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We continue to look for ways of finding stocks that have long-term value and can provide stability in the treacherous financial waters we are currently navigating.

Dan Caplinger of the Motley Fool puts together a couple of filters to find value companies with strong fundamental businesses. His filter started with value stocks -- S&P 500 stocks that had attractive valuations of 12 times AND they had to have returns on capital of at least 20%.

A combination of value along with efficient operation is attractive to me and Dan further separated them into three groups:

Stocks that makes Dan's recommended list

  • Intel (NASDAQ:INTC): Microprocessor manufacturer wanting to expand into mobile applications
  • Freeport-McMoRan Copper & Gold (NYSE:FCX): Mineral mining
  • Joy Global (NYSE:JOY): Mining equipment
  • CF Industries (NYSE:CF): Fertilizers
  • Cummins (NYSE:CMI): Diesel and natural gas engines

Those noted but need better market conditions to rebound

  • Microsoft (NASDAQ:MSFT): Partner to Intel in PC's also wanting into mobile apps
  • Lockheed Martin (NYSE:LMT): Security and aerospace
  • Western Union (NYSE:WU): Money movement

One to avoid

Apollo Group (NASDAQ:APOL): For-profit educators. The industry has taken criticism lately for questionable practices of some.

I am going to build a selection of each of the sets and compare them with our reference ETF portfolio.

AssetFund in this portfolio
REAL ESTATE(NYSEARCA:ICF) iShares Cohen & Steers Realty Majors
CASHCASH
FIXED INCOME(NYSEARCA:TIP) iShares Barclays TIPS Bond
Emerging Market(NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF
US EQUITY(NYSEARCA:DVY) iShares Dow Jones Select Dividend Index
US EQUITY(NYSEARCA:VIG) Vanguard Dividend Appreciation ETF
INTERNATIONAL EQUITY(NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx
High Yield Bond(NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd
INTERNATIONAL BONDS(NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond
  • 5 Value Stocks With Profit-Producing Power -- Total of $10K invested equally in each stock
  • 3 Value Stocks With Profit-Producing Power -- But Wait -- Total of $10K invested equally in each stock
  • Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
  • Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)

Portfolio Performance Comparison

Portfolio/Fund Name1 Week
Return*
YTD
Return**
1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate-1.0%1.4%8.2%76.8%13.0%119.1%7.3%56.6%
5 Value Stocks With Profit-Producing Power1.5%7.1%1.1%2.8%28.1%81.0%14.1%28.8%
Retirement Income ETFs Strategic Asset Allocation Moderate-0.9%2.6%1.5%10.2%11.1%101.2%1.6%6.5%
3 Value Stocks With Profit-Producing Power -- But Wait-0.1%5.3%8.4%39.0%6.0%31.3%0.2%-1.3%
APOL--41.8%-26.8%-38.3%-19.9%-35.8%-8.2%-12.6%

*: NOT annualized **YTD: Year to Date

Working up from the bottom of the list:

  • It's easy to see why avoiding the Apollo Group is a good idea. It shows that these metrics can conceal a company that it is better to avoid.
  • The three stocks with potential show some reasonable short-term results but the five-year outlook isn't good. It isn't clear to me whether this is a sign of bad times in the past and better days ahead. I wouldn't bet on that from Microsoft and Lockheed Martin as both of them are facing challenges ahead and it isn't clear that strong growth is realistic.
  • The benchmarks sandwich the six value stocks that Dan recommended and they have turned in decent long-term results but the short term has been more challenging. The volatility numbers show that there is significant risk associated with the growth.

Three-Month Chart

One-Year Chart

Three-Year Chart

Five-Year Chart

The graphical data gives me the clearest tradeoff -- you can see significant but choppy growth. This is a selection that is worth pursuing but it needs more analysis of each of the companies. I also think that there may be a better combination of companies that would reduce volatility by spreading across more market sectors.

This is a good start but more analysis is required to find a balanced selection.

More analysis...

Source: 5 Value Stocks With Profit-Producing Power

Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.