Davy Bui's  Instablog

View the spreadsheet containing all disclosures for my complete equity portfolio, including initial entry points, YTD returns, total returns, etc. through October 31, 2009.

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With Marc Faber making the rounds and predicting that the US$ will go to zero, this week's screen for foreign stocks seems particularly timely. Unfortunately, investors looking to make a move now must contend with a very weak dollar, which makes overseas stocks more expensive. The specific criteria I used are listed below:

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Investors imbue analysts with high levels of credibility at their own risk. Wall Street analysts communicate in their own cryptic language that may impersonate English but rarely means what it says. When is a buy a buy and a hold a sell? In his book, Full of Bull, former Wall Street analyst, Stephen McClellan, divulges many of the open secrets about analyst-speak that gets retail investors in trouble.

This analyst double-speak is the basis for this week's screen. Analysts are often stuck upgrading or downgrading a stock after the big move in the stock has already happened. Here was the criteria for the screen:

• Current Avg Broker Recommendation>= 4.0;
• Number of Brokers in Rating >= 2;
• Optionable = "YES";
• Current Dividend Yield >= 3%;
• Price-to-cash-flow <= 10;

View the full results of the screen in spreadsheet format here.

Analyst ratings of 4.0 or higher indicate a strong sell call. I added in the optionable requirement as well as a yield so that we are paid to wait in case the stock takes a long time to realize its true value.

Interestingly enough, this screen yields nine names, five of which are REITs. The high dividend requirement probably factored in finding so many REITs and it seems analysts are still very skeptical of that sector. The non-REIT names ranged from auto insurer, Mercury General Corporation (MCY), to Christopher & Banks Corp (CBK), the retailer.

Please note that prices listed are as of 10/10/2009, when I ran the screen. Of course, premium members get instant access to the screen as well as detailed valuation data not available on the public site. Get more information about the premium service here.

Disclosure: none

This was the theme behind my latest stock screen. After the massive run-up, investors need to be careful that laggards were not left behind for good reason. So I screened for cheap stocks relative to their expected growth rates while requiring high return on assets (ROA) and return on equity (ROE).  I added an additional requirement that the stock be within 50% of its 52-week lows to make sure I don't buy in at the top. The specific criteria are listed below:

• PEG < 1;
• ROA > 10%;
• ROE > 15%;
• Positive revenue growth in current and next fiscal year;
• Positive EPS growth in current and next fiscal year;
• Within 50% of 52-week low;

As of October 2nd, the screen turned up nine names. You can view the list here, complete with valuation figures and business summaries.

Again, it is important to recognize possible weaknesses in the screens we use. For instance, revenue can be fudged and accounting earnings are not necessarily accurate in representing a business’ true operating status. Unfortunately, the software did not allow screening for cash flow growth. Also, many of the criteria are dependent on analyst estimates, which are notoriously unreliable. Nevertheless, we use screens to generate possible leads for further research, not as a definitive guide for our investments, so any discrepancies should be caught as we dig into a given company.

The results were diverse, ranging from Allegiant Travel Company (ALGT) to home health services provider, Almost Family, Inc. (AFAM). As is the case with many of my screens, small caps dominated the list with only two companies, First Solar (FLSR) and Myriad Genetics (MYGN), topping $1B in market capitalization.  Two stocks, Arbitron (ARB) and the Ensign Group (ENSG), paid dividends to supplement their expected growth. High levels of insider ownership and short interest seemed to run through most of the names on this list. Caveat emptor.

See the full results of the cheap, quality growth screen.


Disclosures: No positions

THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

• Enlightened-American Portfolio: +34.0% YTD (my actual IRR, including cash balance)
• DJIA: +10.7%
• Nasdaq: +34.7%
• S&P 500: +17.0%
• DJ WIlshire 5000: +20.1%
• Russell 2000 (smallcap): +21.1%

September was kind to our portfolio. Obviously, I am  pleased with the 34% return for the year but I am more gratified to have generated these returns while holding ample cash throughout the year. Currently, cash available for investment sits at 37% of investment capital. The large cash position has built up due to a flurry of activity last month:

• As mentioned on my premium website, I exited the bail-out play which was probably more speculative than my temperament could handle. While I sold the AIG and CIT Group bonds at a reasonable profit, I have always emphasized process over results in the belief that right process leads to good results over time (and vice versa -- bad process eventually equals subpar returns). In this viewpoint, I consider these positions to be mistakes, despite the profit gained.
• The summer months saw a slew of micro-cap, going-private transactions which were perfect for small retail investors. These reverse stock splits limited the ability of institutional investors to participate, thus leaving attractive spreads for the little people. Using multiple brokerage accounts, I put some money to work in stocks like Zareba Systems (ZRBA), Cuisine Solutions and Maxxam (MXM) for annualized returns of 313%, 50% and 25%, respectively.
• As mentioned previously, I sought to hedge a possible pullback in my gold mining positions with gold hovering around the $1,000 mark. Selling calls in Yamana (AUY) and Minefinders (MFN) allowed us to collect 5% - 10% premiums upfront while still leaving room for 25% - 40% upside before being assigned. These stocks have fallen back since then.

All this selling activity leaves me with a chunk of cash laying around, earning little interest.  So what is the market outlook and the prospect for deploying this cash?

October started poorly but I am still waiting for a scary pullback, not one where everybody is waiting to buy the dip. However, I have been waiting for this drop for six months, to no avail. That I have managed to generate strong returns despite being wrong is hopefully a testament to the investment strategy I have laid out.

While carrying a 37% cash position is a bit irritating, it also means I have locked in much of the returns for the year, even if the market does drop from here. Will that happen? I have been preaching caution all year and certainly continue to do so now. In fact, words of caution are more prescient at times like these than at scary points like the March lows. In true contrary fashion, risk aversion abounds at market plunges and abates during strong rallies.

The market has priced in recovery and growth for an economy that is fundamentally unhealthy. Yes, the economic data shows that the bleeding has stopped but the patient is still sickly at his core. The fact remains that the economy is on government life support -- the Fed's reluctance to pull back on its extreme measures and the auto industry's reliance on the government and cash-for-clunkers provide some proof. In a 70% consumer economy, can corporations continue to grow earnings even as the populace sees income deflation? In the long term, this seems implausible but  markets can do funny things in the meantime.

As a value investor, I base my investment strategy on fundamentals, not on macro calls or market timing. While a few unsavory stocks turn up on my watchlist, stocks seem too expensive based on valuation. I am inclined to continue dabbling in non-correlated opportunities while waiting for more attractive opportunities in the stock market.

Disclosure: View the spreadsheet containing all disclosures for my complete equity portfolio, including initial entry points, YTD returns, total returns, etc. through September 30, 2009.

With gold hovering over $1,000 per ounce, now seems a good time to check in on two gold mining stocks I hold in my portfolio, Minefinders (MFN) and Yamana Gold (AUY). Long-time readers will know that I have been writing call options all year long on these two stocks, to good profit. With the recent rally, it may be time to make a clean exit.

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