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When All Stocks Are Value Stocks - Think QDI

by sanserve

Value stocks are those that tend to trade at lower prices
relative to their fundamental characteristics than their more
speculative cousins, the growth stocks; they have higher than
usual dividend yields and lower P/E and P/B ratios. So when all
stock prices are down significantly, have they all become value
stocks? Or, based on the panicky fear that tends to overwhelm
media and financial experts alike, haven't they all taken on the
speculative characteristics of growth stocks?

Well, to a certain extent they have, because the lower value
stock prices go, the more likely it is that they will eventually
experience the 15% ROE that typifies the classic growth stock.
Interestingly, by definition, growth stocks are expected to be
associated with profitable companies, a fact that speculators
often lose site of. There are three features that separate value
stocks from growth stocks and two that separate Investment Grade
Value (IGV) stocks from the average, run-of-the-mill, variety.

Value stocks pay dividends, and have lower ratios than growth
stocks. IGV stock companies also have long-term histories of
profitability and an S & P rating of B+ or higher. Would you be
surprised to learn that neither the DJIA nor the S & P 500
contains particularly high numbers of IGV stocks? Still, since
1982, value stocks have outperformed growth stocks 62% of the
time. So when an ugly correction has a makeover, it's likely that
all value stocks transform themselves into growth stocks, at
least temporarily.

Will Rogers summed up the stock selection quandary nicely with:
"Only buy stocks that go up. If they aren't going to go up, don't
buy them." Many have misunderstood this tongue-in-cheek
observation and joined the buy-anything-high investment club. You
need dig no further than the current lists (June '08) of "most
advancing issues" to see how investors are buying commodity
companies and financial futures at the highest prices in the
history of mankind.

This while they are shunning IGVSI (Investment Grade Value Stock
Index) companies that have plummeted to their most attractive
price levels in three to five years. Many of the very best
multinational companies in the world are at historically low
prices. Wall Street smiles knowingly (and greedily) as Main
Street hucksters tout gold, currencies, and oil futures as
retirement plan safety nets. Regulatory agencies look the other
way as speculations worm their way into qualified plans of all
varieties. Surely those markets will be regulated some day---
after the next Bazooka-pink, gooey mess becomes history.

How much financial bloodshed is necessary before we realize that
there is no safe and easy shortcut to investment success? When do
we learn that most of our mistakes involve greed, fear, or
unrealistic expectations about what we own? Eventually,
successful investors begin to allocate assets in a goal directed
manner by adopting a more realistic investment strategy--- one
with security selection guidelines and realistic performance
definitions and expectations.

If you are thinking of trying a strategy for a year to see if it
works, you're being too short-term sighted--- the investment
markets operate in cycles. If you insist on comparing your
performance with indices and averages, you'll rarely be
satisfied. A viable investment strategy will be a
three-dimensional decision model, and all three decisions are
equally important. Few strategies include a targeted profit
taking discipline--- dimension two. The first dimension involves
the selection of securities. The third?

How should an investor determine what stocks to buy, and when to
buy them? We've discussed the features of value and growth stocks
and seen how any number of companies can qualify as either
dependent upon where we are in terms of the market cycle or where
they are in terms of their own industry, sector, or business
cycles. Value stocks (and the debt securities of value stock
companies) tend to be safer than growth stocks. But IGVSI stocks
are super-screened by a unique rating system that is based on
company survival statistics--- very important stuff.

In the late 90's, it was rumored that a well-known value fund
manager was asked why he wasn't buying dot-coms, IPOs, etc. When
he said that they didn't qualify as value stocks, he was told to
change his definition--- or else. IGV stocks include a quality
element that minimizes the risk of loss and normally smoothes the
angles in the market cycle. The market value highs are typically
not as high, but the market value lows are most often not as low
as they are with either growth or Wall Street definition value
stocks. They work best in conjunction with portfolios that have
an income allocation of at least 30%--- you need to know why.

How do we create a confidence building IGV stock selection
universe without getting bogged down in endless research? Here
are five filters you can use to come up with a listing of higher
quality companies: (1) An S & P rating of B+ or better. Standard
& Poor's combines many fundamental and qualitative factors into a
letter ranking that speaks only to the financial viability of the
companies. Anything rated lower adds more risk to your portfolio.

(2) A history of profitability. Although it should seem obvious,
buying stock in a company that has a history of profitable
operations is inherently less risky. Profitable operations adapt
more readily to changes in markets, economies, and business
growth opportunities. (3) A history of regular, even increasing,
dividend payments. Companies will go to great lengths, and endure
great hardships, before electing either to cut or to omit a
dividend. Dividend changes are important, absolute size is not.

(4) A Reasonable Price Range. Most Investment Grade stocks are
priced above $10 per share and only a few trade at levels above
$100. An unusually high price may be caused by higher sector or
company-specific speculation while an inordinately low price may
be a good warning signal. (5) An NYSE listing--- just because
it's easier.

Your selection universe will become the backbone of your equity
asset allocation, so there is no room for creative adjustments to
the rules and guidelines you've established--- no matter how
strongly you feel about recent news or rumor. There are
approximately 450 IGV stocks to choose from--- and you'll find
the name recognition comforting. Additionally, as these companies
gyrate above and below your purchase price (as they absolutely
will), you can be more confident that it is merely the nature of
the stock market and not an imminent financial disaster.

Steve Selengut
<a href="http://www.sancoservices.com">Sanco Services</a>
<a href="http://www.kiawahgolfinvestmentseminars.com">Kiawa Golf
Investment Seminars</a>
Author: "The Brainwashing of the American Investor: The Book
that Wall Street Does Not Want YOU to Read" and "A Millionaire's
Secret Investment Strategy".

Syndicated by Top Gazebos - www.topgazebos.net

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