Investment Strategy for 2007

First, a quick review of 2006 predictions.

In Investment Strategy for 2006, I said that 2006 should be a challenging year, that Large Cap Value (Dogs of the Dow) should be favored and to watch out for a bottom in October/November timeframe.

Well, 2006 was nicer than anticipated.

Despite a sharp correction mid-year, the market made an exceptional rally from july and the Dow returned 16.3% while the S&P500 returned 13.6% for the year (excl. Dividends).

The year's bottom was in June/July and not in October/November.

The only thing I got right was to favor large cap value stocks and the Dogs of the Dow that returned 22.2% (excl. Dividends) beating the major indexes.

2007 Investing environment

2007 is a year 3 of the presidential election cycle: the best one with highest returns and lowest volatility.

In addition, years 3 of the cycle provide good returns whatever the interest rates environment (rising or falling rates) and whatever the market's valuation level.

2007 Investing Style

Data Driven Investing studied which investing style is best according to the presidential cycle and interest rates environment.

Small Cap Value are usually prefered. However, in years 3&4 of the election cycle and when the fed is agressively increasing rates (which is the case now), Growth stocks are prefered.

The following 2 mechanical strategies are then adapted for this year: Cornerstone Growth and Magic Formula Investing.

Using the stock screener, here are the stocks that pass the strategies.

Cornerstone Growth

Symbol Company Name Rank
DPHIQ Delphi Corporation 1
IESC Integrated Electrical Services, Inc. 2
APN Applica Incorporated 3
PMDX PRIMEDEX HEALTH SYS INC 4
KLMR KLM Royal Dutch Airlines 5
CHAP Chaparral Steel Company 6
SYX Systemax Inc. 7
KNOL Knology, Inc. 8
AZZ AZZ Incorporated 9
NTY NBTY, Inc. 10
CHTR Charter Communications, Inc. 11
LSZZF La Senza Corporation 12
PMTR Pemstar Inc. 13
MTW Manitowoc Company, Inc. 14
KBALB Kimball International 15
WWIN Waste Industries USA, Inc. 16
BAMM Books-A-Million, Inc. 17
AP Ampco-Pittsburgh Corp. 18
FIA Fiat S.p.A. (ADR) 19
SKX Skechers U.S.A., Inc. 20
BW Brush Engineered Material 21
HYNI Haynes International, Inc. 22
PSMT PriceSmart, Inc. 23
PERY Perry Ellis International, Inc. 24
SPAR Spartan Motors, Inc. 25
USAP Universal Stainless & Alloy Products 26
BDOG Big Dog Holdings, Inc. 27
VLKAY Volkswagen AG (ADR) 28
CGA Corus Group plc (ADR) 29
GRA W.R. Grace & Co. 30
SPTN Spartan Stores, Inc. 31
GIII G-III Apparel Group, Ltd. 32
KTII K-Tron International, Inc. 33
DXPE DXP Enterprises, Inc. 34
TTEC TeleTech Holdings, Inc. 35
PCLN priceline.com Incorporated 36
RKT Rock-Tenn Company 37
ANDE The Andersons, Inc. 38
STAN Standard Parking Corporation 39
SNP China Petroleum & Chemical Corp. (ADR) 40
DLAKY Deutsche Lufthansa AG (ADR) 41
AKH Air France - KLM (ADR) 42
KMX CarMax, Inc 43
CAL Continental Airlines, Inc. 44
ALB Albemarle Corporation 45
VTKHY Vtech Holdings Limited (ADR) 46
ARCAF ARCADIS NV (ADR) 47
IMKTA Ingles Markets, Incorporated 48
KKD Krispy Kreme Doughnuts 49
PKIUF Parkland Income Fund 50


Magic Formula Investing

Symbol Company Name Rank
ORVMF Orvana Minerals Corporation 1
NXG NORTHGATE MINERALS CORP 2
ECMV E Com Ventures, Inc. 3
SQPFF Strongco Income Fund 4
PTEN Patterson-UTI Energy, Inc. 5
NVR NVR, Inc. 6
ARGOF Amerigo Resources LTD 7
BWLRF BREAKWATER RESOURCES LTD 8
RC Grupo Radio Centro SA (ADR) 9
RWC RELM Wireless Corporation 10
TOTFF Total Energy Services Trust 11
VPHM ViroPharma Incorporated 12
FTO Frontier Oil Corporation 13
NRXPF Norex Exploration Services Inc. 14
EVEP EV Energy Partners, L.P. 15
FCX Freeport-McMoRan Copper & Gold Inc. 16
CKR CKE Restaurants, Inc. 17
BVN Minas Buenaventura SA (ADR) 18
TRU Torch Energy Royalty Trust 19
ARLP Alliance Resource Partners, L.P. 20
MNTWF March Networks Corp. 21
CEUNF Cathedral Energy Services Income Trust 22
CLMT Calumet Specialty Products Partners, L.P 23
IEMMF Inmet Mining Corporation 24
EGY VAALCO Energy, Inc. 25
TX Ternium S.A. (ADR) 26
PNCL Pinnacle Airlines Corp. 27
ALDA Aldila, Inc. 28
PLTE Claymont Steel Holdings, Inc. 29
BBC Bodisen Biotech, Inc. 30
PPD Pre-Paid Legal Services, Inc. 31
IPS IPSCO INC 32
PCU Southern Copper Corporation 33
NTO NORTHERN ORION RESOURCES INC 34
AXANF Axia NetMedia Corporation 35
CCDPF Canaccord Capital Inc. 36
MRO Marathon Oil Corporation 37
OPTI OPTi Inc. 38
PSJEY Petsec Energy Ltd (ADR) 39
PHXHF Phoenix Technology Income Fund 40
GNCI Gencor Industries, Inc. (DE) 41
BDNNF Boliden AB 42
WDC Western Digital Corp. 43
WNR Western Refining, Inc. 44
BSM BSD Medical Corporation 45
ESVIF Ensign Energy Services Inc. 46
LMS The Lamson & Sessions Co. 47
ISAC I.C. Isaacs & Company, Inc. 48
HOC Holly Corporation 49
MTEX Mannatech, Inc. 50


In Bold are Tier 1 stocks at Foliofn. These stocks qualify for window trades w/o extra fees, meaning they are quite liquid. Only about 20 out of the 50 stocks in each strategy qualify. You may just buy these (whichever broker you use): you will then have about 40 stocks for the 2 strategies.

This article on mechanical stock picking for non mechanical investors shows that if you pick ≥10 stocks from a mechanical screen highlighting ≥50 stocks, you should be fine.


Another strategy that should be favorable this year is to buy stocks with Valueline Timeliness Rank#1. It performs well in years 3 of the election cycle. See Stock Picking and Calendar Market Timing


If you're a more cautious investor, you may want to balance your portfolio with the 2007 Dogs of the Dow.

2007 Dogs of the Dow

Symbol Company Name Dividend Yield (%) Price
PFE Pfizer Inc. 4.45 25.9
VZ Verizon Communications Inc. 4.34 37.24
T AT&T Inc. 4 35.75
MO ALTRIA GROUP 3.99 85.82
C Citigroup Inc. 3.51 55.7
MRK MERCK AND CO INC 3.49 43.6
GM GENERAL MOTORS 3.27 30.72
DD DU PONT DE NEMOURS 3.02 48.71
GE GENERAL ELECTRIC 2.99 37.21
JPM JPMorgan Chase & Co. 2.78 48.3

Conclusion

  • 2007 should be a positive year for the stock market
  • Favor Growth stocks

I wish you a great 2007 Investing year.

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