5 Words That Could Save Your Portfolio

I don't know about you, but this pendulum-swing market has me feeling a bit like Phil Mickelson on the eve of the US Open (where he's been runner-up a heart-breaking five times).

Frankly, it seems like no matter what I do, I'll never quite be able to get my portfolio to where I want it to be.

One step forward, two steps back
For one thing, anytime I start making some real money on a company like Apple (Nasdaq: AAPL  ) , I get blindsided by blow-ups -- both literal and metaphorical -- at companies like Transocean (NYSE: RIG  ) and Freeport-McMoRan (NYSE: FCX  ) .

And unfortunately for my net worth, the number of iProducts flying off the shelves doesn't even compare to the amount of panic selling caused by the environmental catastrophe in the Gulf, or the lukewarm economic outlook from the Chinese government.

To make matters worse, I can never quite figure out when a major-drop represents a great buying opportunity, and when it signifies a skull and crossbones.

So I've decided to do two things ...
First off, I'm heeding some advice my old man gave me on a tennis court when I was about 10 years old: "Always change a losing game."

Not only are those five words the key behind some of the biggest successes in sports history, they're also remarkably similar to Warren Buffett's first rule of investing: "Don't lose money."

With that in mind, I've begun studying the wide-ranging investment strategies used by our Motley Fool Pro team.

After all, they claim that by using both long and short positions, as well as options and ETFs, they can help investors like you and me make money in all markets.

Eight fundamentals the Pro team looks for
While I'm still trying to wrap my head around their options strategies and how I can put them to work in my own portfolio, one thing I have found particularly useful is their CAPShot tool.

This screen combines the power of The Motley Fool's unique community-intelligence platform, CAPS, with eight metrics that the Pro team seeks out in the stocks they recommend, namely:

  • Five-year revenue growth of at least 19%: To identify companies that can grow sales consistently in various environments.
  • Year-over-year revenue growth of at least 14%: To isolate companies whose sales are strong in both the long and the short term.
  • Gross margins of at least 35% (over the trailing 12 months): To find businesses on the upper end of the probability scale.
  • Pre-tax margins of at least 20% (over the trailing 12 months): To isolate the most profitable businesses.
  • Total debt-to-equity ratio of less than 0.50: To identify financially healthy companies with rock-solid balance sheets.
  • Return on equity north of 14%: To find companies that make good use of their shareholders' equity. A 14% return is considerably higher than the 10.4% annualized return of the S&P 500 index since 1926, including dividends.
  • $300,000 revenue per employee: To locate companies that are both ultra-lean and ultra-productive.
  • Current assets to current liabilities ratio of 1.25: To identify financially healthy companies with plenty of liquidity that can pay all of their current bills.

How does your portfolio stack up?

You might be surprised. I certainly was. Just have a look at how my largest holdings held up to this test:

Stock

Fundamental Score (out of 8)

Biggest Fundamental Concern(s)

1-year return

Apple

7

None

96%

Freeport-McMoRan

6

-15.5% YOY revenue growth

29%

Transocean

5

-8.8% YOY revenue growth

(40%)

Caterpillar (NYSE: CAT  )

3

1.4% 5 year revenue growth, -36.9% YOY revenue growth, 3.9% pre-tax margin, 3.37 debt-to-equity ratio

86%

Altria (NYSE: MO  )

4

-27.5% 5 year revenue growth, 2.85 debt-to-equity ratio

30%

AT&T (NYSE: T  )

3

-0.80% YOY revenue growth

12%

All data provided by Yahoo! Finance and CAPShot.

One stock the Pro team likes
Among the six stocks the Pro team currently has designated as "Buy First" in their $1 million real-money portfolio, I've found Intel (Nasdaq: INTC  ) the most interesting.

While this well-known microchip manufacturer falls short of the Pro team's five-year and year-over-year revenue growth targets (owing partly to the cyclical nature of its industry), it meets or exceeds all six of their other fundamental benchmarks.

In fact, it sports both whopping 72.5% gross margins and a 2.7 asset-to-liability ratio. Better yet, it pays a healthy 3% dividend -- an especially attractive defensive bonus in today's uncertain market.

Don't come up short ...
If your current investment strategy is leaving you short of your goals, you should strongly consider changing it. Granted, that might seem like a daunting task, but starting can be easy as measuring the stocks you own against the criteria I laid out above so you can begin to get an idea of how your investments stack up.

If you'd like to learn more about the other strategies our Pro team is using to grow their portfolio, simply provide your email address in the box below. They'll be happy to send you a free report with all the details on how you can begin putting these strategies to use in your own portfolio.

Austin Edwards owns shares of every company mentioned in this article except Intel. Intel is a Motley Fool Inside Value recommendation. Apple is a Stock Advisor selection. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2010, at 2:39 PM, uanant wrote:

    whatever the criteria you gave, could not find any stock in google stock screener. you might want to give something that works

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Related Tickers

8/26/2014 4:00 PM
AAPL $100.89 Down -0.65 -0.64%
Apple CAPS Rating: ****
CAT $108.06 Up +0.09 +0.08%
Caterpillar, Inc. CAPS Rating: ***
FCX $36.39 Down -0.08 -0.22%
Freeport-McMoRan C… CAPS Rating: ****
INTC $34.80 Down -0.01 -0.03%
Intel CAPS Rating: ****
MO $42.86 Up +0.09 +0.21%
Altria Group, Inc. CAPS Rating: ****
RIG $38.52 Up +1.04 +2.77%
Transocean, Inc. CAPS Rating: ****
T $34.50 Down -0.01 -0.03%
AT&T CAPS Rating: ***

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