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Stocks on the Run: Big Profits from Short-Term Momentum Investing

By Jim Fink on May 24, 2010

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There’s nothing like a good challenge to inspire you to your best performance. The competitor in me is unleashed and I vow to either win or die trying.

Elliott Gue, Stocks on the Run

A long literature finds that, on average, stocks with high positive momentum (high 12-month past returns) outperform stocks with low positive momentum.

Clifford Asness

All of us need a good kick in the pants once in a while. It’s just human nature to slow down and take it easy – if allowed. That’s why one-party states and monopoly businesses always lag behind in innovation.  But add some competition to the mix, and everything changes. Competition puts the fear of God into you, the fear of failure. You come to realize that if you don’t do the job right, somebody else will. You need to always give your best in order to survive. Nobody explained the concept of competition better than Chinese General Sun Tzu, who said 2,500 years ago in his book The Art of War:

Throw your soldiers into positions whence there is no escape, and they will prefer death to flight.  If they will face death, there is nothing they may not achieve. Officers and men alike will put forth their uttermost strength. Soldiers in desperate straights lose the sense of fear. If there is no place of refuge, they will stand firm. If there is no help for it, they will fight hard.

Gue vs. Mostrous: Head-to-Head Competition

So, when I learned that KCI’s own Elliott Gue and Yiannis Mostrous, two of the most talented stock analysts on the planet, were starting a short-term investment service based on a competition between the two of them, I knew it was going to be very special.  A Gue vs. Mostrous smack down is sure to bring out the absolute best stock-picking performance these superstars have to offer.

How Stocks on the Run Works

Each month they pick a single stock primed to score big in the next three to nine months. No “value trap” stocks that require years to play out; only timely recommendations that possess the earnings momentum, price momentum, and/or “catalyst” to make a big move NOW.  

Yiannis and Elliott usually take turns picking stocks each month, but if one of them presents the best investment thesis two months running, they’ll go with the guy with the hot hand. You see, the competition is on two levels. Stock performance is the primary measuring stick, but they don’t get a chance to make a recommendation if they don’t first explain convincingly why it should be selected. Elliott explains the adversarial selection process this way:

I told Yiannis my stock idea and told him that he had to play Devil’s Advocate. But I knew the request wasn’t necessary–as I learned in Athens last summer, Greeks don’t consider a conversation useful if it doesn’t involve animated argument. 

While we’ve been friends for nearly a decade I knew that if I hadn’t thought through my arguments, Yiannis would rip me apart. I’m grateful: Our debates have steered me away from countless poor investing decisions.

Learn and Laugh

Each month subscribers don’t just get at stock recommendation, but also a transcript of the discussion between the Yiannis and Elliott showing the thought process behind the pick. Not only is the transcript educational, but it is also usually quite funny since these guys are close friends and like to take good-natured digs at each other whenever possible. Take, for example, the following repartee from the transcript of their second stock recommendation. Yiannis was pitching his stock idea to Elliott, when Elliott interrupted him. Yiannis replied:

Yiannis: Getting warmed up I see, interrupting huh?

Elliott: Yes, if I am to be English I can also be obnoxious. We still have your Parthenon marbles you know.

Yiannis: Why you want to pull my chain now?

Elliott: Ha, ha. Sorry man.

An Enviable Investment Track Record

I’m sure that Yiannis and Elliott’s stock picks will be big winners for three reasons.

The first reason is the competition factor discussed above.

Second, they have already proven themselves in their other investment services. Yiannis is lead advisor of the Silk Road Investor service, which recommends the best stocks in the high-growth emerging markets. He has achieved a 78.4% return for subscribers since its launch in 2006 (compared to a 17% loss for the S&P 500). Not to be outdone, Elliott’s Energy Strategist, which finds the hottest energy investment opportunities and trends, returned a sizzling 116.8% on growth and aggressive-growth energy investments between June 2006 to June 2008. And, overall, it has returned 70.5% since 2005 (compared to a 10.5% loss for the S&P).

Catalysts

Third, the investment criteria for making recommendations make sense to me.  Yiannis and Elliott are both top-down investors who study business cycles and have honed to perfection when to get in – and out of  — industry sectors for maximum profit. For example, back in February Elliott liked the fertilizer sector based on a seasonal catalyst and consequently made Intrepid Potash (NYSE: IPI) the first recommendation of Stocks on the Run:

I think agriculture will be the hottest industry sector in early 2010 and fertilizer — especially potash — is the way to play it. The recent pullback in Intrepid from its mid-January highs offers a great opportunity to get in ahead of the March start of the U.S. corn planting and fertilizer application season.

Catalysts are one of Elliott’s favorite buy triggers.  As he wrote in a recent advisor roundtable:

When researching growth-oriented companies I look for catalysts. There’s no point in buying or selling a stock that’s just going to trade sideways or follow the broader market in lockstep.

Momentum and Value are the Magic Combination

Besides catalysts, both Yiannis and Elliott look for momentum and value. Academic studies have repeatedly concluded that “hot” stocks (i.e., momentum stocks) have a tendency to stay hot over the short to intermediate term.  When you combine momentum with a value filter, future stock performance gets even better. 

Not only has money manager Clifford Asness written about this phenomenon (see his opening quotation above), but so has James O’Shaughnessy, author of What Works on Wall Street. In fact, in a recent study, O’Shaughnessy found that momentum stocks (best six-month price performance) that are also cheap (low price to book ratio) outperform the S&P 500 most strongly in the second year of a bull market. 

Guess what? We are currently in the second year of a bull market measured from the March 2009 low.  This is the perfect time to be buying reasonably-priced momentum stocks, which are frequently the type of stocks that Yiannis and Elliott pick.

Stop Losses Protect Capital

Another thing I really like about the Stocks on the Run investment service is that it employs stop losses.  As I wrote in The Great Investment Truth, preventing the big loss is the key to generating long-term wealth. Yiannis and Elliott provide a stop loss with every recommendation that ensures that none of their monthly stock picks recommendations can seriously hurt you. In fact, if a stock pick shows nice price appreciation, they will not hesitate to provide you with a real-time email alert raising the stop loss in order to guarantee a profit on the trade.

Real Money Confidence

Unlike KCI’s other investment services, every stock recommendation made by Stocks on the Run is backed by cold, hard cash. Phil Ash, KCI’s publisher, is so confident in the investment success of this product that he is investing $10,000 of his own money in each stock pick. Phil has never done this before. Ever. Now that impresses me. 

Spice Up Your Portfolio!

For long-term portfolio performance, check out Yiannis’ Silk Road Investor service and Elliott’s Personal Finance and Energy Strategist services. But if you are looking for a short-term service that can spice up your investment returns with some quick winners, Stocks on the Run is just what the doctor ordered.

You can obtain a monthly subscription to Stocks on the Run for only $5 (that is not a typo). Take advantage of Yiannis and Elliott’s competitive natures to profit from their investment prowess in identifying the stock market’s short-term big movers. Try Stocks on the Run today!

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