Newsletter Watch: "Best versus the rest" strategy
Marketocracy is a unique website developed by Ken Kam, former portfolio manager and co-founder of Firsthand Funds, that allows individual investors to manage "virtual" $1 million portfolios. Designed with the same restrictions as a “real” mutual fund, the system allows investors to test their skills against other individual investors and compare their performance against their peers and the professional money management world.
Today, Marketocracy has over 55,000 people managing 65,000 model portfolios.
“We have followed over 10,000 stock positions at any one time and more than four million trades,” Kam says. By comparing the long- and short-term performance of each stock picker and their buys and sells, Kam attempts to identify what he believes are “truly the best investors.”
This lengthy introduction to his strategy is important, as it is this analysis of all the trades within these model portfolios that forms the basis for Kam’s specific stock selections. One example is his Stock Alerts newsletter. He begins by analyzing each of the stock purchases made by those individuals in his system whose performance ranking is in the top 25% of all monitored portfolios.
He then compares these buys — on a stock-by-stock basis — with the buys and sells made by the 75% of investors whose portfolios have underperformed. The third step is to find those stocks that are being bought by the “best” while simultaneously being sold by the “rest.”
From the stocks that pass this step, Kam selects his “buy” recommendations, such as these three small-cap stocks, based on this “best versus the rest” approach.
With a market cap of $488 million, Fushi Copperweld, Inc. (Nasdaq: FSIN) is an electrical components and equipment company.
The China-based firm, Kam explains, manufactures and sells bimetallic composite wire products that range from 0.05mm to 7.6mm and are used in coaxial cable, signal transmission lines and distribution lines.
He says that its primary customers include 100 customers in China and global companies involved in the coaxial cable industry.
He says the best investors increased their holdings in Fushi by 29% while the rest decreased holdings by 1%. The best investors, he observes, began purchasing FSIN in July 2007 at $12 and have continued purchasing more shares ever since. Kam points out that this buying was "especially" significant in recent weeks.
Technically, he says that the stock enjoyed a run up to a 52-week high of $27.69 in December 2007, but recently it's trading a bit lower at around $20.
With a market capitalization of $332 million, Universal Electronics Inc.
(Nasdaq: UEIC) is a California-based consumer electronics company. Kam explains that the firm creates universal wireless controllers for home entertainment systems, as well as digital antennas, signal boosters and brackets.
UEIC's primary customers are cable operators, OEMs and consumer electronics manufacturers, according to the advisor.
His analysis of stock trading among Marketocracy portfolios shows that the best increased their holdings by 13% while the rest decreased their positions in the stock by 1%.
In reviewing the historical trading, Kam says, "The Best Investors started purchasing UEIC in Aug. 2005 at around $17. Then in Dec. 2006 they sold some at around $21. During the past year, the stock has had some volatility as it has bounced between $20 and $39, but the Best Investors have perhaps gained some confidence as they purchased some shares in the past two weeks."
A third small cap to gain the attention of the best investors is Fuel-Tech, Inc. (Nasdaq: FTEK). The llinois-based environmental and facilities services firm has two business segments: Fuel Chem and Nox Reduction.
"In the Fuel Chem segment they apply chemicals for treating municipal waste, biomass, oil, coal, and solid/liquid fuels to improve efficiency of furnaces and boilers. In the NOX Reduction segment they install units that process and reduce nitrogen oxide," Kam says. FTEK's primary customers, he says, are global industrial and manufacturing facilities.
Again, an analysis of the top-performing stock picks among the Marketocracy universe show increased buying by the best and simultaneous selling by the rest.
"The Best investors increased their holdings by 11%, while the rest sold 4% of their positions in the stock,” he says.
Recounting their trading behavior, the advisor says, "The Best Investors started purchasing FTEK in July 2004 at $5. Then in Apr. 2005 they purchased a bit more at around $6,” Kam says. “The stock enjoyed a great ride, and some sold it at $16 in Apr. 2006 and at $23 in Nov. 2006." Recently, however, he says the best investors have again been purchasing more shares of FTEK.
For 25 years, Steven Halpern has conducted an annual survey asking the leading newsletter advisors to select their favorite stocks for the year. His 2008 report features 120 top picks. You may download the report for free by clicking here.
Disclosure: At the time of publication, SmallCapInvestor.com Editor-in-Chief Bob Bogda owned shares of Fushi Copperweld, Inc. in his investment portfolio. Fushi also is in the model portfolio of Rising Star Stocks, an independent investment advisory published by Business Financial Publishing LLC, the owner of SmallCapInvestor.com.
About the Author
As a newsletter editor and financial journalist, Steven Halpern has covered the investment newsletter industry for 25 years.
Read More
(click a star)
Enter comment: