Valuentum Securities Exclusive Analysis for the Discerning Investor

Symbol Keyword

What's the best way to use your process?

First and foremost, firms in our Best Ideas portfolio should be considered our best ideas at any point in time. The Best Ideas portfolio can always be found on page 8 of our monthly Best Ideas Newsletter. Firms in our Dividend Growth portfolio should be considered our best dividend growth ideas at any point in time. The Dividend Growth portfolio can always be found on page 5 of our monthly Dividend Growth Newsletter. Let's talk about how the Valuentum Buying Index (VBI) informs which ideas we include in our actively-managed portfolios.

We've noticed via our statistical backtesting that the momentum factor behind our process tends to be much more pronounced (powerful) over longer periods of time. This was one of the interesting findings of our academic white paper study, which outlines the tremendous benefits of a combined value-momentum strategy. And we try to replicate this dynamic with the update cycle of our reports (and the time horizon for our ideas to work out). That's why our reports are updated regularly or after material events and not daily. There's just too much noise in daily price movements. We expect our best ideas to work out over a 6-18 month time horizon -- any shorter than that is mostly luck, in our view.
 
So, in other words, we tend to add firms to our Best Ideas portfolio when they register a 9 or 10 on our Valuentum Buying Index (VBI) and tend to remove firms from our Best Ideas portfolio when they register a 1 or 2 on our VBI. However, we don't blindly and immediately add firms to our portfolio once they score a 9 or 10 (and we do not add all firms that score a 9 or 10 to our portfolio). For example, recently Google (GOOG) registered a 10 on our VBI scale, but we remained patient and didn't add the company to our portfolio until after it reported earnings, which provided us with an even better entry point. The firm has been a big winner for us since we added it.

After adding firms to our portfolio, we may tactically trade around these positions when they have VBI ratings between 3 and 8 (inclusive) depending on the size of their weighting in our portfolio or the attractiveness of them relative to other opportunities. We tend to remove firms from our Best Ideas portfolio when they register a 1 or 2 on our process. Importantly, however, firms in our Best Ideas portfolio should be considered our best ideas at any point in time.
 
Take eBay (EBAY), as another example, the firm initially flashed a rating of 10 in late September 2011 (at $32), and we added it to our Best Ideas portfolio. The VBI rating changed to a 6 in December 2011 and then back to a 10 in May 2012. Because the rating never breached a 1 or 2, we did not remove the position from our portfolio. In fact, we tactically added to it. eBay is probably one of the better examples to use for illustrating the prolonged outperformance driven by undervalued stocks that are beginning to generate good momentum.

Though eBay may register a lower VBI rating in a subsequent update, we would still view it as one of our best ideas, as it is a holding in our Best Ideas portfolio (it has never flashed a 'We'd Sell' signal, 1 or 2). Obviously, there have been more straight-forward opportunities in our Best Ideas portfolio, especially in the case of EDAC Tech (EDAC), which has more than tripled since we added it to the portfolio (almost never registering below a 9 along the way). The VBI ratings on our most recent 16-page reports, downloadable directly from our website, reflect our current opinion on the company.

The Significance of Changes in Our Valuentum Buying Index (VBI) Ratings

Let's examine how our Valuentum Buying Index (VBI) ratings have helped us maximize profits in another example. Astronics (ATRO) has been a darling of a stock for our Best Ideas portfolio. The VBI informed us to add the firm in June 2011 to our Best Ideas portfolio in the low-mid $20s (VBI rating of 10) and then to potentially take some profits when the firm registered a VBI rating of 6 in late 2011/early 2012 in the mid-$30s, which we did (selling 30% and then another 50% of our position). Since the firm never registered a 1 or 2 on the VBI despite hitting a rough patch a number of months ago, we've been able to profit significantly from its rebound to all-time highs!

We view VBI ratings of 9 and 10 as actionable for us on the long side and VBI ratings of 1 or 2 as actionable for us on the short (put-option) side. However, we only pick the best of the best from these respective groups to include in our Best Ideas portfolio, and once an idea is added to the portfolio, we typically expect the idea to work out within a 6-18 month time horizon. We may tactically trade around (add or trim to) positions in our Best Ideas portfolio that subsequently score in the "big middle" (3 through 8) depending on a variety of factors, including diversification, macroeconomic, or technical considerations. 

Illustrative Examples of Other Firms in our Best Ideas Portfolio 

Visa (V)

EDAC Tech (EDAC)

eBay (EBAY)

<< Other Frequently Asked Questions