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Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund.
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  • Seven Stock Screens For Success

    Life would be much easier if stock screening was as easy as putting variables into a computer. The fact is stock screening is the beginning exercise of stock selection, not the end point.

    That's because you've got to look deeply into the numbers and underlying trends to find the kind of irregularities that clarify what the numbers-accidentally or no-conspired to obscure. For instance, meteoric revenue growth is positive, but this growth should be considered in conjunction with a cold hard look at the company's revenue recognition policies, with an eye toward changes that made delivering top line growth a little easier.

    That said, you need to start with a good set of screens for stock selection. Here's ours:

    • A dividend greater than 2.5%
    • A dividend which has increased in the past three years
    • A beta below one (compared to the S&P 500)
    • Revenue growth for the past three years (even if a year like 2007 or 2008 happens, and my options get highly limited, this rule stands.)
    • Margin growth for the past three years (operating margin or gross margin)
    • P/B lower than that of peer group, and Price/Cash Flow lower than that of peer group.

    I use this information to look at three aspects of a stock. First, is the cash flow I will receive. Obviously dividend-paying stocks are the best. Countless analyses confirm they offer less volatility and better long-term returns than those stocks not paying a dividend. And if a company has a history of increasing its dividend, it tends to be the stronger performer in its group.

    Second item I look at is future growth. I mean actual future growth, not what an extremely talented accountant can come up with. Revenue is a good place to look because it's nearly impossible to manipulate over longer periods of time. In addition, a company growing revenues (rather than just looking to cut costs) to increase its margins suggests a more enlightened and talented management team capable of delivering superior long-term returns.

    Finally, I like to look at the valuation through the price-to-book and price-to-cashflow ratios to see what they are vis a vis peers. Book value is a good number, but there are many traps in it such as older assets held on the books at historical prices that may have actually increased in value, or decreased faster than the company depreciated it. Still, for a first look, these two ratios, in combination with an understanding of your cashflow and future growth prospects, are good places to start.

    By the way, here are the stocks that made it through this filter. A closer look will tell which are winners, and which ones should be left on the cutting room floor.

    (click to enlarge)

    For GMG Defensive Beta Fund disclosures, click here.

    Oliver Pursche is co-portfolio manager of GMG Defensive Beta Fund. Shares mentioned in this post that are held by the GMG Defensive Beta Fund are identified.

    Tags: LLY, RTN, INTC, MSFT, BMY
    May 10 1:07 PM | Link | Comment!
  • 7 Most Important Criteria For Picking Stocks

    Stock selection is more critical than ever, as Europe's elections probably won't help solve the continent's debt problems while the U.S. economy may already be slowing.

    As disciplined investment managers, we take a fundamental and technical approach to selecting securities. Here are our initial screening criteria, which we refine further with proprietary analysis. On its own, however, it offers important information on three critical variables for stock selection: cash flow, revenue and valuation.

    • Dividend over 2.5%

    • Has increased dividend in past 3 years

    • Beta below 1 (versus S&P 500)

    • Revenue growth for past 3 years (2007 and 2008 eliminated almost all companies based on this criteria)

    • Gross and or operating margin growth for past 3 years

    • Price-to-book-value ratio below that of peer group

    • Price-to-cash-flow below that of peer group

    When I was young, my mother taught me to look three times before crossing the street: left, right, left. I believe this sage advice (I'm still here today) can be applied to selecting securities as well.

    First, look to your left: the cash-flow you will receive. For that, nothing beats dividend-paying stocks. Study after study clearly demonstrates that dividend-paying stocks have less volatility and better long-term total returns than non-dividend-paying stocks. Moreover, companies that have a history of increasing their dividends tend to be the stronger performers in that group. The chart below makes this painfully (for some) obvious.

    Parenthetically, markets will do what they will do, and no one has timed the them -- at least no one we know -- with any success on a consistent basis. Accordingly, focusing on lower-volatility stocks (a beta below 1) is also critical.

    Now look to your right: future growth and what is coming down the road. Companies and their accountants have elevated the manipulation of earnings and balance-sheet items to an art form. However, one item that is nearly impossible to skew, especially over longer periods of time (absent of fraud, of course) is net sales, i.e., revenue growth. If a company is growing net revenues and margins, odds are they are doing a lot more things right than wrong.

    Now look to your left again -- just to make sure the current valuation isn't too high. Price-to-book and price-to-cash-flow are two of our favorite metrics for this.

    Naturally, there is no such thing as a foolproof or error-free investment strategy or analysis. Stocks that meet these criteria can still falter, but in our experience, they tend to do pretty well, especially during uncertain times.

    Here are some of our favorite stocks that fit the above screens.

    (click to enlarge)

    For GMG Defensive Beta Fund disclosures, click here.

    Tags: LLY, DUK, INTC, AVP, MSFT
    Apr 30 3:07 PM | Link | Comment!
  • Treasuries: Trade The Inflection Point
    Longer dated treasury securities have been on a tear. In 2011, the benchmark 10-year Treasury notes produced a total return of 21.64%, spectacular by any yardstick; especially when you consider that ultimately, there's no principal risk.

    On Monday, Chairman Bernanke expressed the Fed's view that the economic recovery and labor markets still needed accommodative monetary policy.

    Market participants took this statement as an indication that the Fed may be ready to launch a third round of quantitative easing (QE3). Subsequently, several commentators discussed the possibility of endless low rates.

    But in my view, the trade in 10-year T-Notes is over and it's time for investors to switch into shorter-term corporate bonds. I view Chairman Bernanke's statements as factual-the recovery is sustainable, but a little help from the Fed can't hurt.

    Our view, at GGFS, is that as long as there are little signs of core inflation and labor markets continue to improve, the Fed is unlikely to take action to further manipulate interest rates.

    As a matter of fact, when reading transcripts of all recent Fed speeches and congressional testimonies, it is clear that the "dream scenario" for the Fed is to keep the official interest rate policy, meaning short-term rates, at current levels, while only experiencing mild core inflation and improving labor market conditions.

    Under this scenario, which we are experiencing, the Fed will be well served-in particular politically-by allowing markets to drive longer dated maturities higher, without interference.

    Based on this, I believe smart investors will start focusing on high-grade, shorter-term corporate bonds. High-grade corporate bonds represent a haven of sorts at the moment because there is little risk to principal in them, in particular as the U.S. and the world economy improves.

    Since picking individual bond issues can be tricky, I would recommend investors execute on this strategy with mutual funds or exchange-traded funds. Vanguard Short Term Corporate Bond (VCSH) and Pimco Low Duration (PTLDX) are two examples.

    As for getting out of T-Notes, keep in mind rates began the year at 1.97% and now stand at 2.25%, an increase of about 15%. I think the trend will continue, and it bumps up against one of our cardinal rules for preserving capital: Don't fight central banks or, for that matter, anyone else who can print money. The reality is the Feds could bring these rates down literally in minutes, and that they haven't after a 15% rise suggests they are willing to let market forces exert their influence for the foreseeable future.

    In my view, as long as unemployment numbers continue to improve, and there is little sign of core inflation, the current scenario is likely to play out as market forces wish, not as the Fed dictates.

    Separately, I am also detecting early whispers that the Federal Reserve Bank Open Market Committee (FOMC) might change its language regarding interest rate policy ever so slightly. I am in the minority camp that is disagreeing with Pimco's Bill Gross, who recently stated his view that the Fed will hint at QE3 in their April meeting.

    I, and a very few others, believe that the tide is shifting, and that the minutes may actually show that more voting members are indicating that a rise in short-term rates may be necessary as early as first quarter 2013-not the currently predicted end of 2014.

    Moving out of Treasuries and into corporate bonds might also do other good things for you. First, if you were smart enough to figure out that T-Notes were going to rally, getting out of them will enable you to lock in your gains, at a capital gains tax rate (certainly the lowest tax rates we expect for many years to come). Second, by switching to shorter-term corporate bonds, I think you will avoid a whole lot of volatility as the Treasury bubble bursts-an inevitable event if you ask me.

    That's right, I did call it a bubble, and I did say it would burst. I'm not the first portfolio manager to advance this idea. I don't see it as particularly radical. That's because I believe there's too much focus on the bursting of a bubble, and not enough emphasis on what's really important. And what's really important is that the world economy is improving with the aid of governments, and that's not going to change because of what happens in the Treasury market. So, remain calm, and carry on.

    For more on these ideas and others, tune into our daily radio program at 10:00 AM weekdays on www.financialtalkshow.com.

    For GMG Defensive Beta Fund disclosures, click here. Oliver Pursche is co-portfolio manager of GMGDefensive Beta Fund. Shares mentioned in this post that are held by the GMG Defensive Beta Fund are identified.

    Mar 30 11:13 AM | Link | Comment!
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