5 Words That Could Save Your Portfolio

I don't know about you, but investing after the 2008-2009 meltdown feels eerily similar to being an Oklahoma Sooners' football fan on the eve of the yet another BCS bowl game (the Sooners have lost their last five BCS outings).

Which is to say that I know the portfolio I've built should be a winning one -- yet I can't help but feel like it will somehow end up letting me down in the long run.

One step forward, two steps back
For one thing, any time I start making some real money on a company like Apple or Chipotle, I get blindsided by blow-ups -- both literal and metaphorical -- at companies like Transocean and Clearwire.

And unfortunately for my net worth, the number of iProducts flying off the shelves and barbacoa burritos flying out the door never seem to offset the panic selling caused by things like the Gulf oil spill or the constant speculation that LTE is about to sink Wi-MAX (and Clearwire along with it).

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)

Apple (Nasdaq: AAPL  )

8

None

Freeport-McMoRan (NYSE: FCX  )

6

-15.5% YOY revenue growth, 1.15 debt-to-equity ratio

Transocean (NYSE: RIG  )

5

-8.8% YOY revenue growth

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

Altria (NYSE: MO  )

4

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

AT&T (NYSE: T  )

3

-0.80% YOY revenue growth

Sources: Yahoo! Finance and CAPShot.

One stock the Pro team likes
Among the five stocks the Pro team currently has designated as "Buy First" in its $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 the team's other fundamental benchmarks.

In fact, it sports both whopping 72.5% gross margins and employs very little debt. 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.

This article was originally published June 17, 2010. It has been updated.

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. Chipotle Mexican Grill is both a Hidden Gems and a Rule Breakers 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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