Viewing stocks from all angles

When it comes to research, investment clubs finds there's strength -- and results -- in numbers

Your Money

April 11, 2004|By Novelda Sommers

Two heads - or 20 - could be better than one when it comes to putting together a stock portfolio. Investment clubs have an advantage over many solo investors when it comes to picking stocks because members help each other research companies' management and examine financial statements.

Here's a look at the approach of three successful clubs.

Mutual Investment Club of Detroit

In for long haul

For the 64-year-old Mutual Investment Club of Detroit, the stock evaluation process is always the same. The group of 23 investors uses a stock-selection blueprint developed by the nonprofit National Association of Investors Corp., club president Bruce Wagner said.

Sticking with the formula, Wagner's club has amassed a portfolio worth about $6 million, with members each adding $10 to $50 monthly toward stock purchases. From the start of 1994 through the end of 2003, the club's portfolio showed an average annual return of 18.8 percent compared with the S&P 500's average annual return of 11 percent during the same period.

Here's how Wagner's club looks at stock:

Evaluate management. Over the past five to 10 years, the pretax profit on sales as well as earnings on equity must be on an upward trajectory. "What we're really looking for is that management is getting consistently better," Wagner said.

Chart five to 10 years of a company's yearly high and low stock prices, earnings per share and dividends. Use this information to project risks vs. rewards over the next five years. Assume one recession and one boom every five years to calculate how high and how low a stock might go.

Look for stocks that are likely to double in value every five years. That means they go up 15 percent per year.

Review your ownership of a stock if its price reaches 150 percent of its relative value and consider selling it. Relative value is a comparison of the stock's current price/earnings ratio with its average PE ratio over the past five years.

Chicks Laying Nest Eggs

Ebb and flow

Investment clubs usually gain popularity during a bull market, although stocks generally are better values during a downturn.

Karin Housley founded her club, Chicks Laying Nest Eggs, in the bull market of the late 1990s, but during the most recent bear market she struggled to get a quorum for the monthly online meetings.

The club's portfolio was ailing, though it has since recovered, showing 4.67 percent annualized growth since the club's inception in 1998. That's compared with the S&P 500's annualized growth of 2.57 percent over the same period.

Housley, whose 2001 book about her club is scheduled for a second printing this year, said she has been barraged with speaking requests recently from across the country because of renewed interest in investing. Her book, Chicks Laying Nest Eggs: How 10 Skirts Beat the Pants Off Wall Street ... And How You Can Too, has been criticized for its simplicity and breezy tone, but Housley said it is meant to be easy for a beginner to understand.

Housley's club keeps a portfolio of 10 stocks and uses a list of rules that members call "The Chicks' Dozen." Some highlights from the dozen:

Keep it simple, sister (KISS). Club members must understand what a company does and be able to explain it to others. Sticking to this principle kept the club from buying Enron and various tech stocks at times when the stocks otherwise looked appealing.

A company's gross profit margins must be at least 50 percent. The club isn't looking for diamonds in the rough. Also, net margins must be at least 8 percent.

A company's cash on hand must be greater than long-term debt. Cash includes short-term investments. Look for it at the top of a company's balance sheet. These companies can expand if they need to and have a good chance of surviving a downturn.

The company's management must have character. Are they good people? Do they cheat on their spouses or exhibit boorish behavior? The likability of Henry and Richard Block helped persuade the club to buy H&R Block Inc. stock. They didn't buy Martha Stewart Living Omnimedia Inc. stock, even though they like the company's products.

The Good Stewards

Beating the odds

Retired marketing manager Carlton Bailey and a few friends from his church in Garland, Texas, knew little about investing before they started their club, The Good Stewards, in June 2000. For the first three months, the stocks they bought tanked.

However, they continued investing during the bear market and several of the stocks they bought have doubled in value. Investing $10 to $100 a month each, and using the investors association's stock selection guide, the group's 20 members built a portfolio of 18 companies' stocks valued at $83,000.

Last year, the club's investments outperformed those of 28,235 other clubs that belong to the investors association, gaining 85 percent compared with the S&P 500's 26.4 percent growth.

The club's best-performing stock has been PolyMedica Corp., a direct-to-consumer medical products and services company. The club purchased shares at $11, and shares closed at $26.80 at the end of the first quarter.

Starting a club

Here's where to get more information on investment clubs.

1. Before you decide to start your own club, check out the Securities and Exchange Commission's guidelines at www.sec.gov/investor/pubs/invclub.htm.

2. The best source of information is the Royal Oak, Mich.-based National Association of Investors Corp. www.better-investing.org (877-275-6242). The site has lots of information on how to find clubs in your area or how to start one.

3. An example of a well-planned club site is at www.chickslayingnesteggs.com. It's got investing tips, message boards and steps for starting a club.

Novelda Sommers is a staff writer for the Daily Press in Newport News, Va., a Tribune Publishing newspaper.

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