Guest Blogger Mishlove: Strategy for the Finals
Senior Editor, CNBC
Hey folks, Jeff Mishlove has some thoughts for the contest finals. We'll get right to them. Here's his post: Now the Portfolio Challenge moves into the finals and the Second Chance Showdown. I am not in the finals, and I have decided not to enter the Second Chance Showdown – so that there can be no suggestion of a conflict of interest with regard to any recommendations I may make for the Million Dollar Buzz.
At this point, every contestant is limited to only one portfolio. That necessitates a somewhat different strategic approach. The short squeeze strategy I advocated, based on earnings, worked well for contestants with multiple portfolios during the previous ten weeks. Even if some stocks fell dramatically, others typically would go up dramatically. But, for contestants dealing with a single portfolio and a two-week time window – the risk of a dramatic price decline is one to be avoided.
At this point in the event, I would recommend that contestants consider dividing their portfolios among a handful of stocks that are showing strong price growth momentum. The hypothesis behind this strategy is that momentum investors will continue to add to their positions of these stocks, driving the prices even higher. Here are some examples that I have obtained using the stock screener at www.morningstar.com. My main criteria was stocks that have shown more than 20% growth in the past three months.
Schnitzer Steel . This stock hit a 52-week high on May 11. It is the only eligible stock with more than 40% growth over the past three months. Additionally, over 11% of the stock float is controlled by short sellers. I do consider that an advantage. The price/earnings ratio is still only 13.89. So, the stock is an attractive buy to value investors.
Nutri-System . This stock has shown strong price appreciation since the beginning of February. Morningstar has given this stock its highest rating among those that have had strong price growth during the past three months. Morningstar rates stocks for growth, profitability and financial strength.
Freeport-McMoRan Copper and Gold . Normally, I would not recommend a stock with a market cap of $28 billion. But, this is an attractive momentum stock, priced within 1% of it’s 52-week high. Short sellers still control over 10% of the stock float and they are in the process of decreasing their positions. Commodities like copper, gold and steel are definitely in a bull market – in spite of recent pullbacks. This stock is also highly rated by Morningstar – right after NTRI. The price earnings ratio is only 11. So the stock is attractive to both value investors and momentum investors.
Lam Research , a semiconductor equipment company, has the third best Morningstar rating of the 3 month price growth stocks. The price earnings ratio of 13.94 is attractive to value investors. Short sellers control 7% of the stock float.
Volcom, a high-growth company that operates clothing stores, rounds out my selection. It is less than 2% below its 52-week high. While it has a higher price earnings ratio than my other selections, 38.46, this is not uncommon among fast moving stocks. The high Morningstar rating will make it attractive to investors nevertheless. Also, as a retailer, it adds some diversity to my list of recommendations.
If I were in the finals, I would consider buying all five of these stocks and simply holding them for two weeks – unless circumstances (such as news) dictates otherwise. With only 19 other contestants, they could do quite well.
However, with so many more contestants in the Second Chance Showdown, the ultimate winner will probably be some lucky individual willing to take greater risks – by focusing on earnings reports. In future blogs, I’ll provide some examples of these, that still place strong emphasis on momentum. But, for details on how to do this sort of research for yourself, check out my Handbook or other comparable stock selection guides.
Jeffrey Mishlove, PhD, is author of Jeffrey Mishlove’s Handbook for Contestants in CNBC’s 2007 Million Dollar Portfolio Challenge. He is the creator of www.forecastingsystems.com.
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