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In the second half of 2011, screens that stressed high-dividend yields combined with high levels of working capital led to the most successful investment strategies. So far in 2012, defensive dividend payers have continued their role of outperformer in most portfolios. However margins have begun to creep toward center stage as investors appear to be shedding the current income requirement in search of value.

If you're an investor who identifies with a revived willingness to venture from the fallout shelter, you're not alone. At this point, it may only be a toe in the water of the "risk on" pool, but it's a start. Investing with a slowly increasing level of risk tolerance can be done wisely by focusing on companies with a historically successful mix of fundamental characteristics.

For example, the strategy assumes a total investment of $100,000, and a 12-month holding period. From the universe of domestically traded equities that are in the Value Line index, I screen for companies with a market cap of at least $50 million, gross margin of at least 30%, return on assets of at least 10%, and a price of at least $5, and select only stocks trading above their 200-day moving average. I then rank that list of candidates by pretax profit margin. I run the strategy on the first trading day of the year going back to 1987 and analyze the results.

Over the past 24 years, this investment strategy has earned investors an average return of 27% annually and is up over 21% so far in 2012. The portfolio built the first trading day of 2012 using this strategy is as follows:

Stock

Sector

Current Price (Aug. 8, 2012)

2012 Return on Investment

Paychex Inc. (NASDAQ:PAYX)

Technology

32.92

9.2%

Intuitive Surgical Inc. (NASDAQ:ISRG)

Healthcare

501.22

4.7%

Smart Balance (SMBL)

Con Staples

11.08

100.0%

PDL Bio Pharma (NASDAQ:PDLI)

Healthcare

7.04

15.1%

MasterCard Inc. (NYSE:MA)

Financial

424.45

9.9%

T. Rowe Price (NASDAQ:TROW)

Financial

60.78

5.9%

Gilead Science (NASDAQ:GILD)

Healthcare

56.82

37.0%

Microsoft (NASDAQ:MSFT)

Technology

30.33

14.9%

Qualcomm Inc. (NASDAQ:QCOM)

Telecom

61.45

10.01%

Taiwan Semiconductor (NYSE:TSM)

Technology

14.09

10.8%

As investors proceed to reenter the market and money managers continue to shift holdings away from defensive sectors, this investment strategy may point buyers in the direction of continued outperformance. Executing this strategy today could be accomplished by purchasing the following:

Stock

Sector

Market Cap

Pre-tax Profit Margin

American Capital Ltd. (NASDAQ:ACAS)

Financial

3.4B

173%

PDL Bio Pharma

Healthcare

982M

85%

Southern Copper (NYSE:SCCO)

Materials

28B

52%

Baidu Inc. (NASDAQ:BIDU)

Technology

4.7B

47%

T. Rowe Price

Financial

15B

45%

United Therapeutics (NASDAQ:UTHR)

Healthcare

2.9B

44%

MasterCard Inc.

Financial

53B

42%

Linear Technology (NASDAQ:LLTC)

Technology

7.6B

42%

Oracle Corp (NYSE:ORCL)

Technology

153B

35%

Verisign, Inc. (NASDAQ:VRSN)

Technology

156 M

41%

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Less Defensive Stock Screening