Stock Screening & Watch-List Management

I recently linked to the Picks of the Pros stock screen over at Forbes. Some of you have asked more about it, and the stocks they picked so I decided to dedicate a post to it today.

In essence, the idea behind the screen is that "if a lot of smart guys like the same stock, it must be worth holding." Over the past two years, the screen's performance has been good - up +10.5% in 2004 & +19% in 2005. The stock screen basically searches for overlapping exposure of specific stocks among top performing mutual funds using Morningstar's data.

This year the screen produced the following 10 stock picks: Citigroup (C), ConocoPhilips (COP), Pfizer (PFE), Tyco (TYC), DR Horton (DHI), Peabody Energy (BTU), WR Berkley (BER), Encana (ECA), Petroleo Brasilelro (PBR), & UBS (UBS). Let's take a look at each:

My comments offer some perspective about how I would go about using the screen's results for my own use. In other words, I see few excellent buying opportunities in this list, but a couple of relatively decent watch-list candidates, particularly for my long-term retirement portfolio.

As many of you know, I'm not one to follow the crowd, particularly when it concerns the opinions of money managers who collectively underperform the S&P 500 (even though this screen specifically screens for opinions of money managers who have good track records). My opinion is that much better opportunities usually lie on the market's fringes, rather than where everyone else is looking. Yet, I love stock screens so I rarely miss an opportunity to pass one over particularly if it's track record is decent in the past few years.

So, how do I manage these watch-list stocks in which these screens create? Typically, after I dig a little deeper and complete more extensive fundamental research to validate the investment idea (other than just a quick technical analysis review like you see above). If I determine that there is some value in the stock screen's finding and my additional research, but I think a better entry point could be obtained later one, I will then set up a reminder in my PIM for me to review the chart at a future time (usually at least once per quarter) along with an additional fundamental-performance review, unless a specific price target alert is triggered before that point.

For example, say I place Petroleo Brasilelro (PBR) on my watch list. I'd then set an alert to be notified if the stock pulls back to less than $74 in order to provide me notice of a possibly good entry point. I've done this because I've run the numbers on the stock and I like what I see there. If and when that price target is hit, then I'd move PBR a higher-priority close watch list and I'd make another determination whether it was suitable for my portfolio. For example, in the case of PBR, the stock would only make a decent fit to my retirement account versus a trading candidate (due to difference in strategies I use for each) so I'd have to do another analysis to whether it would outperform a current holding of mine already in the retirement portfolio and/or whether it makes sense for me to add exposure using that as a position even if a good entry point could be obtained.

Frequently, it doesn't, but if you do this process enough, these watch list candidates will then provide ideal opportunities on a more consistent basis. The goal is to cast the net and your watch list big enough, BUT at the same time effectively enable you to have a system to track, manage, and to spot opportunities in the market as they come along. And, no matter what system you deploy, you'll still find that good stocks will go unnoticed and that you'll miss out on a fair number of opportunities simply because you're being selective on the entry price. That's ok and comes with the territory if you're doing your job correctly.

Like I've said many times before now, I always like to see plenty of examples in both my watch lists where stocks there perform exceptionally well, even though I may not currently own them. It means that I'm doing a good job of finding good opportunities and I rarely beat myself up because I didn't buy when I should or could have. There's nothing worse, trust me, to have watch lists filled with unperforming losers as it can rattle your confidence and impair your ability to focus on stocks that will perform well in the future.

Obviously, everyone approaches this process differently and there are no right or wrong ways to do it as long as you have developed a reliable system that works for you. In speaking to hundreds of traders over the past few years, I'm always shocked by how few have developed a reliable and consistent approach. In fact, one very common trait I find among those who are not happy with their performance in the market is that they typically go by what I call a "seat of their pants" approach.

I'm sure you're familiar with this strategy. In fact, there's a tv commercial by an online broker that provides a picture perfect example of this strategy. I'm sure you know the one if you watch CNBC. It's the ad where the daughter asks her father for $100 bucks to buy some designer jeans. Instead of just giving her the cash, the father quickly looks up the ticker symbol of the company and without doing anything else buys a few thousand shares. Oh, if only stock trading were that simple, easy, and profitable we'd all be multi-billionaires by now. It just isn't that simple folks, no matter what the ads may try to convince you. Sure, you can get lucky occasionally by doing that, but more often than not you're not going to beat the average joe by employing that tactic.

As always, this website is about gaining the edge on the competition. You can only do that by working strategies and methods that the folks on the other side of the trade are either too lazy or ignorant to employ. The greatest advantage you'll ever have as a trader and investor is the work you put into finding, watching, and buying good stocks at attractive prices. Unfortunately, no one can really do that work for you even though investors try to defeat the odds and will literally pay any price on the expectation that there are easy short-cuts to investment and trading success. If you are reading this, I know you're too smart for that. :)