The market has spoiled investors over the past 7 months with one direction only: up. This Great Recession seems to turn into the Great Recovery. Are there any cheap growth stocks left for bargain-hunting investors?

I use following 8 criteria to select undervalued growth companies:

Studies have shown that asset allocation is the most important determinant factor in a mutual fund's performance: according to a study by Gary Brinson, Randolph Hood and Gilbert Beebower, asset allocation strategies are responsible for over 90% of variations in portfolio performance.

The tumultuous 2008 taught us an important lesson: static asset allocation over diversified assets is not effective enough to shield us from severe market loss. What's called for is tactical asset allocation which re-allocates capital based on the current and future economic and market conditions. In previous articles, we introduced several tactical asset allocation strategies including cross-asset momentum strategies. Those strategies are based on quantitative price or value evaluation. Another way is to simply follow the great investors' asset allocation decisions.

One of the major pathways for ETF investors to get international exposure is by investing in the MSCI Australasia Far East Index, or the EAFE. This famous benchmark dates back to 1969, and tracks 85% of the world’s developed markets besides the Americas.

Eric Uhlfelder for Advisor Perspectives reports that this index is also market-cap weighted, measures stocks free float, or the measure of a stock’s equity that is actually tradeable. The EAFE is the world scale S&P 500.

A recent blog posting over at Morningstar sniped at Professor Jeremy Seigel of Wisdom Tree, indicating that his firm's stock selection methodology and retention of assets depended on his call that a market bottom had been hit.

The post compared the performance of several Wisdom Tree ETFs to various total market benchmarks, showing relative YTD performance is lagging for Wisdom Tree dividend selection process. While true, it ignores the beating that all value benchmarks have taken since the credit crisis began in the summer of 2007.

Just for kicks, I set up an ETF screen that used the following criteria for the current one and three month time frames. Of all the ETFs, seven made this list.

• Above average market return.
• Top 20% of net asset value within its category.
• Highest discount to net asset value
• Performance vs. benchmark (whatever it is) >10%

Here they are - with surprises:

By clicking on the chart below, you'll be able to see comparative year-to-date returns for EAFE (Europe, Australasia, Far East) value stocks (EFV); EAFE growth stocks (EFG); S&P 500 value stocks (IVE); and S&P 500 growth stocks (IVW).

By Jim Wiandt

click to enlarge

* Mixed Global Picture - Here we see year-to-date returns for the S&P 500 value stocks (IVE); S&P 500 growth stocks (IVW); EAFE value shares (EFV); and EAFE growth issues (EFG). Notice that growth has been underperforming value in the U.S. (observe recent weakness among such stocks as GOOG and AAPL), but not in Europe, Australasia, and the Far East. Returns are negative all around, but while many economies are dealing with double-digit inflation rates, recession seems to be the larger concern in the U.S.--recent commodity spikes notwithstanding. Mr. Bernanke's testimony to Congress on Wednesday will play an important role, given this backdrop.

At first blush, the BRIC idea seems like a firm foundation for a growth portfolio. In the three months through Sept. 30, Brazil's gross domestic product expanded 5.7 percent; Russia at 7.6 percent; India at 8.9 percent; and China was up 11.5 percent.

Below we highlight non country specific international ETFs. These represent regions around the world and include emerging markets as well.

In the table we provide the 5-day percent change of the ETF, the percent the ETF is trading from its 50-day moving average, and how overbought or oversold the ETF might be. (An ETF is overbought or oversold if it is trading more than 1 standard deviation above its 50-day moving average.)

The style box looks at returns as a function of two intersecting dimensions: large cap/small cap and growth/value. In my own reviews of market performance, I add a third dimension to create a style cube: international vs. U.S. returns.

A click on the chart above will provide a detailed look at a portion of the cube for 2007. We're looking at EAFE value (EFV), EAFE growth (EFG), and U.S. large caps (SPY). Recall that EAFE stands for Europe, Australia, Far East. The iShares EAFE style indexes provide a nice look at returns outside the States.

• S&P shows domestic value stocks winning the performance race while Russell shows just the opposite, with growth outperforming value.
• Surz domestic indexes show the stuff in the middle going wild, with mid cap companies outperforming both large and small. At the same time, core companies, defined as neither value nor growth, have underperformed both value and growth.
• Outside the US, the EAFE (Europe Australia Far East) index has outstripped both S&P and Russell, but it has far underperformed the broad foreign market – the EAFE index has been easy to beat.

These are important considerations because we rely on these indexes to show us who is winning and losing. In the first half of 2007, our assessments of success or failure will rely very much on our choice of benchmarks.

What we find is that, since the start of 2007, growth has been outperforming value. Indeed, small cap growth is beating the pants off the other investment styles.

Investor preference for small caps is not exactly what I'd expect if the market were expecting recession. Nor would I expect a preference for growth stocks.

We have already seen two dimensions of the style cube: large cap-small cap and value-growth. The important third dimension to the cube we might call "domestic-international": investing in the U.S. vs. investing internationally.

Somewhat more specialized than the broad market ETFs are a gaggle of single country funds from iShares, and more broad geographic funds (Europe, Asia ex-Japan, Latin America). The only differentiated international ETFs have been the iShares MSCI EAFE Value Index (EFV), iShares MSCI EAFE Growth Index (EFG), and Powershares International Dividend Achievers (PID). I love PID, and I think everyone must own it. Note that I said "must", not "should"; everyone must own PID.

Any ETFs or Closed-End Funds that we haven't covered that you think we should? Leave a comment below.