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. (PAYX) | Technology | 32.92 | 9.2% |
Intuitive Surgical Inc. (ISRG) | Healthcare | 501.22 | 4.7% |
Smart Balance (SMBL) | Con Staples | 11.08 | 100.0% |
PDL Bio Pharma (PDLI) | Healthcare | 7.04 | 15.1% |
MasterCard Inc. (MA) | Financial | 424.45 | 9.9% |
T. Rowe Price (TROW) | Financial | 60.78 | 5.9% |
Gilead Science (GILD) | Healthcare | 56.82 | 37.0% |
Microsoft (MSFT) | Technology | 30.33 | 14.9% |
Qualcomm Inc. (QCOM) | Telecom | 61.45 | 10.01% |
Taiwan Semiconductor (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. (ACAS) | Financial | 3.4B | 173% |
PDL Bio Pharma | Healthcare | 982M | 85% |
Southern Copper (SCCO) | Materials | 28B | 52% |
Baidu Inc. (BIDU) | Technology | 4.7B | 47% |
T. Rowe Price | Financial | 15B | 45% |
United Therapeutics (UTHR) | Healthcare | 2.9B | 44% |
MasterCard Inc. | Financial | 53B | 42% |
Linear Technology (LLTC) | Technology | 7.6B | 42% |
Oracle Corp (ORCL) | Technology | 153B | 35% |
Verisign, Inc. (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.
