As soon as I wrote yesterday's column about high-multiple stocks with low Piotroski F-scores, I knew I would get several requests for those with high multiples and high F-scores. These market darlings are stocks the market loves that also have strong fundamentals. So, I sat down last night before the second baseball playoff game and ran a few screens and tests.
What I found is a way to use these stocks that tests very well and handily beats the market. We simply ranked high-multiple stocks by F-score and buy the top-20 with a quarterly rebalance.
The resulting portfolio is a blend of high quality and strong momentum that might appeal to growth-oriented investors. Most of the outperformance comes from stocks that stay in the portfolio for an extended period, but that is not knowable in advance. This approach has a high turnover rate as it dumps any stock as soon as it slips out of the top-20.
I have said on several occasions that using a half value, half momentum approach with an annual rebalance is probably the best way to run a long-term portfolio. This method might be a decent way to manage the momentum side of that mix.
The portfolio contains some interesting names. Forrester Research (FORR) is one of the leading research and consulting firms in the world. The Cambridge, Mass.-based firm helps customers develop what its calls "customer-obsessed strategies that drive growth." It also provides data that customers can use to spot trends and consumer behavior in the markets they serve.
Forrester's business is pretty good, as reported earnings in the second quarter were $0.41 per share compared to $0.31 in the previous year. The company has posted a positive earnings surprise in three of the last four quarters and analysts are raising their estimates.
FORR trades at a premium price-to-earnings (P/E) multiple of 45x, but the fundamentals are solid as the company earns an F-score of 9. That is the highest possible score and suggests the company and the stock can continue to exceed expectations.
Robotics is one of those possible 100-to-1 long-term opportunities and iRobot (IRBT) has to be considered as a potential huge long-term winner. The company has spun off its defense robot business and is now focused on developing robots for the connected home of the future.
iRobot has partnered with Amazon's (AMZN) Web Services to give its robots the ability to connect to the cloud. CEO Colin Angle talked about the partnership in an interview saying, "We're excited about the ramifications of being able to start putting parts of our control system up in the cloud, and starting to have this rich, spatial understanding and mapping information in the cloud that we can use to make homes smarter."
The company has an early advantage in the home robotics market and its fundamentals earn it an F-score of 8 right now. iRobot has blown away the analyst estimates four quarters in a row and expectations are being raised for both this year and next.
A few years ago I made the suggestion that Ulta Salon, Cosmetics & Fragrance (ULTA) traded at ridiculous multiples and could never justify such a ridiculous valuation. I was wrong. After walking into Ulta with my wife, my adult daughter and a teenage girl, I never disparaged the stock again. While I may not be mentally able to pull the trigger on a stock at 45x earnings, I can tell you that its customers spend a good amount of money in the stores.
After my visit that day, I came away with two valuable observations. First, I will never willingly walk into an Ulta store again and shorting this stock is an excellent way to go broke. Apparently, makeup is recession-proof. Ulta earns an F-score of 8, and institutional investors love the shares right now.
Let me be clear that I am not throwing in the towel and abandoning my value approach. It works for me and works very well, but I am aware that most investors are not able to just do nothing for extended periods while waiting for deep-value situations to work out.
Using F-scores to sort growth stocks is a high-quality momentum approach similar to those used by wildly successful growth investors such as Louis Navellier and Richard Driehaus with outstanding results. It can help give investors who like owning popular stocks a way to instill some discipline based on fundamentals into the investing and trading process.