A Stock Picker's Market

A Stock Picker's Market

By Jean Gruss

Editor/Lee-Collier

When Keith Moored Jr., 53, was a computer scientist at pharmaceutical giant Merck, he developed a statistical-analysis system to predict and enhance yields on drug production.

Today, as a money manager in Bonita Springs, he uses similar computer tools to forecast the direction of financial markets and to pick stocks. Through Twenty First Advisors, the investment firm he founded in 1993, Moored manages $20 million.

Moored says it's important to pick the right stocks now because he forecasts the stock market overall will return 5% in 2006, including dividends, and he aims to beat the broad market by five to ten percentage points each year. That's just one percentage point over the 4% he thinks bonds will deliver. His recommended asset allocation remains unchanged for 2006: Stocks make up 70% of his portfolio, with 15% in cash and 15% in bonds.

His portfolio's track record shows he has consistently outperformed a broad benchmark of stocks over a long period, according to Money Manager Review, a San Francisco-based company that tracks and analyzes the performance of U.S. money managers. Over the 10-year period through 2004, Moored's portfolio has returned an annualized 10.94% compared with the Dow Jones U.S. Total Market return of 7.73%. Although he hasn't computed his portfolio's 2005 results yet, Moored estimated it returned 13% in 2005, versus 4.5% for the broad stock-market benchmark.

What's more, Moored has outperformed the market without taking on excessive risk, sparing his clients the worst of the most recent bear market. In 2002, for example, the overall stock market fell 23% while Moored's portfolio dropped just 2.89%.

What saved Moored and his clients was a simple rule of thumb: He sells a stock when its price-earnings ratio (P/E) is double that of the Standard & Poor's 500-stock index. The P/E ratio is a company's current stock price divided by earnings-per-share over the last 12 months. Investors often use the S&P 500-stock index's P/E ratio as a benchmark to determine a stock's value relative to the broader market. Today, the S&P 500's P/E ratio is 20, which means Moored sells any stock with a P/E ratio of 40 or higher.

In early 2000, Moored presciently sold all his portfolio's technology stocks because their P/E ratios had risen to more than double those of the S&P 500's at the time. That kind of discipline removes some of the emotion that often gets in the way of successful investing, he says.

That's also why he recently unloaded the shares of Fort Myers-based Chico's FAS. Chico's P/E ratio is now 42, more than double that of the S&P 500. Even if Chico's stock continues to rise, Moored is happy to take his gains and play it safe.

"We are not greedy," Moored says. "Always leave something for the other guy. That's the number one rule to making money on Wall Street."

Moored picks stocks that offer growth at a reasonable price. Once a month, he runs a database of 15,000 stocks through a proprietary screening program that uses 10 variables to narrow the list to 30 stocks.

Among the key variables, Moored wants to see sales and earning rise over the trailing 12 months. But he doesn't want to overpay for that growth, so he looks for stocks with low price-to-sales ratios (P/S). The P/S ratio is the current stock price divided by sales per share over the last 12 months. Moored says he searches for companies whose P/S ratios are half of the market average, which is currently 2.

"That brings you undervalued growth and eliminates the Googles," he says, referring to fast-growing companies whose stocks are expensive relative to the overall market.

With a list of 30 stocks, Moored then drills down into the numbers to pick three. He'll ignore results that don't make sense, such as when his program spit out a list of homebuilders recently. With a widely anticipated forecast of a downturn in the homebuilding industry, Moored says he ignored their stocks. "You've got to override the system," he says.

Still, most of Moored's analysis is based on the company's financials and stock price. He doesn't give much credence to what corporate executives say to gain insights on a stock's future performance. "Everything [they say] is sugar coated," he says. "Personalities do not come into this."

Moored holds stocks about one or two years and won't let any one stock grow to more than 10% of the stock portion of his portfolio. He currently holds about a dozen individual stocks, including Caterpillar (stock symbol CAT; recent stock price $61), WellPoint (WLP; $79) and Florida Rock Industries (FRK; $53).

Moored also invests his clients' money in exchange-traded funds, which are mutual funds that trade like stocks. His favorite: iShares Dow Jones Select Dividend Index (DVY; $63). The fund invests in stocks with rising dividends, so it's heavy on financial and utility stocks such as Bank of America and DTE Energy. Together, stocks in those two sectors account for nearly 60% of the fund's holdings.

When he picks mutual funds, Moored wants to see managers beating their peers. He also seeks funds whose performance is on an upward trend over the trailing 12-month period he examines. "They're even more predictive than stocks," he says. He generally holds funds about three to four years before he sells.

Moored's favorite stock fund today is Fidelity Contrafund (FCNTX; $67). "It keeps growing and growing," Moored says. The large-company growth fund has returned an annualized 8.2% over the past five years, over six percentage points better than the S&P 500. The no-load fund is open to new investors.

For the international-stock portion of his portfolio, Moored prefers to invest solely through a broadly diversified mutual fund with low management expenses. He says Fidelity Diversified International (FDIVX; $34) is a well-managed fund, though it's closed to new investors.

Over the last five years, the fund has returned an annualized 10.7%, double the international-stock benchmark MSCI EAFE index of 5.14%, according to data from fund tracker Morningstar.

"We're really bullish on overseas," Moored says. He believes foreign stocks will grow faster than U.S. stocks and he's put 25% of his clients' money in the shares of overseas companies.

Still, Moored acknowledges that much of the recent strong performance of foreign stocks is the result of a weaker U.S. dollar. When the dollar falls, returns from overseas stocks are magnified.

Moored estimates that the falling dollar accounted for about half of the returns of foreign stocks in the last few years. Despite his forecast for a more stable dollar in 2006, Moored remains confident that foreign stocks will continue to outperform their U.S. peers.

For the 15% of the portfolio allocated to bonds, Moored prefers to buy individual Treasury securities with maturities reaching out to ten years.

He also likes the Fidelity Ginnie Mae fund (FGMNX; $10.88), which recently yielded 4.6%.

Moored is sensitive to the tax implications of selling stocks, so he'll generally hold stocks longer than one year to benefit from the lower long-term capital gains tax rate (now 15% for most investors).

He'll meet with his clients' accountants in the fall to discuss how any gains might be offset with losses to minimize taxes. Moored is a fee-only money manager and charges clients about 1% of assets under management.

ECONOMIC FORECAST NEWSLETTER RANKS HIGH

Besides managing money for his clients, Keith Moored Jr. also publishes a monthly financial-forecast newsletter called Market Forecast.

Using some of the same type of computer tools he developed for Merck, Moored forecasts the direction of the financial markets over the next three months, six months and year ahead.

His forecasting track record measures well against other market-forecast newsletters. Timer Digest, a Greenwich, Conn.-based firm that tracks the performance of forecasting newsletters, ranked Moored's publication among the top ten performers last year.

Here is Moored's forecast for 2006:

• Stocks will deliver 4% return for the next six months but just 5% for the full year. "Oil prices are going to catch up with us," Moored says. "It's starting to crunch the economy." What's more, the recent increase in interest rates will reduce corporate earnings.

•Bonds will return 4%, though much of that will come from interest. Unlike recent years, bond investors won't see any capital appreciation because interest rates will hold steady in 2006, Moored says.

•Gold won't continue to rise. "We're going to see a major sell signal on gold," Moored predicts. Investors will sell gold once they realize inflation isn't a problem. Investors typically buy gold and gold-mining stocks to hedge against rising inflation. Moored says inflation isn't rising because of increased worker productivity and stagnant wage growth.

MOORED'S STOCK PICKS

Jos. A. Bank Clothiers

Stock symbol: JOSB

Recent stock price: $48

The Maryland-based men's clothing store is benefiting from men buying suits again. Plus, the company has opened 50 new stores over the past year, promising new growth. Jos. A. Bank executives said recently they expect the company's earnings to at least meet analyst expectations of $2.20 per share when its fiscal year ends January 28. That would be a 28% increase in earnings over the prior year.

Nordstrom

Stock symbol: JWN

Recent stock price: $40

Despite some gloomy predictions of a consumer-led slowdown, Moored believes people have more discretionary income today. Americans are spending more money on luxury items and Moored says high-end retailers such as Nordstrom should benefit. The only thing that could slow Nordstrom would be a recession, which Moored is not forecasting. Nordstrom reported strong holiday sales with revenue from stores open at least one year up 11% in the five-week period ending Dec. 31 versus the same month a year ago.

Caterpillar

Stock symbol: CAT

Recent stock price: $61

Caterpillar, the giant maker of construction equipment, will benefit from globalization and strong economic growth overseas. In particular, Moored says Caterpillar is a big player in China where economic growth is booming. "It's a good play for the future," Moored says. Plus, the stock offers a decent dividend yield of 1.7%. Caterpillar reported earnings increased 34% in the third quarter of 2005 to $667 million over the same quarter in 2004.

Florida Rock Industries

Stock symbol: FRK

Recent stock price: $53

The prospects for the Jacksonville-based producer of construction materials such as concrete are bright despite an anticipated slowdown in construction nationwide. Moored says the Southeast should grow even if the rest of the country slows. Florida Rock's earnings rose 39% in 2005 to $157.7 million versus the previous year.