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June, 2007: 4 9 10 11 18 24 30

Disclaimer - IMPORTANT - Read this first!

Investor's Journal is a diary focused strictly on investments and personal finance issues, primarily from a contrarian and retiree point of view. Follow along with an average guy's failures and successes as he learns, by trial and error, the fine art of value investing.

My top-ten equities for mention today are: ACGL; AFG; AVTR; AXS; CRWS; OMG; ROCM; WDC; WIRE; and XL.

The focus for the current entry is on a new Classic Value (CV) asset, Encore Wire Corp. (WIRE) (recent price $29.42). WIRE's trailing price to earnings ratio is only 6.61. The asset's market-capitalization size is micro-cap: $687.05 million. Encore Wire Corp. has a 0.30% dividend with a 1.00% dividend payout ratio. The price to sales ratio is 0.55. WIRE's price to book value is 2.09. There is positive free cash flow. Return on equity is 37.54%. Debt to equity is 0.30. The current ratio is 8.82. The shareholder equity to total assets ratio is 0.69. The stock has low price to earnings, low price to sales, and low debt in its favor. This asset meets Ben Graham bargain stock criteria.

Encore Wire Corp. will be added to our CV tracking portfolio (and our actual nest egg) at its market price as of early tomorrow (Tuesday), 6/5/07.

6/9/07-For some time now, I have been following investment approaches based on the classic value teachings of the investing pioneer, Benjamin Graham.

Later I began an experiment to see if combining value with momentum (low P/S, low debt, plus relatively high momentum, compared with the S&P 500 Index performance over the prior 12-month period) might result in competitive or even superior annualized returns. The Classic Value (CV) vs. Leapin' Lizards (LL) portfolio competition, begun in 10/04, was the result. With scores of picks since then, rather surprisingly I have found that so far either CV or LL assets have tended to provide total annual returns of about 20% or better, when held for a year and a day (for long-term tax status) or until an earlier cash buyout occurs, and that the two strategies have quite similar performance, only 1-2% difference between them on an annualized total return basis, with the leadership shifting at times.

To offer somewhat lower volatility risk without significant loss of return, I have thus advised that, if anyone were following the picks or approaches I have used, they might do well to put 50% of their investment funds each into the CV and LL assets. We have done this with our actual nest egg funds and have been pleased with the outcome to date. (I caution, however, that there may as yet be too little experience with either approach to make definite conclusions. At best one may say the results have been encouraging.)

I am now interested in a fresh experiment with value plus momentum, in this case with much more frequent trades. It is based roughly on one of the better performing Zacks techniques, but employing my own variation on it, so that I shall not need to rely on their site for stock ideas. I call this portfolio Low Rating High Momentum Weekly Trade 5-Stock.

Here are the rules:

• Price to sales must be 0.5 or below.

• Average 20-day volume must be 50,000 or above.

• Broker rating average must be 1 to 2.

• Year to date (YTD) price change must be positive 10% or better.

• 12-week price change must be positive 10% or better.

• 4-week price change must be positive 10% or better.

• By using indications of Quicken interest and/or high MSN ratings, pick from the remaining candidates the best 5. These will comprise the initial, or each following week's new, portfolio.

• A fresh evaluation will be done weekly and the portfolio adjusted accordingly.

• No new dollars will be added and no funds deleted from the resulting portfolio. New purchases shall be in an amount as close as feasible to 20% each of the net value of the portfolio after the latest indicated sales.

• The portfolio begins with $50,000, i.e. as close as feasible to $10,000 in each of the first 5 assets: BKR; FOE; HHGP; LBY; and OLN.

• If I will be out of town or otherwise unable to make the transactions for more than 2-3 days past the next weekly evaluation date, I shall sell all the assets and put the net proceeds in a money market account.

• In that event, I would then reinitiate the portfolio and resume weekly analyses/transactions upon my return.

• Here, when in town I shall frequently give the current portfolio picks and net total portfolio value. I also aim to give the absolute and annualized performance of the portfolio as a whole on at least an annual basis, but quarterly if practicable.

• I do not know how things will turn out. They could result in great returns, terrible losses, or somewhere in between, depending, I expect, very much on what the equity market as a whole is doing.

• But I shall regard the experiment as successful if and only if there are, first, at least two positive closed positions for each negative one plus (considering that taxes would inevitably play a role in this strategy's ongoing utility), second, an overall closed position annualized performance of 30% or better.

• The strategy will be reviewed annually and retained or ceased based on whether or not it is still meeting both of those standards.

6/10/07-Well, the just above entry looked promising, but it turns out, after doing a little online research, that others have already done backtests of quite similar approaches (Zacks and others) and found that the positive vs. negative results (2 to 1 or better) ratio I was seeking for such a momentum strategy is almost impossible to achieve. Indeed, the approach is much more volatile and potentially risky than my existing 50/50 blend of CV and LL.

Accordingly, I shall simply stick to my knitting, so to speak, and mainly continue with the already successful approaches I have been using, at least until I do learn of a more advantageous technique, one that clearly provides as good returns yet with even lower risk.

6/11/07-Since the last entry, our Classic Value (CV) pick, CTCI, has been held over a year, and so it will be sold at the early market price Tuesday morning. It will be removed from the CV open positions portfolio, and its closed position info recorded, based on the 6/5/06 to early 6/12/07 per share performance. Through the close of trading on 6/11/07, after subtracting a commission (while not counting any dividends), CTCI has been up 84.66% in the past 12(+) months.

Since the last entry, our Classic Value (CV) pick, STC, has been held over a year too, and so it will likewise be sold at the early market price Tuesday morning. It will be removed from the CV open positions portfolio, and its closed position info recorded, based on the 6/9/06 to early 6/12/07 per share performance. Through the close of trading on 6/11/07, after subtracting a commission (while not counting any dividends), STC has been up 4.38% in the past 12(+) months.

My top-ten equities for mention today are: ASPV; BRK/A (BRK/B); INXI; NUHC; PCR; RE; SAB; TDW; VSEC; and XL.

The focus this time is on a new Leapin' Lizards (LL) selection, Nu Horizons Electronics Corp. (NUHC) (recent price $12.49). NUHC's trailing price to earnings ratio is 23.48. The forward P/E is estimated as 13.58. The asset's market-capitalization size is nano-cap: $226.79 million. Nu Horizons Electronics Corp. has no dividend. The PEG ratio is only 0.61. NUHC's shareholder equity to total assets ratio is 0.57. The price to sales ratio is just 0.29. NUHC's price to book value is below average at 1.43. There is positive free cash flow. Return on equity is 6.96%. Debt to equity is 0.22. The current ratio is 3.22. NUHC's share price is up 52.54% in the past 52 weeks. The stock has low price to sales, low debt, a low PEG ratio, and upward momentum in its favor.

Nu Horizons Electronics Corp. will be added to our LL tracking portfolio (as well as to our personal nest egg) at its market price early on Tuesday, 6/12/07.

6/18/07-Since the last entry, our Leapin' Lizards (LL) pick, URGI, has been held over a year, and so it will be sold at the early market price Tuesday morning. It will be removed from the LL open positions portfolio, and its closed position info recorded, based on the 6/15/06 to early 6/19/07 per share performance. Through the close of trading on 6/18/07, after subtracting a commission (while not counting any dividends), URGI has been down 16.92% in the past 12(+) months.

Since the last entry, our Leapin' Lizards (LL) pick, CTGX, has also been held over a year, and so it will likewise be sold at the early market price Tuesday morning. It will be removed from the LL open positions portfolio, and its closed position info recorded, based on the 6/15/06 to early 6/19/07 per share performance. Through the close of trading on 6/18/07, after subtracting a commission (while not counting any dividends), CTGX has been down 11.35% in the past 12(+) months.

My top-ten equities for mention today are: ACGL; ASPV; BRK/A (BRK/B); MAN; NOV; NTRI; NVR; OMG; RE; and XL.

The focus this time is on a new Classic Value (CV) selection, XL Capital Ltd. (XL) (recent price $83.61). XL's trailing price to earnings ratio is just 8.28. The asset's market-capitalization size is large-cap: $14.64 billion. XL Capital Ltd. has a 1.80% dividend with a dividend payout ratio of 0.15. The PEG ratio is only 0.69. The price to sales ratio is 1.48. XL's price to book value is below average at 1.31. There is positive free cash flow. Return on equity is 18.75%. Debt to equity is 0.30. The current ratio is 2.26. The stock has low price to earnings, low debt, and a low PEG ratio in its favor. It meets Ben Graham bargain equity criteria.

XL Capital Ltd. will be added to our CV tracking portfolio (as well as to our personal nest egg) at its market price early on Tuesday, 6/19/07.

6/24/07-Since the last entry, our Classic Value (CV) pick, CINF, has been held over a year, and so it will be sold at the early market price Monday morning. It will be removed from the CV open positions portfolio, and its closed position info recorded, based on the 6/23/06 to early 6/25/07 per share performance. Through the close of trading on 6/22/07, after subtracting a commission (while not counting any dividends), CINF has been down 4.52% in the past almost 12 months.

My top-ten equities for mention today are: BKS; HHGP;HMNA; LDG; MAN; MGA; NCIT; PCR; VLO; and ZEUS.

The focus this time is on a new Leapin' Lizards (LL) selection, Manpower, Inc. (MAN) (recent price $93.20). MAN's trailing price to earnings ratio is 20.06. The forward P/E is estimated as 17.01. The asset's market-capitalization size is large-cap: $7.88 billion. Manpower, Inc., has a small (0.70%) dividend, with a dividend payout ratio of 0.13. The PEG ratio is 1.32. The price to sales ratio is just 0.44. MAN's price to book value is 3.19. There is positive free cash flow. Return on equity is 14.27%. Debt to equity is 0.33. The current ratio is 1.65. MAN's share price is up 48.71% in the past 52 weeks. The stock has low price to sales, low debt, and upward momentum in its favor.

Manpower, Inc., will be added to our LL tracking portfolio (as well as to our personal nest egg) at its market price early on Monday, 6/25/07.

6/30/07-Since the last entry, our Classic Value (CV) pick, KCLI, has been held over a year, and so it will be sold at the early market price Monday morning. It will be removed from the CV open positions portfolio, and its closed position info recorded, based on the 6/30/06 to early 7/2/07 per share performance. Through the close of trading on 6/29/07, after subtracting a commission (while not counting any dividends), KCLI has been up 5.81% in the past almost 12 months.

My top-ten equities for mention today are: ACGL; ASPV; BBSI; BRK/A (BRK/B); HHGP; NOV; OMG; SNHY; TDW; and WNR.

The focus for the current entry is on a new CV selection, Arch Capital Group Ltd. (ACGL) (recent price $72.54). ACGL's trailing price to earnings ratio is low at 7.28. The asset's market-capitalization size is mid-cap: $5.34 billion. Arch Capital Group Ltd. has no dividend. The price to sales ratio is 1.55. ACGL's price to book value is below average, at 1.42. There is positive free cash flow. Return on equity is 24.06%. Debt to equity is only 0.08. The current ratio is 2.36. This stock has been up 19.19% over the past year. The asset has low price to earnings and low debt in its favor. It meets Ben Graham value plus safety bargain stock criteria.

Arch Capital Group Ltd. will be added to our CV tracking portfolio (and our actual nest-egg) at its market price as of early on Monday, 7/2/07.

I expect to have just one or two more entries over the next few days, including my usual quarterly summary (through 6/30/07) of results for the tracked portfolios, and then I'll be on vacation for several weeks, barring emergency. During that time, I won't have much access to the internet and so will not be posting here.

Anyone following the guidance here of buys and sells is advised, in the interim, to simply purchase, every other week, the best available classic Ben Graham value asset (CV) she or he can find, followed, in the intervening weeks, by purchasing a roughly equal dollar amount of the best Leapin' Lizards (LL) asset that can be found. Entries should resume here in the latter half of August.

As a reminder, here the CV assets are limited to those that may be bought when P/Bk is .8 or below and/or when their P/E ratios are such that twice the AAA corporate bond yield's value, divided into 100, is equal to or greater than the stock's trailing price to earnings ratio. Thus, with a AAA bond yield of 5.9, 100 would be divided by 11.8 for a max P/E stock of 8.47. In addition to these criteria, I require that the debt to equity ratio be 0.33 or below and that, if there is a dividend, the dividend payout ratio is no higher than 0.50.

For the LL assets purchased in the tracked portfolio, the same debt to equity and dividend payout criteria apply. However, instead of CV's low P/Bk and/or low P/E criterion, I limit remaining candidates for purchase to those with a price to sales ratio of 0.50 or below and a 52-week price performance (momentum) at least 25% higher than the 52-week performance of the S&P 500 Index. Thus, if the S&P 500 had a 25% upward price change in the last 12 months, candidates for LL purchase must have been up in price at least 50% in the same period.

Finally, please remember that my system calls for holding each CV or LL asset for a year and a day or till the asset has a cash buyout, whichever first. If these rules are followed and past performance continues to be borne out, on average about twice the number of assets will turn out to be net winners than the number of those that show net losses. While past performance is no guarantee of future returns, so far the results, for many score closed positions, average around 20% a year, particularly once dividends are included.

I do not charge for the posting of my CV and LL picks, yet the results since I began the portfolios, nearly three years ago, tend to be as good as if not better than those of expensive investment services, some of which have higher volatility risk and/or turnover. In addition, the results here appear, so far at least, to be competitive with or superior to those of most equity mutual funds. This may not always be the case, certainly, but the rationale for my picks would seem to be as solid as that for many professionally managed accounts. I do not claim to be a uniquely good stock picker. As indicated in the early entries, I am simply a retired amateur, learning as I go. My point is that, by merely following a few rules already set forth by such value investing pioneers as Ben Graham, most investors can probably do as well as, if not better than, both the markets and the majority of highly paid professionals. So, good luck to you in your own exercise of due diligence. And happy investing!

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