advertisement
Editor's note: To view the stock screens mentioned in this column, download the free MSN Money Investment Toolbox.
While early October can be rocky, from mid-October until the end of the year is usually one of the best times to own stocks.
For example, in the 17 years from 1990 to 2006, the overall market as measured by the S&P 500 Index ($INX) has gained 5.9% on average. Equally impressive, the market scored gains in 13 of those years. It broke even (less than a 1% change) twice and dropped twice. Its biggest loss was 3.9%.
Small stocks do even better. The Russell 2000 Index ($RUT.X), which tracks small-company stocks, averaged an 8.1% gain without adding much risk. It also recorded gains in 13 years, dropped twice and broke even twice. Its biggest loss was 5.8%.
Last October, I described a screen for finding stocks likely to do well in such a strong market. It relied mostly on MSN's StockScouter to find the prospective winners, although I added a couple of extra requirements to limit the field to profitable, relatively low-debt firms.
The 13-stock portfolio turned up by my screen averaged an 11% gain after three months and 17% after six months. Those figures were more or less double the S&P 500's returns (4.5% and 8.5%). Ten stocks recorded gains and three dropped in each of those periods. Surprisingly, the portfolio continued to outperform throughout the year. By Oct. 5, it was up 42% on average, compared with 14% for the S&P 500. However, by that time, with four of the 13 picks in the loss column, the results were more volatile.
(Uncharacteristically, the S&P 500 mostly outperformed the Russell 2000, which returned 3% after three months, 8.5% after six months and 10.8% as of Oct. 5.)
Encouraged by those results, I recently ran another screen, which includes a few tweaks from last year's version.
More from MSN Money
Here's the premise: The stocks that outperform in a strong market usually share two characteristics. For starters, they have already outperformed the overall market in terms of share-price action. In market jargon, such stocks are said to have strong "technicals" (price-chart factors). Second, the best prospects have already recorded strong year-over-year earnings growth, and analysts expect that growth rate to accelerate in future quarters. These stocks are said to have strong "earnings momentum."
Being a disciple of the "work smarter, not harder" philosophy, I let MSN's StockScouter pinpoint qualifying stocks rather than devise my own set of screening parameters.
StockScouter analyzes dozens of data points for each stock, including historical and expected earnings growth, insider and institutional buying and selling, valuation and stock-price action. Based on those factors, StockScouter comes up with a score ranging from 1 to 10 that reflects each stock's appreciation prospects over the next six months.
Video on MSN Money
Numbers that countFred Frailey, editor of Kiplinger's Personal Finance, explains what numbers he uses to gauge the market’s strength.
StockScouter's rating system was devised to work in weak as well as strong markets. So, instead of using its overall grade, I prefer to focus instead on the technical and earnings-momentum factors described earlier.
Fortunately, MSN's Deluxe Screener provides parameters for pinpointing stocks that are strong in those departments. Because StockScouter doesn't consider profitability or debt for its scores, last year I added search terms to rule out low-profitability and/or high-debt stocks.
This year, I'm adding two more requirements. Because smaller stocks usually outperform big stocks during the October-December time frame, I'm avoiding stocks with market capitalizations (the value of all outstanding shares) above $15 billion. Also, because I've found that low trading prices correlate to high risk, I'm ruling out stocks changing hands for less than $5.
Continued: The screening parameters
Rate this Article
High