High Quality Stocks With Price Momentum

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I update the following portfolio/screen on a monthly basis on Scott's Investments. March's list of 35 stocks is here and the top 10 rated stocks returned an average of 2.23% for the top 10 stocks on the list versus -1.57% for SPY. The entire list of 35 stocks last month returned an average of 5.4%, led by Select Comfort (SCSS) at 38.19%.

The screen looks for the following:

earnings growers still reasonably priced as judged by the PEG ratio
low debt
a history of high return on equity and investment, and
price momentum as gauged by the percentage the stock is trading to its 250 day high.
The stocks are then ranked based on fundamental factors as compiled by stockscreen123.

35 stocks qualified for this month's list. Just as in last month, this tells us individual stock momentum still exists in the market and the fundamental factors on the list are easy to find among the high momentum stocks.

Some popular names made this month's list, inclduing Apple (AAPL) and Intel (INTC). AAPL has struggled to breach its high set in February, even after another blowout quarter. It is priced at a reasonable forward projected Price-to-Earnings (P/E) of 12.48 and Price-to-Earnings Growth (PEG) of .84. However, keep in mind these are forward projections and are predicated on Apple continuing to show strong earnings growth. It also has a return on equity and return on investment in excess of 30% and no long-term debt.

Intel is slowly transforming itself into a favorite among dividend investors. It currently yields 3.3% and has little debt. It also has a return on equity and return on investment in excess of 20%. Finally, it has a forward P/E of 9.1 and a PEG of .91. The projected PEG and P/E of Intel are based on much lower earnings growth than a high growth stock like AAPL, a company which has shown significant and consistent earnings growth in recent years. However, for investors seeking a combination of yield, price momentum, a clean balance sheet, and reasonable valuation, Intel is worth consideration.

The rational for this screen is based on backtests showing stocks with low PEG ratios, debt, and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either abandon this type of strategy entirely when the SP 500 or another major index is below a long term moving average, or hedge positions using one of the methods I profiled here.

Below are the backtest results for this strategy starting in March 31st, 2001. Returns exclude commissions and taxes and assume .25% slippage. No position accounts for more than 25% of the portfolio (relevant in cases when the screen produces less than 4 results) and it was equally rebalanced every 4 weeks. The test was conducted using stockscreen123:

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123. For the full list of stocks and real-time results, please see the right hand side of Scott's Investments.

Ticker	Name	Trend	QVG score	Mkt Cap	PEG LT	Dbt Tot 2Eq Q	ROE% 5Y Avg	ROI% 5Y Avg
AIT	Applied Industrial Technologi	Here	99.25	1455.32	0.87	0	15.4	12.47
EZPW	EZCORP, Inc.	Here	98.64	1497.68	0.75	0.03	20.36	19.63
AAPL	Apple Inc.	Here	96.03	324307.69	0.71	0	31.92	28.48
SMCI	Super Micro Computer, Inc.	Here	95.36	641.47	0.96	0.08	16.68	15.12
VSEA	Varian Semiconductor	Here	95.16	3408.49	0.74	0	15.09	13.83
FCFS	First Cash Financial Services	Here	94.25	1195.43	0.89	0.01	18.99	15.95
INTC	Intel Corporation	Here	93.27	115565.5	0.84	0.05	16.28	14.96
DTV	DIRECTV	Here	91.94	37204.02	0.6	0	30.78	12.76
NSP	Insperity Inc	Here	91.79	786.16	0.65	0	16.52	13.25
LECO	Lincoln Electric Holdings, In	Here	90.44	3207.83	0.97	0.09	15.69	12.28
BIG	Big Lots, Inc.	Here	90.11	3120.18	0.97	0	18.49	15.7
JOSB	Jos. A. Bank Clothiers, Inc.	Here	89.91	1429.17	0.91	0	20.55	17.5
SHOO	Steven Madden, Ltd.	Here	87.11	1428.22	0.97	0	20.13	19.63
MA	MasterCard Incorporated	Here	85.07	33792.75	0.81	0	29.76	22.24
NTES	NetEase.com, Inc. (ADR)	Here	83.97	6666.89	0.79	0	32.24	30.68
AIXG	Aixtron AG (ADR)	Here	83.34	4269.27	0.25	0	20.23	20.05
TRCR	Transcend Services, Inc.	Here	80.73	242.84	0.94	0	23.39	21.83
FOSL	Fossil, Inc.	Here	80.51	6156.55	0.95	0.01	18.69	18
ANF	Abercrombie & Fitch Co.	Here	79.8	6071.98	0.78	0.04	17.92	14.06
DECK	Deckers Outdoor Corporation	Here	79.57	3717.31	0.74	0	24.8	24.7
NVEC	NVE Corporation	Here	79.01	273.87	0.83	0	23.98	23.98
TSM	Taiwan Semiconductor Mfg. Co.	Here	78.72	63625.59	0.78	0.06	20.19	22.56
BIDU	Baidu.com, Inc. (ADR)	Here	74.29	51687	0.7	0.01	43.86	43.68
SEIC	SEI Investments Company	Here	72.02	4270.77	0.98	0.09	27.44	30.91
GNTX	Gentex Corporation	Here	70.94	4335.21	0.96	0	13	12.6
GSOL	Global Sources Ltd. (Bermuda)	Here	67.98	542.09	0.52	0	16.57	17.17
VLTR	Volterra Semiconductor Corpor	Here	67.6	624.49	0.8	0	15.44	15.25
WTSLA	The Wet Seal, Inc.	Here	67.38	450.37	0.73	0	15.16	13.37
GA	Giant Interactive Group Inc (	Here	62.55	1994.99	0.99	0	19.8	19.75
BWLD	Buffalo Wild Wings	Here	59.09	1101.29	0.96	0.07	15.86	13.7
NSR	Neustar, Inc	Here	57.67	1948.05	0.73	0.02	17.96	16.84
APEI	American Public Education, In	Here	55.62	805.6	0.76	0	33.59	31.22
QCOR	Questcor Pharmaceuticals, Inc	Here	54.61	1200.42	0.67	0	43.34	42.57
SAPE	Sapient Corporation	Here	43.53	1712.68	0.83	0	13.64	12.77
CKSW	ClickSoftware Technologies Lt	Here	42.61	297.15	0.33	0	26.52	22.28

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