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