Monday, January 20, 2003

He Likes Nortel!

From tulips to internet stocks, hot sectors have a long history of bringing misfortune to investors. But James Floyd, co-portfolio manager of the Leuthold Select Industries fund, hasn't lost faith in a sector-based strategy.

"Our thesis is that the big moves are made by groups," Floyd says. "If you get the groups right, it will be much easier to get the stocks right."

Leuthold Weeden Capital Management, which has $250 million in assets under management, started its Select Industries fund in June 2000, just as the bear market was starting to bite. Since then Floyd and comanager Steven Leuthold have built the fund's assets to $11 million. It has been rough sledding for the fund recently, and its return of -16% since inception seems nothing to brag about, except that a passive investment in the S&P 500 is off 35% over the same period.

Floyd's selling pitch is quantitative analysis. He and Leuthold parse 2,000 stocks into 140 industry groups, which are then ranked according to 30 criteria. Most of the screening items are crunchily objective; they include such factors as earnings growth, cash flow (in the sense of net income plus depreciation), insider activity, relative strength, earnings estimate revisions and present versus historical valuations. But the pair add in some softer subjective scores, such as their assessment of economic or political risks affecting an industry.

The 30 criteria are then grouped into seven broad categories: value, growth, contrarian, technical, judgmental, long-term price momentum and insider activity. Industry groups scoring highest by these seven measures rise to the top of the fund's shopping list. From there Floyd and Leuthold start prying out individual stocks using equally quantitative screens.

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