Tom A's Stock Picks

Changing Strategies

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After a frustrating year in 2007, I have decided to modify my strategy. What I had been doing was essentially value driven, looking at 5 year average earnings or at P/B and buying stocks that were low in their historical range. I spent considerable time on Financial statements, press releases, etc., in an effort to pick winners from among these value candidates. Results have not been good.

This method does not specifically consider momentum, and much of the literature on value strategies suggests including a momentum factor. Back in 2001-2002, I got into a pretty deep hole looking for value among beaten down tech stocks, primarily Semicondutor Equipment, Software, and Electrical Equipment or Components. At that time, I weeded through my portfolio, relying on ratings provided by my brokerage (Schwab), and what remained after several months of that procedure performed extremely well. Their current system provides a percentile rating for many stocks, based on a large number of factors: but, in my opinion, it includes heavy consideration of momentum, which I have been neglecting/ignoring.

I am now transitioning my portfolio, removing stocks which receive less favorable ratings from both Schwab and my methods, and replacing them with stocks that look good under both methods. Hopefully, this will produce a selection of value stocks that also have upward momentum. My problem has been, that I have cheap stocks that have been getting cheaper.

As a start, I sold my UPS - I still believe its a good buy, but suspect price movement will not be rapid.

I replaced it with NVLS, a semiconductor equipment firm, currently trading at a P/E of 13.7. As a kicker, Dr. J(on Najarian) on CBOE TV noted heavy volume in the June 25 calls on 2/7/2008, 3,588 calls traded vs. an open interest of 925. It is possible that someone has information which makes them optimistic about NVLS, and elected to act on this by buying the calls.

I don't think its a good idea to make radical changes in strategy, because first one thing works and then another. However, I expect that by adjusting my value strategy to include a strong consideration of momentum I will be able to improve results.

Tom