Picking winning stocks is what the Bumblebee Guy loves to do. Those of you who have been reading my articles for some time have probably been wondering just how I pick the winners. Now I'm going to tell you. This article should prove particularly useful to those of you who prefer investing in individual stocks rather than mutual funds.
My approach combines technical and fundamental analysis with market timing. It is the approach that I teach in my investment class at Western Nevada Community College. In sum, it is the discipline of buying the best companies at a reasonable price, at the right time.
You should also understand that I treat investing in a taxable portfolio differently than a tax deferred retirement account. That means when investing in a taxable environment, I will trade based on market timing much more reluctantly. Current tax laws strongly favor buying and holding stocks with consistently outstanding year to year performance for at least five years. However, tax deferred accounts, such as 401(k) or IRA plans, are ideal for using market timing, but you must know what you are doing at all times. Market timing is like flying a fighter jet airplane. If you are not fully competent, technically and emotionally, stay on the ground!
Now I will tell you how I have selected stocks for two of my personal accounts. One is taxable. The other account is a tax deferred retirement account.
Between the two accounts, I have bought about 60 different companies. I actually selected the companies over the few months after my last sell signal back in March 2000. I monitored their performance as the broad market fell until my most recent buy signal.
Overall, my goal is to own the next generation of Microsofts, Intels, Computer Associates or Compaqs. I want to buy them when they are like Microsoft was during its first five years after becoming a publicly traded company. My portfolio is turbo charged. It is not for income oriented "widows and orphans."
These are my selection criteria: 1) Both revenues and earnings per share of common stock must have grown at least 20 percent each year for the last five years. 2) Return on investment must be at least 20 percent each year for the last five years. 3) Revenues and earnings for the last three months must have grown by at least 5 percent; i.e., 20 percent plus annualized. 4) Projected revenues and earning for the next 12 months must be at least 20 percent. 5) The current P/E ratio (current price divided by trailing 12 months earnings) must not be greater than 20-to-1.
After selecting stocks with these aggressive revenue and earnings criteria, I will prefer companies with no debt, and increasing cash flow from operations. If they have debt, I prefer companies with debt accounting for no more than 30 percent of their permanent capital; i.e., long term capital. Lastly, I look at published stock analysis reports by major analyst companies such as First Call. They must have analyst rating of "buy" or preferably "strong buy."
These selection criteria will glean about 80 companies from a universe of over 10,000 publicly traded companies. They are the best publicly traded companies in the United States, both fundamentally and technically. These are the stocks best situated for long-term aggressive share price appreciation and outperformance of all the major stock indexes.
When buying, I allocate a maximum of 2 percent of my capital for any one purchase candidate. That degree of diversification is necessary. I learned many years ago there are always factors which can adversely affect an individual security that are totally unpredictable. These are non-quantifiable risks and can cost you a lot of money. A maximum 2 percent exposure reduces that unpredictable risk to a non-lethal level. I first buy companies rated "strong buy." If I have any money left, I will buy companies rated "buy."
If during any subsequent fiscal quarter, a company I have purchased fails to satisfy my minimum 20 percent annualized growth criteria for revenue and earnings, I will terminate it with prejudice. No excuses will be allowed. I will show no mercy and take no prisoners. Only consistent excellent performance will satisfy me.
Well, that is the method to my investment madness.
Clifton Maclin is an SEC-registered financial services representative in Carson City.