Messages: What Members Are Asking On-Line

Trading Rule #1 Stocks

In your article “Trading Rule #1 Stocks” [July/August 2008 Computerized Investing Feature], you wrote that “Town trades in and out of these [Rule #1] companies until either the stock price reaches its fair value or the underlying fundamentals change to the point that the company is no longer wonderful.” Would you please elaborate on that behavior?

—B.M.

CI Staff Response: The September/October 2007 issue of CI as well as the October 2007 issue of the AAII Journal describe the process Phil Town uses to select Rule #1 stocks (both are available in the archives at AAII.com).

In order to be considered, a stock must first exhibit compounded average annual growth of at least 10% in earnings per share, equity (book value per share), sales, and free cash flow over the last 10 years. Furthermore, it must have an average annual return on invested capital of at least 10% over the last 10 years and have a current level of long-term debt that does not exceed three times the level of free cash flow over the last four fiscal quarters (trailing 12 months).

These are the “fundamentals” I alluded to in the July/August 2008 article. As long as the company meets these criteria, and the current share price is less than 50% of the “sticker price,” Town will use his “Three Tools” (covered in the July/August 2008 article) to trade in and out of a Rule #1 stock. When a company no longer meets the fundamental criteria, he sells it for good. Also, if the share price rises about its sticker price, he sells it. However, in this situation, there is the possibility he will buy it back if the price falls back (at least 20%) below the sticker price, assuming its fundamentals still pass muster.

MSN Money Screener

CI Staff Response: Thank you for your comments, but the article was correct. While www.investors.com is the Web address for the Investor’s Business Daily Web site, we used www.investor.com (without the ‘s’) in the comparison, which takes you to the MSN Investor Web site. An alternative URL for the site is investor.msn.com.

Also, the “premium” stock screening module at the MSN Money Web site is the Deluxe Screener, which is part of the MSN Money Investment Toolbox. You must view the site using Internet Explorer or Netscape and install an applet (which is only Windows compatible) to get the toolbox. Otherwise, you only have access to a more basic screening module.

ETF Resources

CI Staff Response: Each year, in the October issue of the AAII Journal, we publish a Guide to ETFs. Currently, we are working on this year’s list, but you can access last year’s list at the AAII Web site: www.aaii.com/guides/etfs. Also, this year’s “Best of the Web” guide, which ran in the September 2008 issue of the AAII Journal, includes a section devoted to ETF Web sites. This is also accessible from the AAII Web site: www.aaii.com/guides/webguide. In our opinion, one of the best is ETFConnect (www.etfconnect.com), where you can screen the universe of ETFs on type and style.

AAII Sentiment Survey

CI Staff Response: While a bit dated now, we performed an analysis in 2004 of the AAII Sentiment Survey as a contrarian indicator. The article ran in the September/October 2004 issue of CI and is available on-line at www.computerizedinvesting.com. Interestingly, two of the four highest bearish readings since the survey’s inception in 1987 came within six weeks of each other between January and March of this year.

Mac Software

CI Staff Response: Unfortunately for Mac users, the Windows operating system is still the preferred platform for most full-featured stock and mutual fund screening and portfolio management software. We provide coverage of Mac-compatible software as we run across it. You may wish to go through our archive of comparison articles, which is available at the Computerized Investing Web site. In the future, I hope to provide a listing of all software programs we have covered in CI over the year, cross-referenced by category and operating system.

For Mac users out there, I also ask that you bring any investment and finance software titles you use to our attention.