Readers know I choose stocks by relying on the strategies of investment greats, whom I call gurus -- Benjamin Graham, Peter Lynch, Martin Zweig and others who have written about how they invest. Years ago, I took their advice and automated their strategies so I could screen any stock on Nasdaq or the New York Stock Exchange via any of my dozen guru strategies and see if the stock received a high grade.
In addition to looking at the performance of individual strategies, I also created for my Validea.com website the Validea Hot List. This is calculated by looking at all the strategies at once and finding those stocks that get approval from more than one guru strategy, among other criteria. By doing this, the Hot List provides an additional level of diversification for a given number of stocks because each strategy looks at a unique set of criteria. Stocks that earn multi-guru strategy approval are therefore very strong across a wide range of fundaments, and history shows these are the types of stocks most likely to do well.
I have been following most of my strategies since July 15, 2003, including the Validea Hot List, so I have nearly a decade of history by which to judge their effectiveness. During this time, the Hot List has provided a 12% annual rate of return, more than double that of the S&P 500's 4.7% annual return. The Hot List is a winner, no doubt, which is why I want to tell you about stocks it currently recommends.
Russian oil giant Lukoil (LUKOY) gets a "strong interest" recommendation from my Peter Lynch and James O'Shaughnessy strategies, as well as "some interest" from several other strategies. The company says it is the world's third-largest, non-state, publicly traded oil company by proven reserves of hydrocarbons and the sixth largest by production. My Peter Lynch-based strategy likes Lukoil's PEG ratio, which is price-to-earnings relative to growth and a measure of how much an investor is paying for growth. The maximum PEG allowed is 1.0, and Lukoil's yield-adjusted PEG is an impressive 0.28. The James P. O'Shaughnessy-based strategy likes the company's large market cap of $54 billion, positive cash flow per share, and strong 5.75% yield, among other reasons.
Another Hot List member is Lear (LEA), which is on the Fortune 500 and manufactures a range of products, including automotive seat systems and electrical distribution systems. The Lynch strategy likes Lear's very favorable PEG of 0.18. My Kenneth Fisher-based strategy highlights Lear's price-to-sales ratio, a measure of how well priced a stock is, which must be below 0.75 to be acceptable. Lear's PS ratio is an impressive 0.36.
Also on the Hot List is World Acceptance (WRLD), a small-loan consumer finance company that operates out of 1,141 offices in the U.S. and Mexico. The company also markets computer software and related services to financial services companies. The Lynch strategy likes the company's PEG of 0.50, while my Warren Buffett-based strategy favors its earnings per share (which have increased for 10 years straight), solid average return on equity of 19.2% and 11.2% average annual return earned on assets. The strategy also predicts investors buying the stock at this time will earn an annualized 15.8% on their investment over the coming decade.
