New Recipe for Success
by David Forrest (firstname.lastname@example.org)
Woodbridge, VA (April 16, 1999) -- One of the basic principles of being a Motley Fool is the notion that we're "relentlessly searching for better solutions." If you ever visit Global Fool HQ, you'll even see this phrase hanging next to the Foosball table and beneath the pretzels at the front desk. In the spirit of relentlessly searching for better solutions, I've been thinking about new ways to combine some of the things we talk about when screening stocks, namely Relative Strength, Beta, and stocks that are at or near their highs.
Relative Strength is a measure of how well a company's stock is performing relative to the rest of the market. I use a software program called TeleChart 2000 to filter for all of this stuff, by the way. It allows me to sort and search on a lot of different things. In order to search for high relative strength stocks, I merely sort the entire universe of stocks they have by the 26-week return percentage. I eliminate all stocks trading below $5 and go from there.
Beta is a measure of a stock's volatility. High-beta stocks generally do much better than the total market in good times and much worse in bad times. Low-beta stocks generally have less of a reaction than the general market in both up and down times. My premise is that the market historically rises, so owning high-beta stocks might be a good idea.
Stock at or near their highs is not a new idea. Many people have followed this idea in the past, including Bill O'Neill in his CANSLIM teachings and Tom and Dave in the Motley Fool Investment Guide.The thought here is that stocks hitting new highs are in favor with investors and, as an extension, perhaps they are doing all the right things with their businesses. This isn't always the case, but the premise exists nonetheless.
Using the three elements, we look for stocks in the top 95th percentile for both 26-week return and beta and then include any stock at or within 5% of a new high. What happens when you mix these three? Do you get chocolate in your peanut butter? Swiss almonds in your vanilla ice cream? Nope. It seems you get a list of some amazing performers. In recent months, the following stocks have appeared on the list. It's fair to note that they continue to be on the list, after several months. They include:
VeriSign (Nasdaq: VRSN)
Aware (Nasdaq: AWRE)
America Online (NYSE: AOL)
Yahoo! (Nasdaq: YHOO)
You'll notice that all of them are involved in the Internet. Of course, the Internet sector has been the place to be in the stock market, so maybe this screen does its job. Let me state that this really is momentum investing with a bit if a fine tune. Filtering out stocks not right near their highs helps you avoid anything that might be slipping lower. Looking for high beta emphasizes the volatility and possible strength. Using stocks with high 26-week return helps give a sense that something might be going well with the company. It also keeps out a lot of stocks hitting new highs that haven't been great performers.
All of the things I mention above in a positive light can also be turned on their heads and talked about negatively. In the past few days we've seen these highfliers get slammed. So, if you decide to experiment with this sort of screen at home, remember that volatility is a two-way street.
Have a great weekend,