The Anatomy Of The 10-Bagger

The Anatomy Of The 10-Bagger
09/05/06 05:41:26 PM PST
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by Thomas Maskell
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Shh! We're hunting for these elusive (but not particularly rare) stocks.


So far in our search for the 10-bagger, we have identified 588 stocks that doubled in price during the past 52 weeks (see part 1, in Working Money back in March 2006). A 10-bagger is a stock that increases in price 10-fold in three years or fewer. To do that, it must at least double in price in each of those three years--a requirement that is easily spotted using an online stock screen, such as the screen available at http://www.reuters.com/. Screening for these doublers, 588 in all, pointed the way to our 10-baggers.

NARROWING THE LIST
That list of 588 doublers was narrowed to 254 stocks to make the task of observing their charts less daunting. To get on this narrowed list, the initial price of the stock had to be greater than $0.01; it must represent a company based in the United States; and it must be traded on the New York, American, or NASDAQ exchanges. There are currently 5,210 stocks that fit those criteria, which means our 254 stocks are 4.88% of that total.

Using a stock charting service like bigcharts.com will allow us to quickly observe these 254 stocks and identify the 10-baggers. Of course, identifying a 10-bagger by chart requires a set of its own criteria. The criteria are launch point, move duration, and peak price. The launch point is the date that the stock closes above its six-month simple moving average (SMA). Its move duration is the time it takes to move from launch to its peak price. Its peak price is the highest open or close price achieved during the move. For ease of observation, I based this discussion on a five-year monthly chart. Daily and weekly charts will help you fine-tune the analysis, but they lose a lot of instructional value on reproduction. Using monthly charts and the criteria given, 44 of the 254 stocks were identified as 10-baggers.


FIGURE 1: AN IDEAL 10-BAGGER. Hansen Natural (HANS) started its move in July 2003 when it closed above its six-month SMA. Over the next 33 months it didn't fall more than 10% below the SMA. The stock climbed to a peak of $148.20 by March 2005.



THE 10-BAGGERS
Figure 1 is a screen capture that illustrates an ideal 10-bagger. I say ideal because many 10-baggers are not this perfect. Of the 44 10-baggers gleaned from our list of 254 potentials, 35 fit this ideal. What is the ideal? It is a stock that closes above its six-month simple moving average (SMA) and does not close more than 10% below SMA during its 10-fold rise. In Figure 1, Hansen Natural Corp. (HANS) began its move in July 2003 when it closed above its six-month SMA at $2.55. Over the next 33 months, it never fell more than 10% below SMA as it climbed to a peak price of $148.20—a 58-bagger. It was a 10-bagger within 20 months (March 2005). In addition, during the stock's rise, its monthly trading volume increased. This is hard to see in Figure 1, so I have replotted it in Figure 2 as both an absolute number and as a percent of the total shares outstanding. Prior to launch, the three-month moving average (MA) in Figure 2 hovered around 250,000 shares. In the launch month, 647,000 shares were traded, more than double the MA. Within seven months of launch, the MA was more than one million shares; and within a year, it was more than 12 million shares. The stock volume began to subside in August 2004, and then increased again in March 2005, the month it achieved 10-bagger status. From there, it went on to higher prices and greater volumes.


FIGURE 2: TRADING VOLUME. The percent of shares outstanding (SO) rose above 100% in May, June, and July 2005. When a company's stock trades more than 100% of its SO in one month, it's something worth noting.

Two other interesting points should be noted about this volume. The first, as seen in Figure 2, is the percent of shares outstanding (SO) that was traded on average each month. It rose above 100% in May, June, and July 2005. (The monthly volume reached that level in June 2004.) The concept of a company trading more than 100% of its shares outstanding in one month is intriguing. The second point and equally intriguing is the number of shareholders in HANS, not shown in Figure 2. From the point of launch to the peak price, the number of shareholders in HANS was reported to have declined from 619 million to 514 million. More shares were traded by fewer shareholders. This would suggest an institutional rather than a general market binge. If this holds true for most 10-baggers, it could be a useful bit of information.

Let's move from the ideal to the sublime. Figure 3 presents the stock chart of Ampex Corp. (AMPX). AMPX is not on our list of 44, but it is a mouth-watering chart that illustrates a compressed 10-bagger. Technically, AMPX launched in February 2004 after two false starts (November 2002 and May 2003). Its launch price (at close) was $1.75, but it achieved that price on a monthly volume of only 320,000, half of the preceding MA. After launch, its price managed to just track its SMA for the next seven months on decreased volume. Given that its two failed breakouts were volumes that were two and four times greater than the MA, ignoring this launch would have been a prudent course of action. This brings us to October 2004.


FIGURE 3: IDEAL TO SUBLIME. Notice how this stock moved from $1.85 to $50.04 in four months. It then declined by 65% to $17.45 but it's still a 10-bagger from its February launch price of $1.75.

In October 2004, AMPX's price moved from $1.85 to $4.09 on a volume of 397,000, three times the preceding MA. That was followed with a close of $11.40 on volume of 1,116,000 in November, a close of $39.50 on 4,933,000 in December, and a close of $50.04 on 1,664,000 in January 2005. In four months it moved from $1.85 to $50.04, a 27-bagger. Three months after its peak price, it closed at $32. After a modest uptick, it continued to slide, closing at $17.45 on May 6, 2006—a decline of 65% from its peak price, but still a 10-bagger from its February 2004 launch price of $1.75.

Figure 3 illustrates how difficult it is to establish rules. If you bought the launch in November 2002 and used 10% below the SMA as a sellpoint, you would have sold the stock the next month at a 50% loss. Your next entry point would be May 2003 with a sale in October for another 30% loss. You could enter again in February 2004 (assuming you weren't too battle-fatigued to continue), with a sale in August 2005 for a gain of 1,700% (finally!). If you started with $10,000, you would have ended up with $64,000, a six-bagger—not a bad return over 34 months. If you ignored the February entry and waited until October, you would have ended up with $27,384, still not bad.

A 27-bagger can compensate for a lot of flaws in an investment plan. If AMPX was just a 10-bagger, selling on a 10% correction would have resulted in a loss of about $150. So any rules we use to guide our stock decisions would have to be statistically significant. Statistics are the study of populations and behaviors. Any quantifiable population or behavior can be analyzed using statistics. In business, statistics are used to improve decision-making. A businessman strives for an 85% confidence level; he wants 85% of his decisions to be correct. While he may strive for 85%, it has been reported that most successful managers are correct only 70% of the time. If we could create rules with a 70% to 85% confidence level, we would have a very powerful stock market strategy.




FIGURE 4: PRICE CORRECTIONS OF TEN BAGGERS. Here you see how many of the stocks corrected and by how much. The statistics provided here give you some idea of the basic chart patterns of the listed stocks.
In Figure 4, the 44 10-baggers are listed. Also listed are their price corrections in comparison to their six-month SMA. Eleven of the 44 stocks corrected twice while 14 did not correct (according to our definition). Two stocks are listed as having corrected and not corrected. These are stocks that had a correction after achieving 10-bag status but then went on to new highs. I included that second correction, but you may choose to ignore it. At the bottom are a few simple statistics, which will help us establish some rules. I recognize that these are very basic, but even the basics can be useful. The data presented is sorted by "Correction %." Half the stocks corrected 7.4% or less during their advance. Twenty-seven (61%) of them corrected 10% or less. The 10% (or less) limit also represents 35 of the 55 corrections (64%). Thirty-three of the stocks did not correct or corrected only once (75%). Eleven corrected twice. There were as many corrections greater than 20% (14) as there were corrections at zero percent. Just based on these statistics, it is difficult to establish a significant sell strategy. Certainly, if we are to achieve a 70% confidence level, we will need more information.

THE REWARDS
Now that we have identified our 10-baggers and observed their basic chart patterns, it is time to gather more information. The goal is to answer two questions. First, why did these stocks launch (cause)? Second, why did they continue to rise (support)? The cause will help us predict their move, and the support will help us predict their peak.

Since there are three kinds of players in the stock market, we will approach this study from three different perspectives. First, we will approach it as investors and study the underlying fundamentals. Second, we will become traders and look for clues in the charts. Finally, as speculators, we will go beyond the fundamentals and the indicators; we will anticipate price based on events, trends, and innovations. Somewhere, in that mix of market strategies and historical data, we hope to find the key to unlocking the rewards of the 10-bagger.



SUGGESTED READING
Maskell, Thomas [2006]. "The Search For The 10-Bagger Begins," Working-Money.com, March 23.

http://premium.working-money.com/wm/display.asp?art=660

Where you'll find the double-baggers

Where you'll find the double-baggers

Small caps' tendency to outperform their large-cap brethren isn't just a down-market happenstance -- it held true in 2005, 2006, 2007, and 2008 as well.

In any market, the stocks with the most potential for outsized returns (stocks that will double, triple, or even increase your investment tenfold) are not found among large caps, but rather among stocks that are:

1.Ignored.
2.Obscure.
3.Very small.

Why? Because the market's greatest inefficiencies (and, thereby, greatest opportunities) lie hidden among the investments that Wall Street analysts and institutional investors shun only because of their size.

Starting today

Investing in small-cap stocks makes many people nervous -- and today's market volatility is sending many people into the arms of stable, financially pristine large-cap stocks. Which makes now an even better time to buy up those oversold small caps.

But not all small caps are equal. You want to make sure you buy small caps that have a rock-solid balance sheet and a solid business model. Both these factors ensure that the company will be around five to 10 years from now, giving it plenty of time to double, triple, or increase tenfold in size.

At Motley Fool Hidden Gems, these are precisely the kinds of stocks we're recommending right now -- and we're putting real money behind our best ideas. What's more, our recommendations are beating the market by an average of 18 percentage points since the service began in 2003.


http://www.themoneytimes.com/featured/20090904/these-stocks-can-easily-double-your-money-id-1082594.html

CANADA TIP SHEET: Law Hunts For 10-Baggers

CANADA TIP SHEET: Law Hunts For 10-Baggers

By Nirmala Menon
Dow Jones Newswires
18 May 2006

OTTAWA (Dow Jones) -- As a small-cap fund manager, Jennifer Law tries to sniff out potential "10-bagger" stocks. She thinks Katanga Mining Ltd. (KAT.V) may eventually prove to be a winner.

Ten-baggers are stocks that increase their value 10-fold.

Law bought Katanga earlier in the year for the CIBC Canadian Small Companies Fund that she lead-manages. But it could take about a couple of years for the company, which owns a big copper project in the Republic of Congo, to show its potential.

"You don't expect them to produce immediately, but you watch as they come on production in 2007, I think that will give a nice lift to the portfolio," Law said in an interview.

"With Africa becoming a more important copper producer, we're sort of taking a little bit more risk, branch out a little bit and finding a next winner," she said.

She builds smaller positions in established winners, such as First Quantum Minerals Ltd. (FM.T), which she bought a few years ago and which emerged as a 10-bagger.

"We try to layer on some more smaller positions that we can build into core positions over the next two years if management delivers what they promise," Law says.

HudBay Minerals Inc. (HBM.T) is another stock that has been an "exceptional performer" for the fund since Law bought it at the initial public offering for C$2.20 a share. The stock came with warrants.

She bought more warrants at 3.5 Canadian cents each and that has risen to become "almost a 10-bagger." She bought more of the stock and warrants in anticipation of strong fourth-quarter earnings, and describes subsequent gains as "pretty sweet."

HudBay is trading at C$13.33 in Toronto Thursday.


Recipe For Making Money In Small-Caps

As a bottom-up investor, what attracts her the most about a company are the qualitative aspects: the management, the product or service, the competitive landscape, how a company sets itself apart to compete, and catalysts for growth.

She keeps sector bets "small and measured" and says she runs a balanced portfolio with exposure to all 10 sectors. Nearly half the fund is invested in energy and materials stocks, reflecting their dominance in the market.

Law says the key to making money in Canada's small-and- mid-cap market is to get a foot in the door early before a company's earnings are included in forecasts.

"If you're there early, you get to know management well, really understand the business, that's where you can outperform and that's when you can make good money," she says.

Law has spent nearly her whole career managing small-caps funds. She started managing the Canadian Small Companies Fund in 2003 and helped turn it from a fourth-quartile fund to the current second-quartile ranking. As of April 28, the fund had assets of C$123.9 million (US$112 million).

The portfolio is run on GARP principles - growth at a reasonable price - but has a lower beta than is typical for the riskier small and mid-cap asset class.

"The beta for this portfolio tends to be 10-15% lower than the benchmark. We're not taking as much risk as the benchmark," Law says.

The price-earnings multiple is also lower, and the return on equity tends to be better than the benchmark. "I think as an investor, you get the best of both worlds," Law says.

She can hold winner stocks until they reach a market capitalization of C$6 billion, unlike other small-cap funds where the limits are much lower.

"That's a really nice flexibility within this mandate (the Canadian Small Companies Fund) that the unit-holder is probably not aware of," says Law.

Law doesn't see "lots of great new ideas" in the market right now.

"We'll continue to dig and find some little nuggets here and there, but overall, I think the biggest call this year is when to take profit on the commodities and the rest of it is just really boring, bottom-up work," she says with a laugh.

(c) 2006 Dow Jones & Company, Inc.

http://www.cibc.com/ca/am/pdf/news-publications/in-the-media/law-dowjones-en.pdf

Bottoming stocks flare 100-1,500% post Sept 11, 2001

Bottoming stocks flare 100-1,500%

B G Shirsat

Stocks which plummeted to their 52-week lows during the last six months gave huge returns. One hundred and sixty four such stocks, identified by the Business Standard Research Bureau, which plumbed their year's lows after September 2001, have turned out to be a gold mine for investors. Their prices flared by 100 per cent-1,500 per cent in the subsequent period.

The returns on the stock indices, over the September 21 level when stock indices declined to almost a nine-year low, vary between 33 per cent (Sensex up 33.82 per cent, S & P CNX Nifty up 33.3 per cent) and 52 per cent (BSE 500 and BSE 200 up around 52 per cent).

Of the 164 stocks studied, the value of four increased 10 times (10 baggers), or by 1,000 per cent. As many as 17 stocks became 5-10 baggers, and 64 others 3-5 baggers. The rest have doubled in value during the period.

Hinduja TMT fell to Rs 32 on September 26 in line with the continuing meltdown in second-rung technology stocks after September 11, 2001.

The booster came from the healthy performance in the quarter ended September 30, 2001. The stock became a 10 bagger in six months.

MphasiS BFL soared to Rs 646.95 on April 11 from Rs 70.35 on October 12, 2001, up 820 per cent. The Financial Technology scrip gained 708 per cent from Rs 7.50 on September 26 to Rs 60.60 on Thursday, even though the company reported a loss of Rs 67.5 million in the nine months between April-December, 2001. The upside is that the company is engaged in a single business segment, providing end-to-end straight through processing (STP) technologies.

The other winners were Fortune Information, up 1,289 per cent at Rs 69.45, Mastek, up 592 per cent at Rs 366.60, IT & T, up 563 per cent at Rs 48.10 and Blue Star Information, up 570 per cent at Rs 194.70.

Take also Praneta Industries, an unknown penny stock trading at Re 0.90 on March 6, 2002. A month later, it surged to Rs 13.45 (April 10), registering a 1,500 per cent rise.

The market was unfavourable to KPIT Infosystems which declined to almost an all-time low of Rs 13 in September, 2001. The numbers for the October-December 2001 quarter, too, were not favourable.

However, investors bet on this stock for the simple reason that during 2001-2002 the company added six new customers who had the potential to bring significant business during 2002-03. The stock became a top multi-bagger with a 1,353 per cent rise in market price.

Apple Amusement bottomed out at Rs 2.65 on October 17, 2001. Operators entered at this juncture and the stock went up to Rs 25.15 on April 11, 2002, getting returns of almost 10 times.

http://search.rediff.com/business/2002/apr/12bot.htm

Buy Low, Sell High With Sir John Templeton

Buy Low, Sell High With Sir John Templeton

Thursday, June 19, 2008 4:22 PM

By: Michael Carr


Always on the hunt for the next great investor, Forbes magazine recently profiled Randolph McDuff, a virtually unknown online trader in Canada who has delivered gains of 32.2 percent a year for the past eight years.


That's almost three times more than Warren Buffett’s Berkshire Hathaway over the same time frame.


Like Buffett, McDuff is a value investor. But lacking Buffett’s ability to consistently find big winners, McDuff has adopted instead the style of Sir John Templeton. He seeks to identify a list of relatively inexpensive stocks.


Templeton, now 96, has been an investment superstar for more than six decades. He made his first investment gains by buying 100 shares of every stock selling for less than $1 a share at the beginning of World War II.


By the time the war ended, almost a third of the companies he had bought into were bankrupt. But his overall investment had returned more than 200 percent.


From there, Templeton went on to found one of the largest mutual fund companies in the world. Eventually he sold Templeton Funds to Franklin Resources, although he is still an active investor.


Known as a global investor, Templeton applies simple concepts to identify potential stock market winners. These factors were used to develop this Templeton value screen:


• P/E ratio less than the five year average P/E ratio for the stock and below the average ratio of all companies in the same industry.


• Earnings per share growing each year for the last five years and projected to increase in the current year. Additionally, the company needs to have forecasted earnings growth greater than the industry average.


• Operating profit margins better than industry average and showing steady improvement over the past five years. Operating margin is the ratio of operating income to sales. This is Templeton’s preferred measure of management quality. When a company's margin is increasing, it is earning more for each dollar of sales.


• Less debt than the industry average demonstrates to Templeton that the company is conservatively managed and likely to make money even in downturns. This is an important criterion for an investor who learned his craft during the Great Depression.

http://moneynews.newsmax.com/michael_carr/carr_templeton_screen/2008/06/19/105999.html

Finding Peter Lynch’s 10-Baggers

Finding Peter Lynch’s 10-Baggers

Tom Gardner has made it his mission to uncover the best underfollowed, underappreciated companies before Wall Street gets on board. The legendary Peter Lynch once had a few things to say on the subject, and Tom thinks investors should listen up.

By Tom Gardner
November 23, 2005


Peter Lynch is recognized by investors the world over. More than 1 million read his book One Up on Wall Street (or, at least, that many bought it). Sadly, many seem to have either disregarded or forgotten the book’s tenets for finding great investments.

That’s a shame. After all, the greatest of these investments — in his words, the “10- to 40-baggers … even 200-baggers” — can rise 10 to 200 times in value.

I haven’t forgotten. A “student” of Lynch for years, I don’t deny that what I’ve learned has influenced the way I invest. Nor that, when we conceived of our Motley Fool Hidden Gems newsletter service and online community, digging up just a few of these “10- to 40-baggers” was very much on our minds.

It might be worthwhile, then, to take a look at six of his primary principles, all of which are core components of our Hidden Gems investing approach. I strongly encourage you to consider them when building or fine-tuning your own stock portfolio.

1. Small companies
Lynch loves emerging businesses with strong balance sheets, and so do I. His extraordinary returns in La Quinta Inns came when the company was young and small, traded at a discount to estimated future growth, and sported a healthy balance sheet. He writes: “Big companies don’t have big stock moves … you’ll get your biggest moves in smaller companies.”

Couldn’t have said it better myself. When searching for prospects, I focus explicitly on strong, well-run companies capitalized under $2 billion.

2. Fast growers
Among Lynch’s favorites are companies whose sales and earnings are expanding 20% to 30% per year. The classic Lynch play over the past decade might be Starbucks, which has consistently grown sales and earnings at superior rates. The company has a sterling balance sheet and generates substantial earnings by selling an addictive product, repurchased every day at a premium by its loyal customers.

The real trick is to find fast growers such as Starbucks or Amazon.com (Nasdaq: AMZN) in their early stages. At the same time, don’t shy away from a slower-growth business selling at a truly great price. Hidden Gems can take either form.

3. Dull names, dull products, dead industry
You might not think this of the world’s greatest — and, arguably, most famous — mutual fund manager, but Lynch absolutely loved dreary, colorless businesses in stagnant or declining industries. A company such as Masco, which developed the single-handle ball faucet (yawn), rose more than 1,300 times in value from 1958 to 1987.

And if he could find that kind of business with a ridiculous name, like Pep Boys, all the better. No self-respecting Wall Street broker could recommend such an absurdly named unknown to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.

4. Wall Street doesn’t care
Lynch’s dream stock at Fidelity Magellan was one that hadn’t yet attracted any attention from Wall Street. No analysts covered the business, which was less than 20% institutionally owned. None of the big money cared. Toys “R” Us, though it might not be so great an investment today, went on in relative obscurity to rise more than 55 times in value after being spun out from bankrupt parent Interstate Department Stores.

And Lynch is effusive in explaining the wonderful returns from funeral and cemetery business Service Corporation, which had no analyst coverage. Compare that with the 38 analysts who cover Intel (Nasdaq: INTC) or the 31 following Yahoo! (Nasdaq: YHOO).

The point is clear: Small, underfollowed companies present the greatest opportunities to long-term investors.

5. Insider buying and share buybacks
Lynch loves companies whose boards of directors and executive teams put their money where their mouths are. A combination of insider buying and aggressive share buybacks really piqued his interest. He would have given a close look to a tiny company like Ultralife Batteries (Nasdaq: ULBI), which has featured persistent insider buying recently, but also Dell (Nasdaq: DELL), which methodically buys back its shares on the open market.

“Buying back shares,” Lynch writes, “is the simplest, best way a company can reward its investors.” Bingo.

6. Diversification
Finally, don’t forget that Lynch typically owned more than 1,000 stocks at Fidelity Magellan. He embraced diversification and focused his attention on upstart businesses with excellent earnings, sound balance sheets, and little to no Wall Street coverage. He admits that, going in, he never knew which of his investments would rise five or 10 times in value. But the greatest of his investments took three to four years to reward him with smashing returns.

I anticipate an average holding period of three years, with the greatest of the group being held for a decade or more. I believe you can and should run a broad, diversified portfolio of stocks, if you have the time and the team to do so — like we do here at the Fool and within our Hidden Gems community.

Finding the next prospect
Peter Lynch created loads of millionaires with his Fidelity Magellan Fund — investors who went on to live comfortably, send their kids to college, and give generously to deserving charities.

You might be surprised to hear that he thinks you can succeed at stock investing without giving your whole life over to financial statement analysis. He’s outlined a method whereby the total research time to find a stock “equals a couple hours.” And he doesn’t think you need to check back on your stocks but once a quarter. Doing more than that might lead to needless hyperactive trading that wears down your portfolio with transaction costs and taxes.

Written by Saumil Mehta
November 24th, 2005 at 12:41 pm


http://www.valuestockplus.net/2005/11/finding-peter-lynchs-10-baggers.html

Accuracy and Peter Lynch’s 10-Baggers

Common Sense Investing: Accuracy and Peter Lynch’s 10-Baggers


I’ve been an investor since before college, and I’ve been a successful investor for almost as long. I talk to other investors, I do research, and I browse the online investing communities. And through all that, I’ve noticed that there is one similarity that you can see in all successful investors: They don’t have 100% accuracy.

My accuracy is around 75% at most, but thats it; and I’m considered an All-Star in the online investing communities. That means generally, 75% of the stocks I pick do better than the S&P. It also means that 25% of them won’t be winners. But, I do my due diligence, I stick to well managed companies that have fast earnings growth, relatively high insider ownership, low P/E for the industry, good returns, and the 7 out of 10 that do beat the S&P beat it by a lot. That’s the key. When you get into investing, you have to have thick skin, you can’t cut and run when a stock goes down and you can’t get discouraged when half of your stocks aren’t beating the market. That’s just how it goes.

Remember Peter Lynch’s theory on 10 baggers:
Say you pick 5 stocks, and you’ve done all the research you can and you’re sure these are solid companies. Well some of them might go down, but even if 4 of the 5 are losers, if you hit just one 10 or 20 or 200 bagger, it makes up for the rest (a 10 bagger is a stock that increases 10 times in value). Look for 10 baggers, look for quality, and you’ll win out every time.

In case you don’t know who he is, Peter Lynch’s Fidelity Magellan fund (FMAGX) returned 29% on average, annually, during Lynch’s 13 years at the helm.

So, if you’d like to learn more about Peter Lynch’s style of investing, check out his book, One Up on Wall Street. It really is one of the best books on investing ever written.

http://csinvestor.com/common-sense-investing-accuracy-and-peter-lynchs-10-baggers/

Invest like the masters: James O'Shaughnessy

From MoneySense magazine, November 2006

Invest like the masters: James O'Shaughnessy

We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy

James O'Shaughnessy

He looked back over decades to find the best stock-picking strategies of all time. We've taken one of his best methods and gone searching for values in the Canadian market.

James O'Shaughnessy is know to most investors as the author of What Works on Wall Street. In this ground-breaking work, published in 1996, O'Shaughnessy evaluated the record of many by-the-numbers investment strategies over decades. After writing his book, O'Shaughnessy put his results to work by launching several U.S. and Canadian mutual funds based on his findings.

Unfortunately, he ran smack into the Internet bubble. The dull, value-oriented stocks turned up by his methods performed poorly and he got roasted in the press. However, in more recent years his funds have performed very well. For instance, his U.S.-based Cornerstone Value Fund has bested the S&P 500 over the past five years by an average 2.19 percentage points a year and has done so with less volatility than the index.

We decided to focus on his Cornerstone Value approach because we're fond of dividends. Like all of O'Shaughnessy's methods, it's a by-the-numbers affair, without any deeper research into individual companies. The Cornerstone Value method starts with "marketleading" stocks, which are defined as those with large market capitalizations, an above-average number of shares, more than an average level of cash flow per share, and more than 1.5 times the average level of sales. From this market-leading group, O'Shaughnessy selects the highest yielding stocks — but he excludes utility companies, to ensure they don't dominate the list.

To apply the Cornerstone approach to the Canadian market, we decided to define market-leading stocks as those with annual revenues of at least $2 billion, market capitalizations of at least $1 billion and an annual net income of at least $500 million. We then sorted this list of big stocks by dividend yield and selected the top 10 for O'Shaughnessy's darlings. We did, however, add our own twist. In the U.S., O'Shaughnessy had trouble with too many utilities dominating his results; in Canada, we encountered a similar problem with banks and other financial institutions. To avoid too much concentration in the financial sector, we allowed a couple of utilities to slip through, but we also selected only the highest yielding stock from each industry sub-group. The result is a more diversified list, but one which still pays a generous average dividend yield of 2.9%.

In many ways, O'Shaughnessy's Cornerstone Value method is similar to the venerable Dogs of the Dow approach, but it ranges wider in its search for large dividend-paying stalwarts. As a believer in high-yield stocks, we expect that stocks with generous dividends will continue to do well over the long run. But remember that even the most successful methods will have off years, as the O'Shaughnessy funds demonstrated in their early days.

O'Shaughnessy's darlings


CompanyIndustry
Price DividendYield P/E ROE

BCE Inc.Telephone utility
$30.22 4.33% 15.3 14.9%
Bank of MontrealBank
$68.65 3.68% 13.2 18.7%
TransCanadaGas utility
$35.48 3.64% 13.3 17.6%
Teck ComincoMining
$71.31 2.85% 7.4 35.4%
Husky EnergyOil and gas
$72.20 2.83% 11.2 29.2%
Sun Life FinancialInsurance
$46.56 2.57% 14.2 12.6%
Power Corp.Conglomerate
$32.38 2.47% 13.5 16.4%
Thomson Corp.Business services
$45.20 2.25% 29.4 9.4%
Magna InternationalAuto parts
$81.99 2.17% 11.9 10.7%
George WestonFood stores
$72.39 2.00% 13.2 16.2%


Source: globeinvestor.com, Sept. 28, 2006

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104200_3896

Invest like the masters: David Dreman

Invest like the masters: David Dreman

We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy

David Dreman

This expatriate Canadian wrote the book — literally — on contrarian investing. His key finding? You can achieve great results by choosing cheap stocks that the market hates.

After graduating from the University of Manitoba in the 1950s David Dreman got his start as an analyst at his father's Winnipeg-based commodities trading firm. But Wall Street beckoned and he soon moved stateside where he has run a money management firm in Jersey City, N.J., for decades.

Dreman is perhaps best known as an author. His Contrarian Investment Strategies: The Next Generation deserves a spot on every investor's bookshelf. But he's no slouch when it comes to putting his book learning to the test and beating the market. His firm's large-cap value composite has bested the S&P 500 index by an average of 3.9 percentage points annually over the last 10 years, before fees. His small-cap value composite beat the Russell 2000 by 6.6 percentage points over the same period.

Dreman looks for stocks with low price-to-earnings ratios (P/E). These stocks are typically out of favor with investors for one reason or another. But often that's because investors have overreacted to bad news. As a group, low P/E stocks have a tendency to bounce back and perform well. In fact, Dreman calculates that U.S. stocks with the lowest 20% of P/E ratios provided average annual returns of 16.8% from 1920 to 2004, beating the market by four percentage points.

You might think that people would look at those figures and be lining up to buy low P/E stocks. The reality, though, is that investing in these firms requires courage. A good example is Dreman's investment in Altria, the cigarette company formerly known as Philip Morris. Altria has been a phenomenal performer over the long term, but it's been pummeled in recent years by tobacco-related litigation. You have to be confident in your judgment to buy a stock like Altria in the face of such overwhelming uncertainty.

Dreman's focus is on the U.S. market, but we decided to apply his methods closer to home and look for large Canadian stocks that he might like. We started with companies that earned at least $250 million from continuing operations over the last year. We then focused on stocks with the lowest positive P/E ratios. Dreman also looks for financial stability, so we required each stock to have less debt than shareholder equity as well as some revenue growth over the last three years. These criteria produced the list of 10 stocks shown in Dreman's value list. In addition to each stock's P/E and debt-to-equity ratio, we also show its dividend yield. After all, it's nice to be paid to wait for better times.

We think that low-P/E stocks will continue to earn more than their higher P/E brethren over the long haul— but such a happy result is not going to happen every year. You only have to go back to the Internet bubble to spot a period when Dreman's stocks trailed. On the other hand, low-P/E stocks usually shine during market downturns. So if you have a gloomy view of what lies ahead, you might find these stocks very much to your taste.

Dreman's value list


CompanyIndustry
Price P/E Debt/Equity Dividend Yield

EnCanaOil and gas
$52.56 6.1 0.42 0.89%
IPSCOSteel
$96.55 6.6 0.18 0.84%
E-L FinancialInsurance
$600.00 6.9 0.00 0.08%
Teck ComincoMining
$71.31 7.4 0.45 2.85%
Gerdau AmeristeelSteel
$10.31 7.7 0.34 0.90%
ING CanadaInsurance
$55.14 9.3 0.05 1.83%
Empire CompanyFood stores
$40.98 9.7 0.47 1.50%
CP RailwayTransportation
$55.23 10.6 0.68 1.38%
TD BankBanks
$66.80 10.8 0.56 2.91%
Talisman EnergyOil and gas
$18.57 11.1 0.74 0.80%


Source: globeinvestor.com, Sept. 28, 2006

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104112_4584

Invest like the masters: Warren Buffett

From MoneySense magazine, November 2006

Invest like the masters: Warren Buffett

We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy

Want to invest like a master? Then look to the works of Warren Buffett, Peter Lynch, David Dreman, and James O'Shaughnessy. These four gentlemen are all great investors, and all of them have either written books on how to invest or, in Buffett's case, produced years of informative shareholder letters. Remarkably, none are shy about sharing their market-beating techniques. In this feature, we examine how each of these wizards thinks and we spell out what each looks for in a stock. But that's just for starters. We've also scoured the markets for stocks that our famous investors might be interested in buying right now. To provide a truly continental perspective, half of our picks come from the U.S. and half from Canada.

We think you'll find a few of these gems to be just right for your portfolio. Remember, though, that not even a great investor beats the market each and every year. To make sure that a given stock is right for you, take out your magnifying glass and examine any investment in detail before putting your money down. Remember that you should spend at least as much time thinking about what could go wrong as what could go right. After all, that's what the best investors do.

Warren Buffett

The greatest investor in history likes to buy quality companies trading at reasonable prices. Oddly enough, the firm that may best fit that description is his own,

When he was five, Warren Buffett set up a gum stand outside his home and sold Chiclets to passersby. Now 76, Buffett still knows how to make a buck. He's the second-richest man in the U.S. (trailing only his friend, Bill Gates) and is starting to give away his fortune to charity. Along the way to his billions, Buffett studied and worked with the venerable Benjamin Graham, the father of value investing, before opening up his own hedge fund in the 1950s. But most people know Buffett as the principal owner of Berkshire Hathaway, which he runs out of a small head office in Omaha, Neb.

Buffett started buying stock in Berkshire Hathaway, then a distressed textile firm, in 1962, when its shares were trading below $8 per share (all prices in U.S. dollars). Today Berkshire Hathaway is a sprawling conglomerate with large insurance operations and trades above $96,000 per share. The trip from $8 to $96,000 represents an average annual gain of about 24% over more than 40 years. Talk about the power of compounding!

In recent years, Buffett has moved away from buying publicly traded shares in favor of acquiring entire private companies in friendly transactions. Nonetheless, he continues to buy a few public stocks — usually in quality companies trading at reasonable prices.

If you want to benefit from Buffett's stock-picking acumen, the simplest route is to invest in his company. (If $96,000 for a Berkshire Class A share sounds a mite steep for your wallet, you can choose instead to pick up "B" shares for only about $3,200 apiece.) In recent years the stock has stalled, partly due to fears that Buffett may not live much longer. Nonetheless, Berkshire Hathaway is the epitome of a quality company. It trades at a below-market price-to-earnings ratio (P/E) of 14.3 and a low price-to-book-value ratio of 1.5. In our view, it's a bargain without Buffett and a steal with him.

Another way to cash in on Buffett's eye for a deal is to buy what Berkshire Hathaway has been buying. Berkshire has bought into several public companies over the past year. By delving into regulatory filings and news releases we selected 10 such stocks for Buffett's best stocks. We wanted to reassure ourselves that the stocks haven't gained too much since Berkshire Hathaway's recent purchases, so we show each stock's price appreciation over the last year. Amazingly, you can buy many of these stocks at or below the price that Buffett recently paid.

While we don't think that buying Buffett's best stocks will automatically produce 24% returns, we do think that our list is a good place for any Buffett-style investor to start looking for prospects. For more insight into Buffett's style, read his frank and funny annual letters to shareholders. You'll find a free archive of them at BerkshireHathaway.com.

Buffett's best stocks


Company Industry
Price* P/E ROE 1-yr. Gain
ConocoPhillips Oil and gas
$59.53 5.5 25.8% -14.9%
Home Depot Home improvement
$36.27 12.4 23.6% -4.9%
TycoConglomerate
$27.99 17.3 11.4% 0.5%
United ParcelDelivery services
$71.94 19.6 24.1% 4.1%
General ElectricConglomerate
$35.30 22.0 17.4% 4.8%
Anheuser-BuschBeer
$47.51 19.7 55.7% 10.4%
Wal-MartDiscount stores
$49.32 19.3 22.1% 12.6%
TorchmarkInsurance
$63.11 13.2 15.0% 19.5%
Wells FargoBank
$36.18 15.4 19.7% 23.5%
USGBuilding materials
$47.07 — — **

Source: yahoo.com, Sept. 29, 2006
*In U.S. dollars
**Recently emerged from bankruptcy

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104045_4328

Invest like the masters: Peter Lynch

From MoneySense magazine, November 2006

Invest like the masters: Peter Lynch

Peter Lynch

He achieved 29%-a-year gains by looking for fast-growing firms trading at reasonable prices. We've applied his philosophy to turn up 10 of today's most interesting prospects

Peter Lynch caught the stock bug in his youth while caddying at his local golf course. One of the golfers was the president of Fidelity, the huge mutual fund firm in Boston. He invited Lynch to join his firm — and the move proved to be fortunate for everyone as the former caddie turned into the Tiger Woods of investing.

How good was Lynch? Well, he coined the term "10-bagger" to describe a stock that grows to be worth 10 times its original price. Most investors would be very happy to pick a few 10-baggers in their lifetimes — but if you had invested in Fidelity's Magellan fund when Lynch started managing it, you would have nabbed a 28-bagger. Yes, a $1,000 investment in Fidelity's Magellan fund in 1977 would have blossomed into $28,000 by the time Lynch retired in 1990. That's a remarkable average annual return of 29.2%.

Aside from providing blowout returns, Lynch wrote three investment books in which he expounds on his methods and investment philosophy. His bestsellers, One Up On Wall Street and Beating the Street, are probably the most useful tomes for most investors.

As you'll discover in those books, Lynch is the most growth-oriented of our four master investors, but he still keeps a keen eye on value. To find stocks that Lynch might like, we started with what he calls fast growers. These are stocks of small aggressive companies that are growing their earnings at a rate of between 20% and 25% a year. Lynch notes, "If you choose wisely, this is the land of the 10- to 40-baggers, and even 200-baggers. With a small portfolio, one or two of these can make a career." They sure seemed to work for him.

But Lynch also keeps an eye on price and he is most interested in stocks with P/E ratios lower than their growth rates. If a company grows at 20% a year, then Lynch would only be interested if it traded at a P/E ratio of less than 20. Similarly, he would only buy a 25% grower if it went for less than a P/E ratio of 25 — hopefully, much less.

Because Lynch likes small companies with room to grow, we began by narrowing our search to U.S. firms with market capitalizations between $200 million and $1 billion (all figures in U.S. dollars). Since we wanted fast growers, we demanded earnings-per-share growth of between 20% and 25% a year over the last five years. In keeping with Lynch's rule, we narrowed our list down to these fast growers that had smaller P/E ratios than their growth rates. Lynch also prefers firms with solid balance sheets, so we stuck to companies with more equity than debt. From the short list of stocks that passed all of these tests, we selected 10 of the best prospects with the lowest P/E-to-growth ratios to be Lynch's leaders.

Of course, our list would only be the first step for Lynch, who believes in exhaustively checking out any stock he buys. His first rule of investing is, "Investing is fun, exciting, and dangerous if you don't do any work." Wise investors should take heed.


Lynch's leaders

Company Industry
Price* P/E 5-yr annual EPS Growth Debt/Equity

North Pittsburgh SystemsTelecom
$25.17 11.1 24.1% 0.24
FNB UnitedRegional banks
$18.63 10.8 23.1% 0.49
United America IndemnityInsurance
$22.47 12.0 23.1% 0.24
Center Financial Corp.Savings and loans
$23.78 14.9 24.0% 0.44
Columbia Banking SystemSavings and loans
$32.01 16.1 24.1% 0.10
Credit Acceptance Corp.Credit services
$29.68 15.8 23.6% 0.81
SchawkMarketing services
$18.22 16.2 23.4% 0.53
Nara BancorpRegional banks
$18.29 14.9 20.8% 0.24
Heritage CommerceRegional banks
$23.14 16.4 21.6% 0.39
Option CareHome health care
$13.39 20.7 25.0% 0.42

Source: msn.com, Sept. 29, 2006
*In U.S. dollars

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104144_5424

Recession type scare causes stocks to be sold down

I wrote:

"Only a recession type scare can cause stocks to be sold per share below asset values. This stock is an easy 10 bagger if you hold long enough for the next upturn in the economy."


http://caps.fool.com/Blogs/ViewPost.aspx?bpid=203897&t=01007468826027738866

Look before leaping into small stocks

10/29/99- Updated 02:09 PM ET


Look before leaping into small stocks

By John Waggoner, USA TODAY

Your neighbors are all buying stocks. So are your co-workers. Heck, the kids down the street are investing in Lemonadestand.com. You? You're sensible and have most of your money in mutual funds. But you have a little money put aside, and you want to try picking some stocks, too.

The operative words here are "a little" money. You want to spend maybe $2,500, preferably less. If you're buying in multiples of 100 shares - which can save you money on commissions - you're talking about stocks that cost less than $25 a share.

Evaluating such inexpensive stocks isn't as easy as evaluating a large stock like Intel. But it's not that much harder - and it can be rewarding.

Low for a reason

Most investors dream of buying a stock for $1 that turns into a 10-bagger - slang for a stock that gains 1,000%. But don't go that low - stocks priced below $5 a share are considered "penny stocks," and they can be dangerous. "When you get below $5 a share, the stinkers outnumber the 10-baggers," says Joel Tillinghast, manager of Fidelity Low-Priced Stock Fund.

Even stocks that sell from $5 to $20 need to be looked at closely. A $5 stock isn't low-priced by accident, says Robert Kern, manager of Fremont U.S. Micro-cap Fund. "It's that price for a reason."

And that reason is rarely a good one. In the best case, the company missed its earnings estimates for a quarter or two or is in an industry that Wall Street currently shuns. In the worst case, the company is shuffling off to oblivion. "You want to make sure you don't have complete wipe-out risk," Fidelity's Tillinghast says.

Check the numbers

So look for a strong balance sheet. Get the company's annual report and its most recent quarterly reports, either through a stockbroker or find them at the Securities and Exchange Commission's Web site, www.sec.gov.

Your first question: If sales take a serious downturn, does this company have enough money to survive the next 12 months? To get the answer, go to the balance sheet and find:

Current liabilities. This is the company's debt due within 12 months.

Current assets. This is the company's accounts receivable, cash, marketable securities and inventory - items that could be used to pay off current liabilities in a pinch.

Dividing current assets by current liabilities gives you a company's current ratio. You want this to be higher than 1, and preferably much higher. For a more conservative number, called the quick ratio, subtract inventory from current assets. Inventory can be tough to sell in a downturn.

You also should get an idea of the company's total debt vs. its total assets. In general, the less debt the better. How much is too much? It depends on the industry, Tillinghast says.

"Financial companies can support debt levels that would be terrifying to industrial companies."

Next question: Does this company actually make money? For that, look at earnings per share. Tillinghast likes to look for annual earnings-per-share growth of 10% or better. "If it's not 10% or more, I'll look for something better," he says.

And these are just starting points. You should be thoroughly familiar with the company and its fundamentals before you invest.

Different styles

Clearly, it's not easy to find a $10 stock that has no debt and 10% annual earnings growth. In most cases, that's because the company has stumbled recently. You have to figure out why the company's price might rise.

Different managers use different techniques. John Rogers, manager of the Ariel Fund, looks for stocks that are simply out of favor and should rebound. For example, HCC Insurance earned $1.57 a share the past 12 months. Like most property/casualty companies, it got clobbered this fall during hurricane season.

Analysts expect the company to earn $1.20 a share this year, which is short of expectations. But the stock's price is down more than 55% from its July 1999 high, while earnings are expected to be down only 24%. So Rogers figures it's been punished enough.

Erin Piner, manager of PBHG Limited Fund, looks for stocks with strong growth in earnings or sales. Her favorite low-priced stock, Hall Kinion & Associates, supplies staffing for Internet sites. Earnings have risen 58%, from 12 cents a share to 19 cents, and revenue is rising, too. "It's a low-priced way to play the build-out of the Internet," she says.

Most low-priced stocks are small-company stocks, and small-company stocks have been mostly ignored for years. So many of them are historically cheap. "I've never seen anything like it in the past 17 years," Rogers says.

More time and effort

Cheap or not, investing in individual stocks takes more time and effort than investing in mutual funds. Small-company stocks are often traded infrequently, which means you may have trouble selling for the last price you've seen quoted. You're also taking on more risk: There's always the chance a stock price can go to zero.

The stock picks in the chart are by some of the best small-stock fund managers in the business. But these are just starting points, and you need to investigate the stocks carefully. Otherwise, your tuition to Stockpicking University could be costly indeed. If this all seems like too much work, consider investing in a good small-cap stock fund instead.

Fishing for low-priced stocks

Finding small stocks can be tricky. Here, five pros offer some of their favorites. P-E, or price-to-earnings ratio, is a stock's price divides by its earnings per share. Higher P-Es generally show investors are willing to spend more, in the expectation of higher rewards.

http://www.usatoday.com/money/wealth/making/mmw182.htm

10 bagger over 5 years

Santa, let the Sensex hit 15000

Larissa Fernand December 23, 2005


Dear Santa

When I asked my friends what features on their Christmas wish list, I mourned their lack of imagination and creativity.

I mean, why would you ask for a perfume bottle or a pair of Levi's? Can't you go out and get one yourself?

Since you choose to make an appearance just once a year with a promise to make wishes come true, I have decided to make the most of it.

So here is my wish list for this Christmas.

Wish 1: Can you make this bull run last for at least five years?

Now, don't get me wrong. I am not for a moment suggesting that you keep the Sensex at 9,000-odd levels, with a gradual rise now and then. Can you push it to at least 15,000?

Over five years, this should not be too difficult.

All you have to do is let the Foreign Institutional Investors keep pouring money into this country. The Americans and the British were the first entrants, followed by the Germans. The Japanese are the latest. So you still have a large part of the globe to work with.

And yes, don't forget the non-resident Indian population abroad. In case you haven't noticed, they are loaded.

Simultaneously, you can work at keeping interest rates in the US really low. This will ensure that none of the above pull out their money and run to greener pastures for better returns (isn't everyone money crazy!).

Of course, there will other loose ends that have to be tied, but nothing that your ingenuity cannot overcome.

Is this bull run over?
Wish 2: Can you name the most lucrative stocks to invest in?

Now, what is the point of a bull run if I have not invested in the galloping stocks? So how about giving me the names of five 10-baggers?

You know what a 10-bagger is, don't you? Let me explain just to make sure we are both referring to the same thing. Ten baggers are stocks that have increased 10 times in value from the price at which I purchased them.

And yes, I am not looking at them turning into 10 baggers for my grandchildren. I am talking about the next five years.

Now, in case that is a bit too demanding, here is what I suggest. Why don't you orchestrate a stock market correction?

Let the Sensex fall precipitously by around 20%. At that time, I will pick up the five stocks you recommend since their prices would have fallen to dirt cheap levels. Once I have done that, the bulls can start galloping again and the bears and can hibernate for the next five years.

Come Christmas 2010, I will sell the shares, smile and pat myself on the back.

After that, the stock market can shut down for all I care.

Wish 3: Please give me some money!

Be reasonable. What good is a bull run going to do me, even if I have a list of the five best stocks, if I have no money to invest in the stock market?

How about a gift from a benign relative? This one is tough. You will have to make them benign to start with.

Better still, why not just convince my boss to give me a bonus? A million rupees should be fine.

Investing that and getting 10 times that amount in five years is perfect. If you do the math, you will realise that I am far from greedy. Investing a million and getting 10 times that amount would leave me with 10 million (Rs 1 crore).

Asking for a crore is really not too much.

Don't let the festive season empty your wallet
Wish 4: And yes, throw in a gift card

Alright, here's the last one.

I know a gift card sounds weird. But look at it practically. What I am asking for will materialise only after five years. What about now?

Just like my friends asked for perfumes and jeans, I guess the mundane must be given some amount of attention.

Now I am not asking for a gift certificate. Those are so limiting. You can only use them at a particular store. I would like a gift card -- the ones that work like pre-paid debit cards and are acceptable at all merchant establishments.

Don't sigh, it's very simple.

All you have to do is approach a bank that offers such cards (you can get your elves to do the groundwork). Kotak Mahindra Bank and IDBI Bank is where you can start. Pay the amount and you will get a card worth that much, which you can gift to me.

The bank would have tied up with either Visa or MasterCard and the person getting the card (in this case, me) can use it just like a debit card. As I spend, the amount gets debited.

The maximum limit of around Rs 25,000 would suit me fine.

Want a gift card?
And yes dear Santa, in case you feeling exhausted after reading this, I have a promise to make.

If you do give me all that is on this list, you have my word that I shall not bother you or ask for anything for the next five years.

Oops, I almost forgot!

Merry Christmas to you too!

http://www.rediff.com/getahead/2005/dec/23santa.htm

How to Buy Cheap Stocks

How to Buy Cheap Stocks

The name of cheap stocks might cause some confusion. The common understanding of cheap stocks is of little help to boost the assets of an investor’s portfolio. Successful cheap stock trading has nothing to do with blindly buying any stock just because of its low share price. The key of cheap stock trade is to find the undervalued stocks with promising potentials.

Peter Lynch – Master of Cheap Stock Trading

Peter Lynch is considered to be the best fund manager in the world. Under his management, the assets of Magellan Fund had increased from $18 million to $14 billion in thirteen years (1977 – 1990). Lynch’s investment philosophy is quite simple and straight forward. He believes in “Invest in what you know”, which echoes with what Warren Buffett preaches and practices “Never invest in a business you cannot understand”.

In One Up on Wall Street and Beating the Street, Lynch revealed the secret of his super performance is largely due to a series of successful cheap stock trading. Lynch coined an investment term called “10-bagger”, which refers to a ten fold return of the initial investment. Lynch had found more than a hundred “10-bagger” stocks during his career, just to name a few, Fannie Mae, General Electric, Ford Motor, Dunkin’ Donuts, Taco Bell, and Philip Morris International.

Normal investors would brag a lot if they could lay their hands on one or two of “10-bagger”, while many would never have this kind of experience in their lives. The fact that Lynch can find more than a hundred of them makes him a live legend of cheap stock trading.

Cheap Stock Trading Example with Forty-fold Return

While Lynch reigned as a fund manger, the market never ends to produce “10-bagger” stocks. Sina Corp. (SINA) is an excellent example after 2000. During the debacle of dot-com frenzy, the share price of SINA crashed from its all-time high $47.87 down to $1.07 in less than one and half year (May, 2000 – Sep, 2001), which qualified it as a cheap penny stock. Since SINA is a leading information service provider in China, during the next two and half years, SINA made a round trip back to $47.69 by Jan, 2004. For shrew investors, SINA would be a handsomely “forty bagger”, and multiply their investment portfolios many times in less than three years.

A thorough understanding of principles of value investing and Peter Lynch’s investment philosophy is indispensable to buy cheap stock successfully. For investors who rush to search for the next “10-bagger” best cheap stock, they might find their cheap stock picks aren’t cheap at all. It takes time and great efforts to buy cheap stock effectively. Be well prepared and do your homework, you might be able to add the next good cheap stock to your investment portfolio.

http://hubpages.com/hub/How-to-Buy-Cheap-Stocks

Some Ten-Baggers For You

August 2nd, 2009 at 6:31 pm

Some Ten-Baggers For You

A cognoscente is someone who has specialized knowledge. I’m not perfect. I wish that I had sold all of my stocks at the end of 2007 and started buying in March of this year. One of my 401K’s was down almost 50% last year, and a two of my stocks were down 66%. It’s always my feeling though that you need chips on the table, good or bad, or you don’t even have a chance of winning. One thing I’m proud of is that I held on to everything I had, and began a buying program in the face of the worst market since 1933. I’ll let you be the judge if I qualify as a card carrying member of the stock market cognoscenti.

If you review my blogs since I began, you will see that by and large, most of my recommendations and picks have panned out, many of them, spectacularly. I conservatively stated that most of my picks would gain 50% or more in one year, but many of them doubled, tripled and even quadrupled in the last 7 months !! If I had a lot of money to invest, I would have bought all of my own picks, but like you, I can only buy a few at a time.

You might think it’s time to sell. But you would be wrong. Let me give you some insight as to why I was so optimistic when I started.

As you know, I have been a student of the stock market and investing for over 35 years. You don’t have to work on Wall Street to be good at this game. Look at the smartest cognoscente in the world, Warren Buffet, he’s been watching from Omaha for the last 50 years and is to investing what Einstein was to Physics, a genius. What I’m getting at is the “bird’s eye view.”

As we descended into the abyss last October, everyone was asking “Is this going to be a repeat of the Great Depression ? “ I’m fully aware of the economic history behind that debacle. My answer was no. The reason for my optimism is that there was just too much money around. And there still is.

Once you take my supposition, and if you believe we’re emerging from a Great Recession rather than a Great Depression, then from my bird’s eye view, what was happening to the market was an outlier. Statisticians know what outliers are. They are temporary deviations from trend due to a cataclysmic type cause. Think of the market drop after Kennedy was assassinated. Think of September 11th. Last August, it all had to do with Treasury Secretary Paulson suddenly getting capitalist religion and deciding, wrongly, to let Lehman Brothers go under.

Let’s return to the present. Because the market has gained so much, you would think, under normal circumstances, that we’re going to have another crackdown. I don’t think we’re going to get a crackdown at all. We might get a 10 or 20% drop at some point. That mild drop (comparatively) won’t come until the outlier is erased, possibly as early as Labor Day, but more likely by the end of this year.

Cognoscenti have knowledge but to survive in the stock market, you have to have insights, hunches, or revelations. My current revelation is that we will not return to normal in this stock market until we have fully climbed the proverbial Wall of Worry. There are still too many people that are negative and think the market will drop. And the higher it goes, the more negative they get that it will drop. However, it will not drop, until they give up and transfer all their 401K money back in because they are afraid they’ll miss the next up wave.

If you are a novice to the stock market, what I’m saying to you may be contrary to common sense thinking. However, the stock market is not based upon common sense, it is based upon people’s expectations of stock supply and demand. No one explained this concept better than the great cognoscente John Templeton, on Louis Rukeyser’s old Wall Street Week program, every Friday night, at 8 pm, on public TV. What he said was, if you had an ailment and went to the doctor and got an opinion, then consulted another doctor and got an opinion, and then went to 10 doctors and got an opinion, and if all 10 of them were in consensus about your ailment and its cure, you would take that advice. However, using stock market logic, you would take the consensus of 10 stock advisers, and THEN DO THE EXACT OPPOSITE.

This is what Warren Buffet was trying to tell us last October when he said “sell when others are greedy, and buy when others are fearful”. He lent 5 Billion Dollars to Goldman Sachs for a 10% dividend forever, with warrants to buy the stock at 117. Goldman dipped down into the 60’s or 70’s, and last month they paid back their 25 billion in Tarp money, AND their stock price is now in the 160’s. And Warren is sitting on a massive unsold capital gain while he collects 500 million year after year until he decides he’d like to cash it in.

Ten Baggers

A ten bagger is a stock which goes up 10 times in price. Seem impossible ? OK, after September 11, I bought some shares of Amazon for my kids accounts at 6 dollars, and about 1 year or 2 years later I was selling them over 60 dollars per share. Amazon closed this week at 85, and I think you’re looking at another double at least by the end of next year.

Before I get to the 10 baggers which is what you do with speculative money you might lose, let me mention my personal 5 horsemen, stocks that I keep holding because they’ll probably double or triple pretty easily in the next 2 years, these are the type of stocks you can own more of without worrying about losing sleep– GOOG (Google), AAPL (Apple), Amazon (AMZN), Blue Nile (NILE), and Research in Motion (RIMM) the makers of Blackberry. Hey, I know there are also a bunch of other great stocks out there, but technology is my business and I like these particular stocks. Oh, don’t forget Brk.B that will double and you won’t lose a minute of sleep at all.

In your 401K’s, try to move your funds into International Funds, they are going to do well this next year. If you like funds, look at EWZ (Brazil), PBD (Global Clean Energy), GEX (Global Alternative Energy), and COW (Livestock Stocks).

Here are some potential 10-baggers (over the next 1-3 years) for you to consider not necessarily in priority order. I expect many of these to double by December.

OCNF – Dry Shipping , now at 1.36 a short-term double, it has a book value (if it were to be liquidated) of $11.
XTEX – Nat Gas, now at 3.39 , has a book value of $15 and pays 20% dividend
URE – a real estate mutual fund, now at 4.28 it pays 10%
CLZR – they make cosmetic surgery lasers, now at 1.13 book value $3 and no debt
ESCA – Sporting Goods, now at a buck, $6 book , looks like a quadruple in 1 year.
OBAS – Optibase, they’re into internet TV, now at $1, $2 book.
LYG – Lloyds of London insurance, now at $6, $10 book, pays 30% dividend.
SHS = Sauer Danfoss Heavy Machinery, now at $5, $6.5 book, pays 14%.
UYG – these are your biggest banks, 4.59 pays 4%

No one has enough money to buy all of these, but here are some more if you’d like to check them out.

XJT airlines 1.37 $11 book
WNC Trucking .83 $4 book

Real Estate
AHR Reit .58
BEE Hotels 1.18 $5 book
ABR Reit 1.81 $11 book, pays 53%
DDR Shopping Centers $5 , $16 book
TPGI Prop Mgt 1.37 $5 book

Oil and Gas

FTK drilling 1.88 $2.7 book
AHD Pipelines around 3 bucks, pays 7%
DPTR Nat Gas $2 , $6 book

Retail

TWMC Entertainment (owns FYE) 1.11 $7 book
FNET Toys and Games 1.15 $4 book
KDE Toy and Game Licensing 2 , $5 book, no debt
PERF umania Perfumes, 2.4 $7.8 book

Hodgepodge

MIC 4 , pays 20%
NWD .13 Asia Food and Bev
HTX Foreign Telecom 4

Remember what Cramer says, do your homework – these stocks are going to have some ups and downs, but from my birds eye view, even if they don’t become 10 baggers, some of them might double or triple, and that’s not a bad thing. You should diversify and spread some of your speculative money (10-20% of your overall) into these and I think overall, you will be rewarded.

Sorry, I am not a regular blogger, from my birds eye world I really only need to comment periodically. I only like to write when I get an inspiration. Stay tuned.


http://www.emilsblog.com/?p=24

The multi-baggers from 10k to 20k index of the Indian Stock Market

Sunday, Nov 25, 2007

The multi-baggers from 10k to 20k

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The majority of the multi-baggers owe their stellar returns to the market “re-rating”, rather than an impressive expansion in their earnings.


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Kumar Shankar Roy

It took a little over 18 months for the benchmark index of the Indian stock market to double from 10,000 levels to the dizzying heights of 20,000. Not to be left behind, the Nifty too breached the 6000 level on November 1, from a shade below 3000 last June. One would think this would have made the job of ferreting out multi-baggers (stocks whose prices have risen several times over) easy. But could you have spotted these multi-baggers through some in-depth research into th ese companies in June last year? Maybe not!

Indeed, the list of multi-baggers over the past year and half would leave an investor confused. Street-sense says that capital goods, real-estate and infrastructure, the most fancied sectors in the stock market in the past year, would have been the ones to yield multi-baggers over the past year and a half. But there is no specific sector theme to the stocks that made it to the top. Companies from the infrastructure, capital goods and real-estate sectors are, in fact, missing from the top 20.

Unitech comes in at the 38th position in spite of witnessing its stock price rising 5.6 times. It would also have been quite difficult to catch these stocks last year, even had you pored over their financials. The majority of the multi-baggers owe their stellar returns to the market “re-rating” them (allowing them a larger price-earnings multiple), rather than an impressive expansion in their earnings. Which are the stocks heading the multi-baggers list? Is there a pattern to them? Let us find out.

Top multi-baggers


Jai Corp, Walchandnagar Industries, State Trading Co, India Infoline and BAG Films lead the list of top 10 multi-baggers since June 2006 (when the Sensex was at 10,000). These stocks naturally represent the big gainers among the 1,033 listed stocks on the NSE. Others that make it to the list are Autolite (I), KS Oils, REI Agro, Nicco Corporation and Goldstone Technologies. All these stocks had risen tenfold or more in the period under review — June 19, 2006 to November 16, 2007 (we chose these dates as they represent Sensex levels of 10,000 and 20,000 respectively).

Would you have put Jai Corp on your “buy” list last year, based on its business prospects? Maybe not. Seeking an explanation for why a Rs 19 stock in a matter of just one-and-a-half years rose to Rs 1,000, we find that Jai Corp is into such businesses as steel, plastic processing and spinning yarn facilities. But this was not why it was sought after.

The stock came into the limelight because of speculation that the promoters of a mega corporation have an indirect stake in the company and plan to use it as their infrastructure vehicle. This partly explains the stock price rising by over 67 times. The fact that only 15 per cent of its stock is freely available to the investing public may also have helped its stratospheric rise.

In the second slot, we have Walchandnagar Industries Ltd (WIL), whose story is a different one; though the fact that the stock has risen by nearly 20 times its price tag of Rs 450 in June last year. WIL is engaged in the manufacture of sugar plants, cement plants, nuclear power and space equipment and other engineering products. Notwithstanding the decent results posted by it over the past year (72 per cent profit growth), interest in the stock has been stoked by reports of indirect stake held by some influential politicians in the stock.

Apart from these, companies that operate in “sunrise” businesses and seen as offering high potential, such as India Infoline (broking), Goldstone Technologies (IPTV services), BAG Films (media), Nicco Corporation (entertainment parks) and REI Agro (basmati rice) feature in the top ten multibaggers (see Table).

Surging on ‘potential’


For five of these companies, namely WIL, State Trading Corporation, India Infoline, BAG Films and Rei Agro, earnings have risen, but their PE multiples have expanded even more, as investors have marked them up on the strength of their forays into promising new businesses. There are a couple of stocks which did benefit from a change in fundamentals.

The spike in prices of the shares of Autolite and Nicco Corporation is explained mainly by a turnaround in profitability. Nicco recorded a profit of Rs 6 crore last year as against a loss of Rs 16 crore in the year ago. Autolite, which makes lights and tubes, posted around Rs 5 crore profit, compared to a loss of Rs 3.3 crore in the earlier year. Both companies continued a sharp ramp-up in earnings numbers in the first six months of the current fiscal.

Though spotting the multi-baggers in advance was difficult, there was actually a good chance you held one in your portfolio. In the over 1,000 stocks reviewed on the NSE, shares of more than 490 companies, over half, gave a 100 per cent return between June 19 and November 17. Most of the stocks enjoyed both domestic as well as foreign investors’ attention, leading to a hefty rise in prices. Over 60 companies saw their stock price rise five-fold or more. Stocks of 12 companies multiplied 10 times or more.

Small-caps in limelight


It is a known fact that retail investors have an unexplained penchant for stocks trading at low absolute prices, and these dotted the list of multi-baggers. While the multi-baggers, in general, did not huddle close to any specific sector theme, the market-cap status of stocks did play a role.

Results showed that out of the 490 companies that doubled their value in these 18 months, 409 were small-caps, i.e. companies with a market capitalisation of Rs 2,500 crore or less. In this set of small-cap companies, the average share price rise was 3.4 times, higher than the average share price rise in mid-caps as well as large-caps at 2.4 times for each respectively.

Mid-caps are companies that have market capitalisation between Rs 2,500 crore to Rs 10,000 crore.

These results are not surprising because this period has largely seen the mid-cap (103 per cent) and small-cap indices (107 per cent) exceeding the returns of the bellwethers such as the Sensex (97 per cent) or the Nifty (98 per cent).

In the mid-cap space, around 61 companies were multi-baggers (they at least doubled in value) while only 23 large-caps (companies with a market capitalisation of Rs 10,000 crore or more) were a part of the list. This data clearly indicates that cheap stocks of lesser-known companies delivered a more stellar rise than stocks of widely-tracked, larger companies.

Parting shot


If the multi-baggers were not entirely sought after for their strong earnings growth, the stocks that fell most sharply in this period were certainly swayed to a greater extent by fundamentals. Companies such as Aztecsoft, Nova Petrochem, Thiru Arooran Sugar and Suryalakshmi Cotton Mills head the list of worst performing stocks over this period.

Other laggards include Dhampur Sugar, Celebrity Fashions, Shah Alloys, Uttam Sugar Mill, Simbhaoli Sugars and Sakthi Sugars.

Unlike the multi-baggers, whose share prices have gone up as a result of better growth potential, rather than actual earnings, the laggards appear to have declined directly in response to their profit performance.

Finally, discussion on multi-baggers from 10k to 20k would be incomplete without mention of the following companies. IFCI, despite its unimpressive financials, saw a stellar rise, following the announcement that the management had put a 26 per cent equity stake on the block. Reports of the company’s real-estate holdings and its long list of suitors helped the stock move up from Rs 9 to Rs 90, gaining a whopping 900 per cent in the process.

India may not yet be ready for Internet protocol TV, but that didn’t deter investors putting their money into IOL Broadband. From being a little known entity, the Rs 53-share gained almost 10 times its value in a matter of months, without the fundamental picture changing too much.

On the other hand, stocks such as Gujarat Mineral Development Corporation (832 per cent), Reliance Natural Resources (740 per cent), KLG Systel (500 per cent) and Welspun Gujarat Stahl (480 per cent) rode excellent earnings growth.

Fundamentally sound companies that turned out to be multi-baggers include TV18 India, Everest Kanto, Elecon Engineering, SREI Infrastructure Finance, Kotak Mahindra Bank and Larsen and Toubro.

In some cases, niche business areas attracted investors’ attention. Educomp (e-learning), Alphageo (seismic surveillance), Aban Offshore (oil rigs), Karuturi Networks (a leading cultivator of flowers), and Rolta (digital mapping) are prime examples.


http://www.thehindubusinessline.com/iw/2007/11/25/stories/2007112550750700.htm

Best stocks to buy now are banking stocks

Monday, January 5, 2009

Best stocks to buy now are banking stocks

Amid easing of liquidity, low bond yields and expectations of long term economic revival, banking stocks are seen as the best bet for investment - both in medium term and long term.

Banking sector is expected to outperform the market giving an on an average return of 20 per cent, according to analysts.

"With softer monetary policies and consequent reduction in bank lending rates and benchmark G-Sec rates, action would shift from core income to treasury and asset quality," said Amitabh Chakraborty, president (equities), Religare Securities.

Added Chakraborty, "Slower credit growth coupled with reduced benchmark prime lending rate (BPLR) will keep NII subdued. However, fall in benchmark rate will result in reversal of mark-to-market provision and trading gain opportunities."

BPLR is a short-term interest rate quoted by a commercial bank as an indication of the rate being charged on loans to its best commercial customers.

With capital adequacy ratio of 9 per cent and tier-I capital of 6 per cent, India banks (both PSUs and private sector) stand firm in the face of worsening global banking scenario.

Said Manish Sonthalia, vice president-equity strategy, Motilal Oswal, "Indian banks are 5 times more risk averse than US banks wherein capital adequacy ratio is merely around 2% as against standard 9% in India. The debt to equity ratio of Indian banks is 10 times more than US banks."

With a healthy 7 per cent GDP growth, India still stands strong in terms of economic development, for which banks are the major drivers for funds. Among Indian banks, PSU banks are the most preferred to park money. "Because of the higher investment of 27- 28% in SLR securities, the PSU banks are a better investment bet as against private banks (25% in SLR)," states a Religare research report.

Furthermore, because of more retail loan disbursement, chances of defaults are relatively higher for private banks.

However, net non-performing asset (NPA) levels for both PSU and private banks ranges between 0.7% and 1%. "Whatever may be the current NPA level; those are manageable and banks are making enough provisions for that. NPA is no threat for Indian banks," added Motilal's Sonthalia.

Top picks from PSU banks are SBI, Oriental bank, Indian Bank, Andhra Bank, Bank of Baroda, Federal Bank etc while ICICI, HDFC, Axis are the banks which rule the roost in private segment.

CHECKOUT:
State Bank of India (SBI) - Elephant in Banking sector
ICICI Bank - BUY report from BNP Paribas Securities
HDFC - Safe Investment
HDFC - Best stock to invest in Banking sector

According to the analysts, any fresh 'buy' on these bank stocks can attract returns of upto 15-20% in a year. Meanwhile, market slowdown does not seem to have played any spoilsport for banks' financial performance. Experts are of the opinion that PSU banks are expected to post a hike in their bottom line on YoY basis.

Source: Economic Times

http://www.indianstocksnews.com/2009/01/best-stocks-to-buy-now-are-banking.html

How to buy stocks ? Buy stocks with confidence

Monday, January 19, 2009

How to buy stocks ? Buy stocks with confidence

Current stock market, as we all know, is in an uncertain situation with ups and downs in stocks every week. Every investor may be wondering about how to buy a stock as buying stocks for long term investment has become difficult when there are no clear market trends.

We advise investors to keep the following factors in mind in order to make safe and sensible investments.

Stock trades at cheap brokerage and buying stocks online or online stock trading have made stock trades a very frequent practice for normal investor, they should understnad that stocks mentioned here are for long term investing and will be fruitful if they hold for longer time durations.

1. Low Debt-Equity ratio stocks
This is the ratio shows that how much equity and debt is used by the company to finance its assets. Debt-equity ratio above one shows that the company has resorted to debt for financing its assets rather than equity. If the ratio is lower than one, it means the company has a lesser debt burden. The positives of such companies are that they need only a lesser amount to be kept aside to pay the interests that arise out of loans. The fluctuations in interest rates during high inflationary situations may have little impact on the financials of such companies. So companies that have zero debt should be targeted with a medium to long-term perspective.

2. Stocks trading below their book values
Another factor to be kept in mind while investing in shares is the book value. The book value of a company is the cost of an asset minus accumulated depreciation. In other words it is the total value of the company’s assets that shareholders would theoretically receive if a company is liquidated. So, if a stock is trading below its book value, then it is underpriced, and should therefore be seen as an opportunity to make an investment in that stock.

3. Buying ‘A’ group stocks
An investor with a medium to long-term perspective can, without any hesitation, go for stocks in the ‘A’ group, even if the situation is not very favourable. Once the markets consolidate and pick up, the first stocks to move up will be the ‘A’ group stocks as they form the index. When the index moves up, obviously these stocks will be the movers. One main thing to keep in mind is that, never make your whole investment in a single sector or a stock. Instead, investors should create a diversified portfolio including more than one stock belonging to different sectors.

4. Following the averaging pattern of investment
Investors should follow the averaging pattern of investment when the markets are volatile and not giving any trends. This will put the investors in a better position. The investor has to enter the market at three or four different times which will help the investor to reduce the per share price of his holdings.

E.g. if an investor is desirous of making an investment of Rs 40000, he should invest the money at three or four different times with an investment of Rs 10000 each. When the stock which the investor wants to invest in is trading at Rs 100, he can make his first entry by investing Rs 10000 and purchasing 100 shares of the stock. When the share price comes down to Rs 80, he can make his second entry by investing Rs 10000 and purchasing 125 shares. When the share falls to Rs 70 and then Rs 60, the investor can make his third and fourth entries by investing Rs 10000 each, and purchase 143 and 167 shares, respectively. When the market moves up from lows, the average rate of the stock in the investor’s portfolio will be Rs 74.7 which will be the investor’s BEP.

The following table shows the stocks that are trading below their book value and with zero debt. Investors also can go for stocks in the ‘A’ group segment which are/are not given in the table given below. Investment should be made in these stocks in the above said averaging pattern.


Source: Geojit Securtiy research house

http://www.indianstocksnews.com/2009/01/how-to-buy-stocks-buy-stocks-with.html