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Author: Jacko2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3296  
Subject: Flare-out Growth 1 yr Cdn port Date: 2/5/2000 8:48 PM
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The folks over at http://investor.msn.com have developed a number of strategies. One of these is called "Flare-out Growth" (FOG, for short), a large-cap momentum-based strategy, that comes in yearly traded and monthly traded ports. The FOG port for 1999 was up over 200%, but the monthly one was down about 28% in Jan 2000.

I don't know what backtesting they've done. The screening criteria apparently come from a book called "Online Investing", carried by Barnes & Noble.

You buy the top 4 stocks that meet the criteria. At the moment, the yearly screen at investor.msn pulls up mostly the fiber optic stocks (Harmonic, and so on).

The criteria for the yearly traded port are:

1. Market cap >= US$1B
2. 12 mo rev >= US$10M
3. price/sales >= 4
4. % price change over last month >= 1%
5. % pr chg over last quarter >= 10%
6. % pr chg over last year >= 100%
7. % pr chg yr - % pr chg Q - (3 * % pr chg mo) = as high as possible

I interpret the criteria as finding relatively large companies, with some but not a lot of revenue, that seem relatively expensive (though because higher p/s ratios can be supported by healthy net margins, p/s can be a proxy for profitable companies), and that have doubled (gone up significantly) in the past year and still show some, but not a lot, of price gain recently.

If you play with the math for criterion #7, you'll find that stocks with recent large moves fall to the bottom of the selection list. But criteria 4 and 5 require the stock still to be moving upwards, even if the largest movements have been in the first 9 months of the past year.

I gave the criteria a whirl this morning at www.globeinvestor.com. On the price filter page, I screen for all securities with a price > $10 and meeting the criteria for yearly and quarterly price change (you can only do two on the screen). That gave me a list of 62 stocks, which I listed in market cap order, descending. About 23 stocks had a market cap of more than CDN$1.4B (Zi Corp just missed the cut; you could shade down to capture more stocks).

The revenue criterion knocked out some stocks such as QLT (which I found surprising).

The p/s criterion knocked out the larger, but stodgier companies, such as BCE (p/s of 3) and Rogers Comm'ns (p/s of 3.7). (I like Rogers, so I'd probably let this one slide a bit.) You calculate the p/s ratio by going to the financial reports filter: print out the "quarterly" page (which gives you market cap) and the "annual" page (which gives you most recent annual revenues); then do the math (market cap/rev).

You use the price reports page to calculate criterion #7, but that page only gives you the 1-year price change and the monthly price change. That was good enough for me. Keeners can go to some place like bigcharts.com and get and calculate the quarter price change info. On this criterion, Ballard Power fell to the very bottom of the list, with Cognos and BCE Emergis trailing, as well.

Here's the top 10 stocks (all on the TSE), ranked by criterion #7, with the Feb 4/2000 closing prices:

1. JDU (JDS Uniphase) $305
2. RIM (Research in Motion) $135.50
3. MTI.b (Microcell Telecom) $69.75
4. Corel (Corel) $29.20
5. NT (Nortel) $171
6. DE (Delrina) $85
7. NET.a (Clearnet Commn) $59.60
8. DSG (Descartes Systems) $52.50
9. RCM.b (Rogers Cantel Mobile) $66.35
10. BVF (Biovail) $84

The first 3 stocks were clear winners; I don't think the quarterly term would make much difference to the order there. Corel and NT are close enough that the quarterly figure would make a difference; and I'd probably choose NT over Corel anyway. The FOG port takes the top 4 stocks, but the first 10 make an interesting port. Stocks 9 and 10 were almost identical in their item #7 score, so the quarterly figure would definitely make a difference there; and given the other wireless companies in the list, you could go for BVF to get some biochem exposure, for a touch more diversification.

I note the similarities with Crapshooter's Key-TSE portfolio. I'm tempted to put some real money into these things (I hold a small position in JDU already). But then the voice in my head wonders whether this momentum-driven market will come crashing to the ground one day, perhaps this year.

Don
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