CharlesDKirkpatrick

“Relatives” are how I believe stocks should be selected. The best stocks relative to all others allow the marketplace to tell us where the action is. Too many investors try to anticipate the market by guessing where the next stock winners will come from. Using “relatives” (relative price strength, relative earnings growth and relative price-to-sales) the market tells us.

The Specific Method

1982: I began with the Growth List. Its triggers for addition or deletion are given in the stock report legend. These triggers were determined solely by guesswork at the time. Nevertheless, the Growth List grew at a rate ten times higher than the S&P 500.

1998: I began the Value List. Because the chart pattern used in the Growth List didn’t seem to add value (it triggered at the same time as relative price strength), I decided to use a “value” calculation for selecting stocks rather than for deleting them. This “value” calculation was the price-to-sales ratio.

2006: I desired to find the optimal trigger levels for each of the three relatives I use and tested them in a bull and bear market.  This study developed the Bargain List, which is now the premier list.  The study is the subject of the book Beat the Market.

What to Do with the Old Lists

For historical context and because many investors use these old lists, I decided to keep the Growth and Value List. They are still a good source of stock selections because they include earnings growth. To emphasize when a specific stock in each list does not meet the new rules of the Bargain List, I place an “XX” in front of the stock name on each report. This is a warning that the relative values for that stock are warning that the stock may be risky.

Summary

The original published study in 2001, "Stock Selection: A test of relative stock values reported over 17.5 years" describes the early methods I used and their performance. More recent studies are related in Beat the Market. Suggested portfolio configurate to minimize market risk is explained in this Portfolio Construction PDF.