Earlier this week when I wrote about value and momentum strategies, I referenced the idea of buying stocks ranked either No. 1 or No. 2 by Value Line for year-ahead performance, and which were priced in the single-digit range.
This simple screen has returned up some powerful ideas over the years. The research service only covers around 1,700 of the more than 11,000 listed stocks, so the list contains fairly well-known stocks. The system weighs earnings and price momentum fairly highly in its selection, so these tend to be either emerging growth stocks or turnarounds that are starting to work. Although it is volatile, the screen has blown the market away for more than two decades now. It is a great approach for aggressive investors who can stomach high volatility levels in exchange for high long-term returns.
I sat down this morning and screened the latest data to see what stocks were on the list. The first thing I noticed was that this is the only screen I have run in the past few months that has increased in size. There are more than 50 names on the list, which is a pretty good jump from the last time I visited this screen.
It seems that money is flowing into these potential longshot stocks as big institutions are having a harder time finding solid ideas among the larger- capitalization companies. Smaller stocks with signs of strong revenue and earnings growth ahead are attracting attention, and this could be great news for investors who use this approach.
The second observation is a happy one for me. Many of my small bargain stocks are on the list this time around, and that could mean decent price moves in the near term for some of my undervalued selections. Coal stocks are well represented on the list, and I would love to see Arch Coal (ACI) begin to attract some attention from more growth-oriented investors. The stock is trading at around $4.25 and receives the highest ranking for one year potential performance. Mueller Water (MWA), Pengrowth Energy (PGH), Apollo Investment (AINV) and Calloway Golf (ELY) are other long-term holdings that make the list of low-priced potential winners.
One intriguing stock on the list is a retail turnaround story that appears to be working is Christopher and Bucks (CBK). The company operates 605 specialty apparel stores, primarily in the Midwest and Pacific Northwest portions of the United States. It has pretty much worked through the merchandising problems they were experiencing and have cleared unpopular merchandise out. There should be fewer markdowns as they approach the key holiday selling season.
CBK has now seen five straight quarters of positive same-store sales and the analysts think they can continue to improve next year. They market to an older crowd, so they have a better chance of regaining their customers than those marketing to the far more fickle teen and young adult market. This used to be a $30 stock, and a recapture of even half the old highs would be a significant return from current levels.
I am really intrigued to see that shares of Advanced Micro Devices (AMD) actually show up on the list with a ranking of 2 by the research service. This stock has just been destroyed over the years as revenues have been in a steady decline. Profits have been hard to come by for the semiconductor company.
AMD did show a revenue gain in the third quarter and has now painted the bottom line black for two quarters in a row. Some are hopeful that the company has a brighter future.
AMD's products are used in all three of the new gaming consoles being rolled out by the larger manufacturers and their Kabini product is used by many of the new lower-priced thin laptops that are coming to market. The gaming systems could be a huge driver as both the PlayStation 4 from Sony (SNE) and Microsoft's (MSFT) Xbox One are expected to be big sellers this holiday season and well into 2014. There have been other predicted turnarounds for AMD that fell short of the mark but this is the first time I recall seeing it make the Value Line top ranked low price list.
I have tested this approach and used to it to pick turnarounds for a long time now and it has been very profitable. I have friends who use it to manage a portion of their assets in an aggressive fashion and I think younger investors should make it a regular part of their investing methodology. It is not a pure value approach but it works very, very well over time.