Holland, CEO of Holland Capital Management in Chicago, “as could financial services, healthcare, and technology stocks. Small- and mid-cap stocks also do well whenever we exit a bear market.”
To put the advice of the experts to good use, we turned to Morningstar, the Chicago mutual fund monitoring company, to generate a list of mutual fund opportunities. First, we sought to provide a list of six core holdings with mutual funds that would provide investors a good starting point in light of the current market. Using Morningstar’s Principia software, we hunted for funds investing in rock-solid, large-cap companies — corporations that deliver steady performance no matter what the economic environment.
Our screen honed in on portfolios run by the same managers for five years or more (as a measure of stability and experience) through the roaring bull market of the 1990s, as well as the vicious bear we have just exited. We looked for outstanding track records to boot, limiting our sights to funds whose average annual total returns for the last five and 10 years ranked in the top 20% of their Morningstar category. Finally, we narrowed the field to two funds each from three Morningstar investment styles: large-cap growth funds, which invest in companies that are booming; large-cap value funds, which invest in companies that are underappreciated or worthy of notice; and large-cap blend funds, which invest using a combination of growth and value criteria.
Our second group of funds focused on diversifiers: portfolios investing in overseas stocks and shares of small and mid-size companies. Again, we put Morningstar’s database through the same track of hurdles, including management tenure and long-term track records.
STOCK SCREENS
Next, we tackled the long list of individual stocks with two screens that were run
on the Zacks Investment site (www.zacks.com), a Chicago stock market and brokerage data firm. For criteria, we revisited the same screens we used to select stock picks in our January 2002 issue (“22 Stocks for 2002”). Only this time we added a few twists.
As in early 2002, we sought out large companies with stock market values of $2 billion or more. We essentially wanted to play it safe: The larger a company, the less likely its stock will be shaken in a turbulent market. We also looked to see if company officials liked their own businesses, limiting our picks to companies where inside management had either made substantial stock purchases in the last quarter or held their stakes intact. And we looked to snare companies already profiting from a potential economic turnaround.
To capture stocks that are showing sparks, we checked for earnings surprises — instances where quarterly company profit reports may have exceeded Wall Street’s expectations. From there, our two screens took divergent paths.
Our screen of growth stocks looked for companies that had yet to reflect the full value of any business upswing, shares whose price-to-earnings growth (PEG) ratio was 1.5 or less. A PEG is the market’s way of measuring a stock’s price per share against its earnings per share growth rate. Observers feel