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Value Stocks: Best Fool Community Ideas

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By WendyBG
February 17, 2010

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I am writing this post to tie together some of the best Fool ideas in one place. I encourage others to add to it. Then I will post the collection on the METAR FAQs for future reference.

The impetus for this post is Jeff's excellent POD, "Putting it all together: Making Money."

As a conservative investor, I appreciate it when Jeff, Mungofitch, Mike Klein, and Jack Cade focus on value stocks, especially high-quality, low-risk dividend-yielding stocks.

My approach to selection is to sort Jack Cade's Mr. Goodbuy dividend stock list (which he kindly posts weekly on the BMW Board).

I have observed in past recessions that a high-quality stock whose dividend is higher than the 10 year Treasury bond yield not only gives a good return, but also rises in price after the recession ends.

Mungofitch contributed several key observations:

A Screen for Skeptics

So, here's the general idea:
- Start with the stocks rated in A++ or A+ for Financial Strength by Value Line (there are about 120 of them, usually).
- Of those, consider only the 75 biggest ones by market cap.
- Of those 75, buy equal dollar amounts of the few (anywhere from 3 to 15)
that have the highest current earnings yields (lowest P/E ratios).
- Hold them all for a while (a fixed number of months, 1 or more).
- When the hold period is over, find the new picks, sell anything no
longer top of the list, and buy the new top picks.


Well, when it comes to investing, I like nothing better than a good yawn! Thanks, Mungofitch!

Jack Cade converts the Value Line Financial Strength to a number, which he publishes every Sunday on the Mr. Goodbuy list. Jack also creates a Quality Factor (QPZ) that he calculates from Financial Strength, growth persistence and price stability (all from Value Line). A company with a high QPZ is a very strong company.

The Mr. Goodbuy Dividend stocks (Table 9) require that each company have Morningstar Stewardship (shareholder friendliness) of A or B, and also a dividend yield >= 2.5%.

Mungofitch further looks at whether it's a good time to be in the market.

At the end of each month, find the S&P high for the month. Check to see if it's the highest one in the last 7 calendar months. (the month just ended, and the 6 previous months). If so, let's call that month a "winner".

Then, check to see if any of the last four months is a winner. (the month just ended, and the 3 previous months). If so, stay in the market for the next month.  If not, go to cash for the next month.

So, you only have to check once a month at most. (if any of the last 3 months was a winner, you don't even have to check).

One bonus of this system is that there are only two number to tune, 4 and 7. They have to be integers, and are only sensible in the range of 5 plus or minus a hand full. ...

For those who want to be even more conservative and are less greedy, you can be bullish only if the prior month was a winner. This has returns 1.25% per year less than buy and hold, but you're only in the market 43.5% of the time and the risk is only 51.9% as high as buy-and-hold. The odds of making money in any given year go up to about 88%, and the worst rolling year is only -8.4%.

... In short, if there was a new recent high last calendar month, this calendar month is usually a pretty safe bet. The next two months are a bit riskier, but still lower risk than usual.

More conservative and less greedy -- lower risk than usual -- that sounds good to me :-).

Finally, mungofitch presents a hedge:

Another possible approach is to stay long this screen, but add  some short-S&P hedging when some simple long-cycle bear signal triggers.  For example, if you stay 100% long this screen all the time, but then  add 100% short the S&P index with futures on a calendar-month basis  (no checking daily!) using this signal...then things get a whole lot better.

The signal is the one in the previous post.

To sum it up:

1. Use Mungofitch's signal to decide whether the market is bullish or not.

2. Use the Mr. Goodbuy list to locate the high-quality stocks (in my case, high-quality dividend yielding stocks). Pay special attention to the stocks whose dividend > the 10 Year Treasury yield.

3. Go long the ones with the lowest P/E ratio.

4. If the Mungofitch signal is bullish, keep the stocks long. If the Mungofitch signal is bearish, either sell the stocks or buy a short S&P index ETF to hedge.

I always check Mike Klein's BMW charts before buying any stock. It's part of due diligence.

And in a bow to the technical traders (such as trenchrat), I always check the chart to make sure I'm not buying a falling knife.

As a fundamental investor, I always do due diligence (financial statements) before buying a stock.

With a tip of the hat to Zeelotes and the Mechanical Investing Board -- that's too complicated for me. I like the simple screens.

I hope that others will refine this technique for lower-risk investing in value stocks.