SAPI Slugs 2008 – Quant Screen Results

November 29, 2007

S&P Index Slugs (SAPI Slugs) Adapted from Pages 44-45 of The Disciplined Investor – Essential Strategies for Success

According to MSN Money, this simple but effective value search presents a pure yield play. It is similar but potentially superior to the better-known “Dogs of the Dow” search we reviewed on November 14th because it draws from a wider pool of large-cap stocks and includes a secondary financial-strength overlay.

The search was also developed and tested by money manager and author Jim O’Shaughnessy. The strategy calls for buying the top 20 stocks from the result set of this search, ranked by dividend yield. These should be held for 1 year and then rescreened and rebalanced. It can be combined with O’Shaughnessy’s Momentum Growth search to create a balanced 30-stock, 1-year portfolio. This search criteria and others are available in the stock screener section of the MSN Money website and can also be downloaded from The Disciplined Investor website. Below is the criteria used to create the screen with the MSN Money Deluxe Screener.

SAPI SLUGS Criteria

The theory of using more than one screen is to allow for greater diversification within the portfolio. This way, if one particular screening method is sorely out of favor, the other may help to avoid massive losses. In his research, O’Shaughnessy built portfolios for one year each. Translated, this means that once you buy the resulting stocks and effectively hold them for 52 weeks, you can rerun the screen to find the stocks to include in the next cycle.For most individual investors, this is a tedious task and can result in excessive trading fees. Also, as has been discussed, the tax implications alone could be extremely detrimental to a portfolio’s performance. This is precisely why these methods are often used within tax-deferred accounts along with additional fundamental overlays. Suffice it to say that these screens should be used as initial idea generators, not as absolute methodologies.

Click Table to Enlarge

Sapi Slugs 2008

The theory of using more than one screen is to allow for greater diversification within the portfolio. This way, if one particular screening method is sorely out of favor, the other may help to avoid massive losses. In his research, O’Shaughnessy built portfolios for one year each. Translated, this means that once you buy the resulting stocks and effectively hold them for 52 weeks, you can rerun the screen to find the stocks to include in the next cycle. For most individual investors, this is a tedious task and can result in excessive trading fees.

Also, as has been discussed, the tax implications alone could be extremely detrimental to a portfolio’s performance. This is precisely why these methods are often used within tax-deferred accounts along with additional fundamental overlays. Suffice it to say that these screens should be used as initial idea generators, not as absolute methodologies.

This chart shows a 1-Year price performance for the 10 highest yielding stocks within the SAPI Slugs using the above screening criteria.

SAPI Slugs Chart
* There are many more screens along with additional strategies available within the pages of The Disciplined Investor.
Note: Horowitz & Company clients may hold long or short positions in any position mentioned.

TDI Podcast 36: Rags to Riches

November 28, 2007

Guest: Timothy Sykes – Author of An American Hedge Fund

Early in the week, Andrew forecasts that we were due for a swift change and now the capitulation is at hand! Once we saw the consumer step in during Black Friday and the Cyber-Retail follow up, it was clear that the underlying economy is still strong. Even as we saw sentiment wane, the economy is not dead…at least not yet!iTunes Subscribe

Stocks discussed in this episode: (FRE) (BOOM) (MER) (LEH) (BSC)

Tim SykesAndrew’s guest this episode is Timothy Sykes, the author of the book, An American Hedge Fund. He studied Philosophy and Business at Tulane University while turning his $12,415 Bar Mitzvah Gift money into a fully audited pre-tax sum of $1.65 million from 1999 to 2002 before founding his hedge fund, Cilantro Fund Management, LLC in 2003. He went on to graduate with a B.A. in Philosophy from Tulane in 2003. He is also the benefactor of a Tulane University Scholarship, ‘The Timothy Sykes Day Trading Award for the Talented” that is a unique award in that it is awarded to an deserving Tulane student, faculty, or alumni. In 2006, Timothy’sAn American Hedge Fund hedge fund was ranked the #1 Short-Bias Fund by Barclays for 2003-2006 and he was named to Trader Monthly’s 2006 ‘Top 30 under 30″, a list recognizing the top 30 investment professionals under the age of 30.

He recently debuted as a keynote speaker alongside industry legends Steve Nison and Larry McMillan and starred in the television documentary, Wall Street Warriors on MOJO. He has been featured in Reuters, CNN, CNBC, Businessweek, CBSMarketwatch, FOX News, MSN Money, Yahoo! Finance, Forbes.com, Hedgefund.net, Hedgeco.net, Institutional Investor, Page Six, Gawker.com, Dealbreaker.com, Salon.com, The Kirk Report, The Los Angeles Times, The New York Post, The New York Times, The New York Observer, Trader Monthly, Realhoboken.com, Dealbook, Alternative Universe and Absolute Return Magazine.

Andrew’s book, The Disciplined Investor is shipping from Amazon and Barnes & Noble.

Kindly subscribe and go to iTunes or your favorite podcast directory and post a review of the show – This is much appreciated!

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Frolicking at Hell’s Gate – Mortgage Mayhem

November 21, 2007

The only thing worse than running out of Turkey on Thanksgiving is talk about cutting dividends on stocks. This is nothing to take lightly. It ranks up there with yelling fire in a theatre and is almost as bad as telling investors that they cannot withdraw money from their accounts. The recent flurry of negative news concentrating on the financial sector has investors running for cover, as they are apprehensive about what else could lurk beneath the surface. Of course, that point is relatively clear to most. What may not be so apparent is what financial firms will do in their desperation to help defray costs associated with their frolic through Hell’s Gate, now better known as the mortgage business.

It is very troubling to find that the “shoes dropping” are not showing any signs of abating. In fact, it seems that the number of shoes related to the problems in the financial sector can only be matched in quantity to those found in the closets of Imelda Markos. The truth is that this recent announcement by Federal Home Loan Corporation, aka Freddie Mac (FRE) a traditional and conforming lender is much more significant as now, it is known that the spread of the sub-prime problem has seeped into areas which were not anticipated by most analysts.

Direct from the pages of the Freddie Mac website: “as of September 30, 2006 held a $3 billion cushion over the OFHEO mandatory target surplus.

This is real, permanent, at-risk capital that provides the first line of defense in the unlikely event of a financial catastrophe at Freddie Mac. Since shareholders are the ones providing the capital, they – and not the taxpayers – will be the ones to bear the losses. Shareholders expect an adequate return on their investments in exchange for putting their money on the line, but like any other investor, they buy our stock at their own risk.”

According to reports by the company, Freddie Mac saw the fair value of its net assets decreased by about $8.1 billion in the third quarter. Freddie Mac has also hinted at the possibility of the cutting their dividend in a defensive move to protect the required level of capital surplus requirement imposed by regulators. A cut to their dividend would immediately help to stem the reduction of assets due to their ailing portfolio; but whether it is significant enough is yet to be seen. Read more

TDI Podcast 35: A Rant and a Retail Rundown

November 21, 2007

Panel-Kristin Bentz of RealMoney.com and Evan Schuman of Storefrontbacktalk.com on Retail Stocks.

Andrew goes on a RANT about the mess with Freddie Mac and Fannie Mae. This mortgage fiasco is bringing out a bit of steam from his ears. What happened with the Analysts? Why have they not watched our backs? Why have they let us flounder? Let’s get ready to RUMBLE….Something has gotta give!

Our Guests/Panel

Kristen BentzKristin Bentz, the managing editor of RealMoney, joined TheStreet.com in August 2007. A former Wall Street retail analyst, Bentz served as the product manager for consumer equities at Lehman Brothers. She has analyzed retail stocks for Northeast Securities’ Independent Research Group and Ladenburg Thalmann. Bentz writes the blog Talented Blonde. She holds a bachelor’s degree from Arizona State University, a master’s degree in business administration from Fordham University Graduate School of Business Administration. Kristen knows her stuff and it shows during this discussion.

Evan SchumanEvan Schuman of StorefrontBacktalk.com, a terrific retail technology and E-Commerce blog. He also writes for other publications regarding the retail sector. Having covered IT issues for 20 years – and other stuff like legal affairs, politics, Wall Street and the environment for about seven years before that – Schuman is in a good position to gripe about technology trends and sometimes accidentally makes a good point. Evan does a great job in this podcast bringing up some very key points about the retails sector/industry.

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Please pick up a copy of The Disciplined Investor – Essential Strategies for Success. You will be glad you did.

Interested in the audiobook? The Disciplined Investor is now available for download. CLICK

STOCKS MENTIONED

(JILL) (CWTR) (ANN) (CHS) (ANF) (ZUMZ) (CROX) (LULU) (UA) (SBUX) (MCD) (AMZN) (BGP) (FNM) (FRE)

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52,000,000,000 – That’s a lot of Chickens!

November 14, 2007

China ChickensThere are how many people in China? Current estimate put that somewhat incomprehensible total at 1,321,851,888. What has always haunted me is the thought of pork and fowl. Here my dilemma: With that many people, you would assuredly agree that they are eating daily. (for the most part). It is also well known that the regions diet is rich in protein and starch.

Let’s go out on a limb here…Can we estimate that for each person in China, we assume that they eat one chicken a week? If so, WHERE DO THEY PUT ALL OF THOSE CHICKENS? We are talking about consumption at a rate approaching 52,000,000,000 a year! That is just unbelievable.

This is a growing concern as can be seen by the latest economic report:

(UPI) China’s Consumer Price Index rose 6.5 percent in October from year-ago level, equaling August’s 11-year high of 6.5 percent.

The National Bureau of Statistics said the October increase came after easing to 6.2 percent in September. Analysts blamed the increase largely on higher prices for food, including pork, the Xinhua news agency reported.

The CPI, the main gauge of inflation in China, increased 4.4 percent in the first 10 months of the year compared to the same period in 2006, the bureau reported.

The report said food prices jumped 17.6 percent in October and pork prices were up 54.9 percent.

Now, we can look beyond this and realize that there are a vast amount consumables the Chinese people need daily. It is obvious (not a new revelation here) that they require a great deal of materials to satisfy their ravenous appetite. This is not only constrained to food, mind you. Materials and goods such as steel, spices, oil, coal and food are seeing a tremendous supply problem on a global scale due to the population explosion we have seen over the past two decades.

This will continue to benefit U.S. companies that export, especially as we maintain our “unofficial” weak-dollar policy. The main beneficiaries continue to be the raw materials suppliers as well as many retailers. We are maintaining a bullish stance on these sectors as long as there is a seriously overpopulated planet. Rest assures, this is not something that will change anytime soon.

A few stocks that could benefit from this thesis: ZUES, WMT, PEP, ADM, SYY, AA, EP and don’t forget about SAFM (100% CHICKEN)

Horowitz & Company clients may be long and/or short companies mentioned in this post.

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