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April, 2017

THE LUCKY 13 PORTFOLIO
by LARRY

  1. Every 4 weeks for a year, invest a roughly equal amount in the single best "Value Line Investment Survey (VL)" asset not already held.

  2. Exclude from consideration limited partnerships, real estate investment trusts, exchange traded funds (ETFs), and stocks not traded on U.S. exchanges, i.e. assets on the Toronto Stock Exchange. Also avoid stocks with negative recent return on equity, negative or "NA" levered free cash flow, or a negative or "NA" trailing price to earnings ratio (P/E).

  3. Limit remaining purchase candidates to VL securities that meet one or both of these two sets of criteria:

    a. High Quality: stocks with VL timeliness and safety rank each 1, 2, or 3, financial strength A++, A+, or A, a maximum combined numerical rank of 5 or less (counting A++ as 0, A+ as 1, and A as 2, and adding this value to the latest reported VL timeliness and safety ranks), 4 or 5 Motley Fool CAPS stars, and VL 3-5 year average annual projected total return 15.00% or above; OR

    b. Smaller-Cap Dividend: stocks from VL small-cap above average dividend screen with VL timeliness rank 1 or 2, safety rank 1, 2, or 3, financial strength rating B+ or better, a P/E in the range 4-18, a dividend of 2.5% or better, dividend payout ratio 0.60 or below, at least 3 significant value mutual fund holders of the asset's shares, 4 or 5 Motley Fool CAPS stars, and VL 3-5 year average annual projected total return 15.00% or above.

  4. Once the resulting portfolio reaches 13 (i.e. in 52 weeks), replace the worst performing stock that no longer meets either of the above sets of criteria with the single best available new asset that does.

  5. Repeat indefinitely.


April Candidates

CompanyTicker
Symbol		Recent
Price		Dividend
The Buckle, Inc.BKE$17.835.5%
Cardinal HealthCAH$72.312.2%
CVS HealthCVS$78.222.5%
Infosys, Ltd., ADRINFY$14.422.3%
McKesson Corp.MCK$137.040.8%
Novo Nordisk, ADRNVO$36.172.2%
Qualcomm, Inc.QCOM$52.714.3%
Teva Pharmaceutical, ADRTEVA$31.053.6%
Verizon CommunicationsVZ$49.124.7%



Why does it work? By dollar-cost-averaging, purchasing about monthly (each 28 days) an approximately equal amount of the chosen assets, one is spreading the risk over time and also achieving diversification, spreading risk as well among several holdings. All eggs are not in one basket. Risk is reduced too by picking mainly the stocks of financially strong enterprises. Further, dollar-cost-averaging tends to result in more shares being bought when prices are low, fewer when they are relatively high, thus assuring that, on average less is paid for the shares. This buying low tenet is supported as well by selecting among the qualifying candidates the one security (not already owned) at each new investment that has the best risk-adjusted potential. Chosen stocks tend to be those that, though strong companies, are currently lower in price as a result of various temporary market conditions. By selling the weakest holding that no longer meets buy criteria, one upholds another profitable investment tradition: "Sell the losers and let your profits run." On average, the assets will be in the portfolio for several months, allowing most to provide valuable dividend payments, a significant portion of the total return. Ben Graham recommended buying the shares of successful corporations when they were at bargain levels, then selling the majority of them once they had been restored to closer to their true value as providers of a stream of income for shareholders. Others, those that had since share purchase not been good performers because of such contingencies as poor management or dysfunctional business decisions, were also to be weeded out. This method is not as precise as that advocated by the value investing pioneer, but is a good ballpark version of his strategy.


How does one tell which are the best available new assets meeting a set of criteria such as those above? Each investor must research this issue for him- or herself or rely on the services of a trusted financial consultant. My preference is to stick to measures that, as far as possible, are mathematical. Looking at the first set of criteria, for example, suppose I had three candidates that met all of the requirements up to the final selection, XXX, YYY, and ZZZ. Due to copyright concerns, I cannot use actual VL stocks for this illustration; nor can I include VL rankings or financial strength ratings in the table. Yet perhaps XXX has a numerical total of timeliness and safety ranks plus the numerical equivalent of its financial strength (see #3a) of 5 and an average annual projected total return from VL of 18.0 (derived by adding the 3-5 year low and 3-5 year high projections and dividing by 2), while YYY has a numerical total of 4 and an average annual projected total return from VL of 18.0. Since 5 is a riskier numerical total than 4 and the projected total returns are the same, YYY is the better risk-adjusted return choice. But suppose ZZZ has a numerical total of 5 and an average annual projected total return from VL of 25.0. Here, ZZZ proves to be the best pick (if not already in the portfolio). Why? To obtain the risk-adjusted return potential, I would have divided each asset's average annual projected total return by its numerical total. For XXX, this is 18/5 = 3.6. For YYY, it is 18/4 = 4.5. For ZZZ, it is 25/5 = 5.0. Everything else being equal, on a risk-adjusted basis ZZZ would be the best choice.


I am not a professional. In my amateur experience, however, users of this strategy should see significantly above average long-term returns. Had a person been employing this method last year, for instance, he or she would likely have acquired shares of Berkshire Hathaway, Class B shares (BRK/B) and Franklin Resources (BEN) near their lows for the following year and have seen total returns of about 17% (BRK/B) to 25% (BEN). I am not saying this kind of profit is expected, but it is also not atypical. On the other hand, one would also likely have picked up shares of Infosys, Ltd., ADR (INFY), which still meets the first set of criteria, and so is not yet eligible for sale, but has underperformed the market since it met buy requirements several months ago. Once gainers and losers are averaged out, overall long-term performances of 12-13% plus annual average dividends of 2-3% (i.e. total returns of about 14-16% a year) would not be unreasonable before taxes, if one stays invested, sticks to the method through both up and down markets, and reinvests dividends. If in addition we add new investments modestly in excess of the weaker assets' redemptions, combined mean increases in liquid assets of 20% or better would be possible. Not bad.


In my opinion, currently good choices for readers' further analysis are shown in the table. My favorites from that list now are CVS Health (CVS) and McKesson Corp. (MCK).

"Value Line" is available by subscription, the online-only versions lower in price. Often libraries or brokerages also have "Value Line" available. Indeed, this is how my paternal grandfather, Papa Frank, got information for his stocks selections. Papa Frank was a pastor who averaged around $200 a month, as his career spanned the Great Depression. Sometimes folks in the congregation had no money for the donation plate but might pass along a rabbit or a chicken. He became a millionaire by virtue of his bargain stock purchases. At the time, that was regarded as being wealthy.



DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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