MAGNET - CANSLIM At Reasonable PriceThe acronym stands for: M: Management / Momentum A: Acceleration in Revenues/Earnings G: Growth At Reasonable Price N: New Products/Management E: Emerging Product/Industry T: Timing Let's use the stock screening process to pick MAGNET stocks. Investing UniverseMarket Cap / Liquidity:The strategy can be used with any Market Cap. The only criterion used by Kimmel is a minimum share price of 8$. Therefore use a Market Capitalization adapted to your risk profile. This is good if you're a cautious investor because you can stick to Larger Cap whereas CANSLIM usually focuses on Small/Mid Cap only. Primary ThemeM is for Management / Momentum Kimmel wants to see Management buying rather than dumping shares. Insider Buying is then used in the screening. Being a Momentum strategy, a high Relative Strength Rank is required. Kimmel looks at both 12 months and 3 months Relative Strength. A is for Acceleration in Revenues/Earnings Like many Momentum investors, Kimmel wants to back the stock price's momentum with accelerated Earnings. The Earning Per Share Rank (EPS Rank) may then be used. Note: not many stock screeners provide the EPS Rank. You can build a series of Growth tests to approximate. But most importantly, Kimmel put emphasis on Revenue Growth rather than Earning Growth. Indeed, Revenues are more difficult to manipulate. In order not to eliminate larger Cap, MAGNET put the Growth threshold at a reasonable 15%. In addition, in order to ensure growth is genuine - and not coming from cost cutting or other accounting gimmicks - Kimmel wants to see improving Profit Margins. G is for Growth At Reasonable Price This is the main difference with CANSLIM. Kimmel wants the Price/Earnings ratio to be less than half the Earnings Growth: PE<0.5*Growth or PEG<0.5 Can you notice how the PEG is set pretty low (many investors use a PEG<1 or <0.8) ? The strategy looks for truly undervalued growth stocks in motion. In "Contrarian Investment Strategies: the next generation", David Dreman shows that value stocks react very positively to Earnings surprise while overpriced stocks do not. Therefore, the addition of Value in a momentum strategy - although seldom used - seems to be a winning combination. Secondary ThemeIn his book "MAGNET Investing", Kimmel tested 2 strategies. A simplified one called MAG that basically use the criteria sets in the above "Primary Theme" and the more complex MAGNET that adds NET. N stands for New products, New management team This plays a similar role than the N in CANSLIM. Kimmel relates improving Profit Margins to new products or new management. As it is difficult to quantify other impacts of new products/management, we can stick to the already used Improving Profit Margins. E is for Emerging Products/Industry This is kind of linked to N (New Products). Now, Kimmel seems not to use any specific screening criterion in his backtesting. Again, we can assume that improving Profit Margins will capture the essence of the E criterion. T is for Timing Kimmel backtested the strategy combining both Fundamental and Technical analysis. He likes to time his stock's entry with a combination of indicators such as Moving Averages, MACD, Stochastic, Accumulation/Distribution, Volume. In addition, he further mentions recent insider buying
as a timely entry point. Insider Buying is
already used in the Primary Theme.
You may then combine any of these 2 market timing systems with MAGNET. Ranking2 parameters can be used for Ranking:
Holding PeriodMomentum strategies require holding period ≤ 1 year.Kimmel backtested the strategy with holding periods of 3 months and 1 year. As in most strategies using Relative Strength, the shorter holding period provides better results. Both holding periods handsomely beat the S&P500 over the backtest period (1990-1998). Kimmel shows that 3 months holding period provides better performances than 1 year even after factoring in short term capital gain tax. Now, he did not take into account hidden costs such as Bid-Ask spread, not to mention trading costs. In the end, it is more a personal choice and how comfortable you are with short holding periods. A possibility is to use a strategy similar to that of Joel Greenblatt in his Magic Formula Investing: run your screen every quarter, buy say 5-10 stocks each quarter and hold each stock for 1 year. At the end of the 1st year, you'll be holding 20-40 MAGNET stocks. Sample MAGNET Screen
Here is a MAGNET screen using MSN Deluxe Stock Screener.  If you have the MSN screener installed (Free), you can click on the following link to get the list of stocks that currently qualify: MAGNET Investing MAGNET is an interesting alternative to CANSLIM. The addition of Value and the possibility to include larger capitalizations can provide the necessary cushion to tempt more cautious investors into growth/momentum strategies. Now, the strategy is still volatile. Note: Kimmel backtested MAGNET from 1990 to 1998 so only during Bull Markets. The strategy may lack robustness in Bear markets, however the addition of Value in the screen should make it safer than CANSLIM. In adition, he ranked the entire database with his stock picking strategy and showed that higher ranking always provided better results than a lower ranking. This is a sign of robustness of the strategy. |
Related PagesMomentum InvestingHow to build mechanical momentum strategies with stock screeners. CANSLIM Stock screen to pick CANSLIM stocks like William O'Neil. Momentum Stock Picking System |
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