Investor Uprising aims to tell you about great growth stories and reasonably priced stocks. That's why we've come up with our Investor Uprising 25 Index, which is a guide to successful, profitable companies whose stock valuations are quite reasonable.
The Index is always listed in the lower right corner of our home page, or you can always find all of the components of the Index listed here. Every day it will track the fortunes of those high-quality companies we have identified as reasonably priced, according to the principles we outlined in our Guide to Investment Metrics.
So, what kind of list is this -- a GARP (Growth at a Reasonable Price) list? A Value list? It's a bit of a hybrid of both. Really what we aim to do is find cheap stocks, whether they are growth stocks or value stocks. I'll tell you what's not in it: overpriced speculative stocks, or any stocks without revenue, earnings, or positive book value. We don't like to go fishing in the sewer.
The list originates from hundreds of stocks that we screen regularly. We started in January, compiling an aggregate screen of about 100 stocks. Then we went through every single one of them, looking for companies that met the following criteria:
Profitable
PEG (price/earnings/growth) below 1.25 or P/E below 15 -- preferably both
Return on equity greater than 10%
Preferably an ROE greater than the P/E ratio
Industry leader or potential to improve leadership position
In many cases, we screened out lots of companies that we didn't like upon further qualitative analysis. We also tried to balance the index with companies from several industries, especially industries that appear to have long-term prospects, such as technology and energy. When possible, we focused on finding companies that are innovation leaders yet don't have extravagant valuations, which isn't always easy in the technology sector.
I have been performing this exercise for nearly six years. Here's an interesting thing that I've found: The number of stocks that comes out in the initial screen varies wildly from year to year. Some years, there are hundreds of candidates. Some years, the pickings are very slim, and it's hard to find five stocks that meet my criteria, let alone 25. This year, there were more candidates than usual.
Why is this so? Well, the market vacillates, as we all know, and it floats between periods of relative overvaluation and relative undervaluation. At extremes such as 2000 (overvaluation) and 2009 (undervaluation), this is sometimes very clear, but often the market is in the middle, with dozens of stocks that are overvalued and dozens that are undervalued. Right now, we appear to be at a period of time in which there are many reasonably priced stocks.
Here are a few stocks from the IU25 Index to watch in the next couple of weeks, and why:
SanDisk Corp. (Nasdaq: SNDK) earnings come tonight. Flash memory is a growing industry. I feel good about this stock.
Qualcomm Inc. (Nasdaq: QCOM) just had a good earnings report. The stock is up 2% today. It's a good play on growth in the smartphone and tablet markets.
Priceline.com Inc. (Nasdaq: PCLN) has been regularly hitting 52-week highs. In the stock business, we call that a breakout. With earnings growth of 70%, a ROE of 33%, and a PEG of 1.25, it's still not terribly expensive.
Cephalon Inc. (Nasdaq: CEPH) has rejected a bid from Valeant at $73 per share for the company. Will a higher bid emerge?
How does one use our index? You could use it to find good investment ideas. Or maybe places to work. I personally use it to build a portfolio. I believe a market-beating portfolio starts with a list of solid, profitable companies with reasonable valuation metrics. It then involves a strategy for deploying cash into the portfolio (dollar-cost averaging over time). I plan to write more on strategies for doing this next week.
At the moment, I do not personally own any of these stocks. The reason for this is that I plan to build a model portfolio, which will be published on this site. I will be personally invested in this model portfolio so that the readers can see what I'm doing and think about how it relates to their own investment strategies. More on that later!
Thanks a lot for sharing your index with us. It seems that you got a good list of criteria for screening stock. Would you mind to tell us, the selection of IU25 is fully automated by machine, or you will fine tune the list manually after machine crunching out the initial list based on your criterias?
Great questions Value Hiker. I'm weighing either quarterly or 6-month updates where we go in look at the stocks decide if any need to be thrown out and what to replace with. It is not automated -- the final selections are made by a human (me).
I feel more comfortable with IU25 now. I never fully trust machine, otherwise I will invest all my money in Index fund. By the way, I still have small percentage of my portfolio invested in index fund. It will remind me to never become too overconfident with my stock picking skill.
I regular check the Form 13F from gurus like Warren Buffett, Bill Miller, and Tom Gayner, etc. Some time I really find Gems in their holding. IU25 will be another addtional to my list to check
Value Hiker: Thanks. Yes, I think it's important to add the human filter at the last level.
A great example is many of the Chinese stocks, especially something like CHBT. Many of these are being identified by many computerized stock-screening tools but you have to ask yoursleves are the numbers real? They are almost too good to be true on many of these China plays and several have turned out to be alleged frauds. CHBT in fact was recently hit by a few analysts/publications that dug into their numbers, alleging cooked books. The stock has not been trading well, indicating nervousness about this. Another example of this is China Green Agriculture which looks great on paper (P/E of 4) but there are also charges of bad accounting and the stock has traded terribly, going nowhere but down in the last six months.
This is why after I look at the straight numbers I like to take a deeper look at individual companies and throw out companies I'm not comfortable with.
I agree with your comment. We recently ran into a Chinese company called Deer Consumer Products (DEER). Just crunching the numbers alone, it is a screaming buy. However after checking the management team, we uncovered lots of problems. We finally decided it would be safe to ignore the company.
Numbers can be helpful, but never be the main reason for a purchase decision. Investing is about business, business is about people. It is especially true for investing in growth companies.
I like the index here, there are definatly a few of the stocks that i did not know anything about at first but have done some research on my own, and pretty much found out what you described here.
Is there a plan for the site to spend some time covering each of the stocks on the index like the coverage Apple got today?
Yes, we are going to try to cover as many of the major news events related to these companies as possible. We'll also be covering many of the trends/growth businesses they may be linked to.
Nice! It will be interesting to be able to follow the news for the index on the site while see how it is performing against the other stocks on the index, sort of one stop shopping.
It is a great idea to have some central places to discuss individual stocks. It will be attractive to people like me who run a highly concentrated portfolio. Detailed discussion about an individual company will greatly enhance the ability of investors to find fraud, accounting gimmicks, operating issues on an interested company.
Good point. This DEER does look suspicious. Wondering how many those hot Chinese stocks are actually telling us truth. We need more research to make sure everything is by their book. Well, I guess that's why Warren Buffett is so interested to learn a compnay's management team before he decides a buy.
Loved your insights, I will try match my picks with yours. a somemore details on how you deleberate on secotors and equities in specific while picking would be interesting to read.
Thank you for sharing this index with us. It's quite interesing, and it will give me another angle to look at the market.
A question here, do you keep some kind of diversity balance when you compiled this index? By looking into each company in your index, I noticed you have a diversity balance like this:
Technology 48% (12 companies)
Basic matericls 32% (8)
Health 12% (3)
Cosumer goods 4% (1)
Services 4% (1)
I doubt you are using this index to map any market, or I missed the point?
I'd love to know more about the companies on the list. Looking forward to seeing brief summaries of each. Could you put something like that on the site so we can get some quick insight about who and what these firms are?
1) yes, we'll be profiling companies regularly. Check this space often.
2) Index balance -- we try to add companies from different industries and from those that appear to be doing well, but it's more important to me that the companies be growing and have good growth numbers. I think the fact that technology is a large majority of the index is a product of the fact that innovation is what's driving success of many companies these days.
We have just been through a Decade where the Stock market has gone nowhere.Still everyone is chasing Capital Gains instead of looking at something as basic ,patient and realistic as Dividends(and especially Compounded Investing).
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