When great investing minds think alike
Stocks that get approval from different gurus are often big winners.
What's better than one investment guru? Two investment gurus, of course. That's what I've found over the years using my "guru strategies," each of which is based on the approach of a different investing great.
When one of these models is high on a stock, it bodes well for those shares. But when two or more of these guru-inspired strategies like a particular stock, it can really mean good times are ahead.
For example, on Aug. 16, my models issued a trade alert for GameStop Corp. (GME) based on the interest it was getting from my Joel Greenblatt- and Benjamin Graham-inspired models. Since then, shares of the video game giant have jumped 17.5% (through Sept. 26), while the S&P 500 has gained just 1.3%.
These trade alerts are issued when a stock demonstrates fundamental characteristics that earn it a certain level of interest from one or more of my models (usually multiple models are involved). Through back-testing, I've found that stocks that have had these characteristics in the past have tended to perform well over a subsequent period (usually the next three or six months).
For example, according to my back-testing, stocks that in the past have met the conditions that triggered the Greenblatt/Graham alert have gone on to gain an average of 18.8% over the following six months.
While there are, of course, no guarantees in the market, I have had a lot of success with these trade alerts. Of the 18 alerts that are currently ongoing (not including any that have been triggered in the past month, as they haven't been active long enough to judge), 15 are beating the S&P 500. Here are a few stocks my alerts have found in recent months that still get high scores for my models, as well as a couple of the most recently issued alerts:
Homeowners Choice, Inc. (HCII): Based in Tampa, Fla., Homeowners ($220 million market cap) is the parent of Homeowners Choice Property & Casualty Insurance Company, which provides homeowners insurance in Florida. My system triggered a Trade Alert for the stock on June 27 based on its scores on my John Neff-based model and my Motley Fool-inspired approach (which is based on the writings of Fool co-creators Tom and David Gardner).
When the alert expired on Sept. 26, the stock had gained 30.1% vs. 7.6% for the S&P. Though the alert, which historically has generated average returns of nearly 23% over a three-month period, expired, my Fool-based approach is still quite high on the stock. It likes Homeowners' excellent 147% earnings per share (EPS) growth rate and 99% sales growth rate in the most recent quarter (vs. the year-ago quarter), as well as its reasonable 0.52 price/earnings-to-growth ratio and red-hot relative strength of 98.
j2 Global Inc. (JCOM): My Graham- and Greenblatt-based models triggered a six-month alert on this Los Angeles cloud computing company ($1.5 billion market cap) on May 7, and since then it's up 24.2%, vs. 4.7% for the S&P 500. My Greenblatt-based model still has strong interest in the stock, thanks to its 12% earnings yield and 78.5% return on capital. My Graham-model doesn't have quite as much interest in the stock since its price (and thus price/earnings and price/book ratios) have jumped. But my Warren Buffett-based strategy does currently give j2 very high marks. A few reasons: Its annual EPS have dipped just twice in the past decade, it has no long-term debt, and it has averaged a 23% return on equity over the past 10 years.
USANA Health Sciences, Inc. (USNA): Based in Utah, USANA makes nutritional and personal care products such as vitamins, nutrition bars, and skin and hair cleansers. It has customers in the U.S., Canada, Australia, New Zealand, Mexico, the U.K., and a number of countries in Asia. Its subsidiary, BabyCare, Ltd., has a direct selling business in China.
On April 26, my Graham- and Greenblatt-based models flashed a six-month trade alert for USANA, and the stock has responded by gaining 11.3% vs. just 2.4% for the S&P. My Greenblatt-based approach still has strong interest in USANA, thanks to its 13.5% earnings yield and 63% return on capital.
As was the case with j2, the Graham approach has lost some interest in the stock since the alert, mainly because its valuation has jumped, but my Buffett-based model is now high on it. The Buffett-based approach likes that the firm has upped EPS in all but one year of the past decade, has no long-term debt, and has averaged a 37.7% return on equity over the past 10 years.
Nu Skin Enterprises, Inc. (NUS): Also based in Utah, Nu Skin ($2.3 billion market cap) is a direct-selling company that sells personal care, nutrition, and technology products. My Greenblatt- and Kenneth Fisher-based models just issued a trade alert for the stock on Sept. 21. The Greenblatt-based approach likes Nu Skin's 48.5% return on capital and 14.7% earnings yield, while the Fisher model likes its 1.1 price/sales ratio, $2.26 in free cash per share, and 33.8% long-term inflation-adjusted EPS growth rate (based on an average of the three-, four-, and five-year EPS growth rates). Historically, this particular trade alert signal has averaged returns of 6.3% over a three-month period.
Scholastic Corp. (SCHL): Based in New York City, Scholastic ($1 billion market cap) is the world's largest publisher and distributor of children's books and is also involved in educational technology and children's media. Its trade alert was triggered on Sept. 21 by the same models that triggered the Nu Skin alert. My Greenblatt-based model likes the stock's 16.4% earnings yield and 40.2% return on capital; my Fisher-based approach, meanwhile, likes its 0.5 price/sales ratio, $4.24 in free cash per share, and 56.2% long-term inflation-adjusted growth rate.
I'm long GME, HCII, USNA, JCOM, and NUS.
John Reese is the founder and CEO of Validea Capital Management and Validea.com and the author of The Guru Investor: How to Beat the Market Using History's Best Investment Strategies.
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