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Jim Collins: Momentum Magic
02/20/2004 12:00 am EST
Jim Collins has been honing his investment skills since 1955, through his newsletters and his money management operations. His managed small-cap portfolio was up 139% last year. He explains the strategy behind momentum investing, and offers his latest favorites.
"We use a very disciplined investment process to uncover top picks. Our basic philosophy is to maximize returns with a manageable level of risk by selecting companies with solid fundamentals and stock performance in the top 10% of all stocks. The three-step process involves computer screening on a daily basis. Top-ranked stocks are then analyzed, as we look for companies that are growing sales and earnings at three times the nominal GDP. Once stocks have been identified as having solid fundamentals, the next step is performance analysis of each stock price. Its performance must place it in the top 10% of all stocks in order to be considered.
"On the sell side, we monitor all stocks in our portfolios with ten measurements of relative and absolute performance on a daily basis by looking at changes in quantitative and fundamental data. The purpose on the sell side is to liquidate stocks as quickly as possible. Most of the sells are triggered by negative change in fundamentals. Meanwhile, our current outlook on the investment environment can be simply stated: things are as good as it gets. Valuations are attractive. The economy is locked into a recovery and growth as a management style will outperform value this year and probably next.
"I think the outlook for small, rapidly growing companies is very good. Right now, we are looking at PEGs-price to earnings growth- and these ratios are still very reasonable relative to the backdrop we have here. We've done very well with the Chinese Internet stocks, and among those, we still like SINA (SINA NASDAQ) very much. This company has a record of giving lowball guidance and then coming in with fantastic numbers. It is the leading provider of Internet services in China, and we're very positive on that.
"We also like e-Research (ERES NASDAQ), a company which is involved in digitizing electrocardiograms. The Federal Drug Administration has been pushing to have electrocardiograms digitized, and e-Research currently has about 50% of this market. Only about 10% of the market for electrocardiograms are currently digital, and the FDA's decision should increase this amount.
"I also like something, which is a little more mundane. Netflix (NFLX NASDAQ) is the largest home DVD rental service. They have about 1.4 million subscribers and they are growing very rapidly. They carry about 15,000 titles and there are no past-due dates or late fees. The industry is projecting a compounded growth rate of about 32% a year and this company's revenues will be up about 69% in 2004 and another 49% in 2005. Earnings are skyrocketing and are estimated to be up 135% in 2004 and 87% in 2005.
"In the technology area, we like Cognizant Technologies Solutions (CTSH NASDAQ). There is a lot of 'farming out' of software, and this company will come in and design and develop software as well as maintain your systems. A lot of software development work is going to India and this company has one of the best reputations in that area. It is a very rapid growth company. Earnings last year were up 51%, and this year will be up 33%, and about 34% next year. Revenues show about a 29% long-term growth rate.
"A lot of things are happening in the wireless area, and the company we like is Research in Motion (RIMM NASDAQ). You may be familiar with their Blackberry device. The firm has just come out with a color, handle-held model. Revenues are growing very rapidly, up 92% last year and an estimated 72% this year. Earnings are up by 255% last year and 168% this year. So overall, there are still some exciting growth companies out there."
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