Working Within the System

My recent conversation with Henry Carstens of Vertical Solutions started me thinking again about a test we ran a few years ago. We bought S&P 500 stocks that traded below book value with relatively low levels of debt on the books and held them until they either doubled in price or went to zero. The system handily beat the market for a long period and had never had a down year. The list of stocks we produced in July 2008, just as the stock market went into a tailspin, has been a tremendous performer, to say the least. Although the timing was unfortunate, the system has produced a seven-stock portfolio that is 80% higher today, not including dividends. I revisited the test in a column last September, as the market was starting to fall down around us. That list of stocks has matched the market before dividends since then, rising by about 15%, not including dividends.

This morning I ran a screen for stocks that fit that approach in today's market. Although we had experienced a nice rise in the overall market in the past few months, there are still a few candidates for purchase based on this mechanical approach. I came up with seven stocks that have decent balance sheets, trade at a discount of 10% or more to book value and were in the index. Four of them were insurance companies: Lincoln National (LNC), Unum (UNM) and XL Group (XL). These companies and their stock price probably have a great future, but I'm lukewarm on insurance companies, as they have had a strong run recently. I prefer to buy these in a down market....510 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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