firms such as Apple Computer (Nasdaq: AAPL) and Starbucks (Nasdaq: SBUX) offer consumers things they love. Also appealing are repeat-purchase products -- things people buy over and over again -- such as express mail delivery, cheeseburgers, and shampoo, instead of items bought only sporadically, such as cars or trash compactors.

Strong competitive position. Ideally, a company will have advantages over its peers. These can include brand value, economies of scale (if it's making so much that its costs per item are relatively low), and bargaining power. (Wal-Mart (NYSE: WMT), for example, is so big that it usually calls the shots.)

Consistent, reliable earnings and sales growth, and robust profit margins. Look for sales and earnings to have increased steadily over past years, suggesting that management is planning and executing well. Stack your company's gross, operating and net profit margins up against those of its competitors to see who's wringing the most value out of each dollar of sales.

Lots of potential. A stellar past isn't enough. Make sure the company has much potential for growth. Is it expanding abroad? Is it coming out with exciting new products or services? Are its offerings taking the country by storm? Is it spending significantly on research and development?

Finally, consider how well you know the company and industry and how much you'd enjoy keeping up with its developments. A firm might have enormous potential, but if reading about it puts you to sleep, it might not be the best addition to your portfolio.

-- from The Motley Fool Investing Basics newsletter, 12/21/04

Charlie the dumb investor

Was it really dumb luck?

the stock screens of Kevin Matras

Every week, Zacks presents a stock screen by Kevin Matras. It always touts a very back-tested high return. (I suppose if it didn't output a high return, they wouldn't present it.) As far as I remember, the screen always has the Zacks ranks as one of the criteria (makes sense) and usually an indicator that the stock is moving up (momentum), so as such they probably should all be viewed as short term (three to six months or so) screens. This week's screen looks interesting.

"Cheap stocks and Big Returns"

This screen is one of Kevin Matras' favorites for when he's
looking for low priced stocks. The premise behind this screen
was to try and find cheap stocks (stocks at or less than $15)
that were trading at (or consolidating) just under their 52
week high, in an effort to `get on board' before they broke-out
to new highs.

In other words, Kevin wanted the stocks to be near their highs,
but most of all, he was looking for stocks that had been turned
back from their recent highs, had consolidated their advances
on their trek higher to those highs and were just now starting
to make a run at the 52 week high again.

Kevin is a big fan of getting into basing patterns (relatively
narrow trading bands) after an uptrend has been established.
Especially near recent price highs, since stocks making new
highs tend to make even higher highs.

He has found this screen to be an ideal strategy for finding
low priced stocks with a high probability of success.

Parameters:

- It searches for stocks trading at or below $15.

- They also have to have a Zacks Rank of 1.

- They have to be trading within 10% of the 52 Week high.
(Expressed as Current Price / 52 Week High greater than or
equal to .90) (Simply put, Kevin is looking for stocks high up
in their uptrend.)

- The % Price Change over the last 4 weeks has to be greater
than or equal to 10% but not more than 20%. (Kevin is looking
for stocks on the move, but not ones that have moved so much,
so quickly, a correction could be in store. Since 10% seems to
get people's attention while follow-thru at 20% typically
signals the beginning of a `trend' or a `breakout', Kevin
wanted to be alerted BEFORE a breakout was seen.

- And lastly, for good measure, he wants the Beta to be less
than or equal to 2. (Active stocks are good, but wildly
volatile ones are not.)

Results:

Kevin ran a series of tests over the last 4 year time span
(2001, 2002, 2003, and YTD 2004 -- thru 11/26/04) as well as a
series of tests for each of the last 4 years individually. He
rebalanced the portfolio every four weeks and started each run
on a different start date so each test would be rebalanced over
a different set of four-week periods. (This was done to
eliminate coincidence and verify robustness.)

Over the last 4 years, this strategy has shown an average
annualized gross return of 66.9% with an average win ratio
(winning periods divided by the total number of periods) of
74%. And it holds on average of only 3-5 stocks in your
portfolio each month.

In 2001, the average annualized gross return was 53.5%, with an
average win ratio of 71%. (This year's avg. # of stocks held
per period was 8.)

In 2002, the average annualized gross return was 36.2%, with an
average win ratio of 70%. (4 stocks / avg. per period.)

In 2003, the average annualized gross return was 167.2%, with
an average win ratio of 87%! (3-5 stocks on average.)

And so far, 2004's YTD (thru 11/26/2004) average annualized
gross return is up 45.5%, with an average of 3 stocks per run.
(The S&P is up 7.9% comparatively.)

As of Mon., 12/13/04, 5 stocks had qualified. They are

AKS AK Steel Holding Corp.
BABY Natus Medical, Inc.
CIB Bancolombia.
TZIX TriZetto Group, Inc.
UHCO Universal American Financial Corp.

Note: Even though this screen will generally produce on average
of 3-5 stocks per period, there will be times where literally
no stocks will qualify due to the narrowness of the parameters.

Tip: Since this screen has such a great track record and such a
high success rate, if nothing comes through on Kevin's first
pass, he'll run it day after day, until the screen spots
something.

(This is one of the reasons why Kevin runs so many backtests
using different start dates in my analysis. He wants to make
sure that the strategy has a history of picking good stocks
`at any time'.)

Since I don't do short-term trading, I have never tried any of these screens. But they do look like they have potential if you stick to the system.

[6/15/05] How have the picks done?

AKS has gone from about 14 to about 7

BABY went from about 8 to 10.5

CIB went from about 12 to 16

TZIX went from about 9 to about 13.5

UHC went about 15 to near 24 today

All in all, it looks like the strategy worked out despite one pick losing 50% of its value.

How to Value Stocks (DCF)

[9/21/06] Tim Beyers runs through a DCF calculation

[12/12/04] VectorVest explains their methodology of valuing stocks. (Warning: contains math.)

VectorVest's formula

This Discounted Cash Flow Calculator explains the methodology behind it


David Meier explains DCF

[5/11/05] Another explanation

Quicken's intrinsic value calculation

types of investors

What type of investor are you? (see mia 9/14/04)

Or you could be a monster (see mia 10/28/04 comments on PLB)

Durrell interviews Dreman

Dreman talks about overreaction

Dreman is still bullish on MRK and FNM

[5/28/06] see also David Dreman and the Long View

Four value investors

Four value investors: Marty Whitman, Chris Browne, Jean-Marie Eveillard, Mario Gabelli gather in New York City

two questions

Two questions to ask when deciding on a investment

1. Is this a high-quality company that I'd love to own a piece of?
   
2. Is the price right to buy it now?

Average Broker Recommendation

Zacks.com is first and foremost a free resource to help you make more profitable stock picks. In this space each week, we will provide insights into various tools and data points provided on Zacks.com, and how to use them to improve your portfolios performance.

Average Broker Recommendation

Perhaps the most often used (and abused) stock research item is
the Average Broker Recommendation (ABR). Lets dig into the ABR
and learn how to employ this information to make better
investment decisions.

What is the ABR? It is a simple statistic that tries to
synthesize all Wall Street research into an easy to digest form.
Lets take a look at the example of the ABR for General Electric
(GE). Currently there are 17 brokerage firms that have a rating
on GE with 10 Strong Buys, 3 Buys, 4 Holds and 0 Sells. Now we
layer on a weighting system from 1 to 5 with Strong Buy being a
1. This adds up as follows

10 Strong Buys x 1 = 10
3 Buys x 2 = 6
4 Holds x 3 = 12
0 Sell x 4 = 0
0 Strong Sells x 5 = 0
Total points = 28

28 Total Points divided by 17 brokerage firms with ratings =
1.65 ABR

On the surface an ABR of 1.65 sounds pretty good as it is saying
that the average brokerage firm believes that GE is somewhere
between a Strong Buy and a Buy. However, before you place your
life savings in this stock you may want to read this next
paragraph

The ABR of a stock is virtually worthless in helping you pick
good stocks. Hows that? The usual assumption by investors is
that the better the ABR (closer to 1) the more likely they are
to profit with the stock. However, our studies over the years
show a very minor correlation between ABR and results. In fact,
when the market is going poorly, the stocks with the best ABRs
dramatically underperform the stocks with the worst ABRs.

We dont know the exact reason why this is the case, but the
general assumption is that when everyone on the street is
recommending a stock, then it will probably be priced too high
and more likely to fail miserably on any bad news. Conversely,
an out of favor stock will probably already be trading at a
steep discount and any turnaround will create a nice bounce for
the stock.

So, now youre probably thinking to yourself the key to eternal
happiness is to find stocks with the worst ABRs. Unfortunately
we dont recommend that either because over the long haul these
stocks will underperform the average stock (meaning that both
the best and worst ABR stocks underperform the market).

The good news is that we have indeed found an effective way to
invest using the ABR. Our research has uncovered that stocks
with the biggest positive change in ABR over the last month will
outperform the market. We call this the Piggyback Strategy.
Here are the results of the test for the 10 year stretch from
April 1992 to March 2002

Top 10% of ABR Changes = 18.3% average annual return
Average Stock = 10.7% average annual return
Bottom 10% of ABR Changes = 0% average annual return.

There are some great free resources on Zacks.com to take
advantage of these changes in ABR to find some potential winners
as well as stocks to avoid.

Pre-Defined Screen: Best Change in Avg. Broker Rec 1 Week
http://at.zacks.com/?id=1501

Pre-Defined Screen: Worst Change in Avg. Broker Rec 1 Week
http://at.zacks.com/?id=1502

Profit Tracks: Upgrades and Revisions Strategy. These are stocks
that are enjoying both positive estimate revisions and brokerage
rating upgrades. This strategy has handily beat the market over
the last 4 years. Learn more at http://at.zacks.com/?id=1503

Analyst Recommendations Research Report: This research report
gives details on the break down of recommendations for any
stock. Here is a link to view the report for GE. Once there you
can enter any ticker symbol to get the Analyst Recommendations
report for the stock you want. http://at.zacks.com/?id=1504

Want more insight on the Piggybacking Strategy? Mitch Zacks
covers it in detail in his critically acclaimed book Ahead of
the Market. To learn more about this book and special 30%
discount go here http://at.zacks.com/?id=1505

-- From Profit from the Pros - 9/22/04

Hunting For Value

How Philip Durrell hunts for value

part 2

Phil Knight steps down

Phillip Knight will step down as CEO of Nike. Will remain chairman of the board.

betting on Lampert

My latest buys were Kmart and Sears this morning as detailed in my stockmarketeers group. The success of this transaction will lie on Edward Lampert's ability to find value in the combining of the two companies. Given his track record, I'd give him a better than 50-50 shot.

Here's more on Lampert.

New York Times story

More on the merger from fool David Meier.

Morningstar's Pat Dorsey chimes in with this analysis

Presidential Rally

The market has rallied furiously in the last couple of weeks pushed up in the last few days by the Bush victory. The Dow has gone from oversold to overbought with an RSI of 69.6 and stochastics of 93.28. While some are looking for a breakout, this hasn't happened the last three times it rallied from a valley. I'm looking to take some profits on overweighted positions that have run up in the rally.

10 Big Investing Mistakes

[5/10/06] 12 Common Investing Mistakes

[5/5/06] 8 Common Investing Mistakes

[11/6/04] Or are they?

early Halloween

The market took a hit today as the Dow fell 108 to 9758, the Nasdaq tanked 38 to 1915, and the S&P 500 lost 11 to 1096. The Dow is at the lower end of a declining channel line and RSI is down to 30.7. It could be ready to bounce like it did the previous three times. The $SPX and $COMPQ don't look as oversold. The RSI for the Nasdaq is flat neutral at 50.0.



Here's Band's take, excerpted from his hotline.

Halloween comes early to Wall Street! Stock prices declined again this week, with the headliner Dow Jones Industrial Average closing today at a new low for 2004. Record oil prices are clearly spooking investors.

But is the picture really so haunting? We don’t think so. For one thing, the NASDAQ actually gained a couple of points on the week. Relative strength by the tech-heavy NASDAQ has occurred at several important bottoms in the past two years. We also believe the election uncertainty is starting to lift, which should help the market. We continue to look for a final low very soon, to be followed by good November-December rally.

Catch The Low

from Richard Band's Journal

CATCH THE LOW
October 20, 2004, 10:28 am EDT

The stock market is forming a good, tradable bottom in here. Within the next couple of days -- probably well before the election results are known -- Wall Street should make its peace with the political forces at work and move on to the traditional post-election relief rally.

What makes me so sure there’s a rally coming? I’ve kept an eagle eye on one of the market’s most reliable contrary indicators -- the behavior of the traders in the options pits. Whatever investors may say to pollsters or the media, the options data tell us what folks are doing with their money.

Truth is, the options players have been buying an exceptional number of puts (downside bets) lately, compared with calls. In fact, we’re seeing essentially the same degree of pessimism that prevailed at the lows in March, May and August this year -- even though the major market indexes are hovering comfortably above those lows.

I foresee a rally of 5%-7%, maybe a little more, on the S&P 500 by year-end or early 2005.

Rukeyser steps down from TV

Louis Rukeyser has decided to suspend production of his television show

MWD, FNM send stocks lower

NEW YORK (Reuters) - Stocks were knocked lower on Wednesday after a U.S. government review questioned home finance company Fannie Mae's (NYSE:FNM - News) accounting methods, while investment bank Morgan Stanley (NYSE:MWD - News) reported a drop in quarterly profit.