19 Low PEG Momentum Trades

by: Scott's Investments

I update the following portfolio/screen on a monthly basis here. December's list of 19 stocks is here and returned an average of 3.47% for the top 5 stocks on the list versus 3.63% for SPY. The entire list of 19 stocks last month returned an average of 2.59%, led by Varian Semiconductor (NASDAQ:VSEA) at 13.73% and InterDigital (NASDAQ:IDCC) at 13.45%. The previous month IDCC was the leader of the pack, returning 26.58%.

The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio
  • low debt
  • a history of high return on equity and investment, and
  • price momentum as gauged by the percentage the stock is trading to its 250 day high.
  • The stocks are then ranked based on fundamental factors as compiled by stockscreen123.

This strategy of screening stocks has produced stellar returns since this summer. For example, August's list returned a whopping 16.17% versus 7.87% for SPY and July's top 5 stocks returned over 19%.

The rational for this screen is based on backtests showing stocks with low PEG ratios, debt, and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either a) abandon this type of strategy entirely when the SP 500 or another major index is below a long term moving average, or b) hedge positions with a position in SH or write a short option strategy on an equity index or ETF like SPY.

Below are 1 and 5 year test results if an investor were to invest in the top 5 stocks in this screen every 4 weeks. Test results exclude commissions and dividends but include .5% slippage (click to enlarge):

Once again Metropolitan Health Networks, (MDF), is near the top of the list but is no longer ranked first, supplanted by Applied Industrial Technologies (NYSE:AIT). Apple, (NASDAQ:AAPL), remains on this month's list. Two new additions of note for this month are three well known companies, Mastercard (NYSE:MA), Google (NASDAQ:GOOG), and First Solar (NASDAQ:FSLR).

Ticker Name Trend Rank PEGLT ROE%5YAvg ROI%5YAvg
AIT Applied Industrial Technologi Here 99.45 0.98 15.4 12.47
MDF Metropolitan Health Networks, Here 99.31 0.76 19.21 19.01
LRCX Lam Research Corporation Here 98.42 0.91 20.8 17.78
AMAT Applied Materials, Inc. Here 98.3 0.83 12.91 12.11
FCFS First Cash Financial Services Here 95.85 0.95 17.74 14.63
VSEA Varian Semiconductor Here 94.22 0.61 15.09 13.83
NTES NetEase.com, Inc. (ADR) Here 93.47 0.82 36.62 32.93
AAPL Apple Inc. Here 92.82 0.74 31.92 28.48
JOSB Jos. A. Bank Clothiers, Inc. Here 89.2 0.91 21.54 17.83
TSRA Tessera Technologies, Inc. Here 88.45 0.74 12.46 12.27
AZO AutoZone, Inc. Here 87.84 0.98 646.25 24.99
IDCC InterDigital, Inc. Here 85.23 0.77 50.36 23.34
SNHY Sun Hydraulics Corporation Here 84.1 0.18 19.58 18.03
QCOR Questcor Pharmaceuticals, Inc Here 82.22 0.95 48.3 45.63
NVEC NVE Corporation Here 80.95 0.82 23.98 23.98
CTCM CTC Media, Inc. Here 76.86 0.37 17.27 16.96
FSLR First Solar, Inc. Here 75.87 0.85 25.72 22.83
GOOG Google Inc. Here 72.65 0.8 20.13 19.46
MA MasterCard Incorporated Here 67.82 0.96 24.18 16.42
Click to enlarge

Disclosure: No positions in stocks mentioned