While many investors -- including John Paulson and George Soros
-- have been keying on gold lately, Kenneth Fisher recently offered
some words of caution to investors looking to ride the gold wave.
In his latest Forbes column, Fisher says that while gold has
averaged annual returns of about 7.1% since the downfall of the
Bretton Woods exchange-rate system 37 years ago, the gains have
come in bursts -- gold has gained ground in just 66 of the 433
months in that period. So, "if you aren't an exquisite timer, or
very lucky, gold isn't a great place to aim your money," he warns.
Instead, Fisher says he is currently targeting stocks of firms with
good growth potential. I think he's wise to do so, and I recently
came across two such stocks -- thanks in part to the Guru Strategy
I base on Fisher's early writings.
The two picks came to my attention through the new "Trade Alerts"
feature on my Validea Professional web site. The Trade Alerts are
issued by my Guru Strategies, each of which is based on the
approach of a different investing great. Developed after extensive
historical testing, the alerts are issued when my models detect a
series of high-conviction buy signals that, when previously reached
by individual stocks, have tended to be followed by strong
The two stocks my models issued alerts on this week are Lincoln
Educational Services Corporation (
) and Fuel Systems Solutions, Inc. (
), and the reason is that both attained certain scores on my
Fisher- and Joel Greenblatt-based models. In the past, stocks that
hit similar scores on those two models went on to gain an average
of 15% over the next three months, producing positive returns 76%
of the time and beating the S&P 500 almost 70% of the time.
Hopefully, these two stocks will have the same success enjoyed by
several other stocks my models have issued Trade Alerts on this
year. Among the big winners so far in 2010: Ross Stores (
), which is up 24.7% since an alert was issued for it, vs. just
2.0% for the S&P 500; Aeropostale (
), up 27.1% since its alert vs. 1.1% for the S&P; and Balchem
), up 32.4% vs. the S&P's 8.3% gain since its alert.
To be clear, these Trade Alerts aren't short-term, technical,
market-timing instruments. They are triggered by the scores a firm
receives from my Guru Strategies, which are fundamental-based
models. And the duration of the buy signals, determined by the
specific signal's past performance, is usually in the three- to
six-month range. (In the case of Lincoln and Fuel Systems, the
alerts are expected to last about three months.) You should also be
aware that I use a 15% stop-loss on each trade.
With that in mind, let's see which of Lincoln's and Fuel Systems'
fundamentals are impressing my Fisher- and Greenblatt-based models
Lincoln Educational Services Corporation (
Like many private education firms, this New Jersey-based company
has seen a surge in earnings in recent years, as the recession led
many people who were unable to find work to try to further their
education. Lincoln, which offers high school graduates and working
adults various degree and diploma programs, is a small-cap ($700
million) that has taken in about $550 million in sales in the past
Lincoln gets a 90% score from my Fisher-inspired model, which is
based on Fisher's 1984 classic Super Stocks. This model targets
firms with low price/sales ratios (PSRs), and for non-cyclicals
like Lincoln that means below 1.5 (and preferably below 0.75). With
a PSR of 1.28, the strategy considers Lincoln to be a good value.
A few other reasons the Fisher-based approach likes Lincoln: The
firm has a reasonable 26.2% debt/equity ratio; 5.6% three-year
average net profit margins; and an inflation-adjusted earnings per
share growth rate of more than 27% over the long term.
Lincoln also gets a strong 90% score from my Greenblatt-inspired
model, which is based on the remarkably simple two-variable "magic
formula" Greenblatt laid out in his Little Book that Beats the
Market. The two variables the strategy uses are earnings yield and
return on capital, and Lincoln acquits itself nicely on both
fronts. It has a 12.3% earnings yield, which ranks 123rd out of the
several thousand stocks I track, and it has a return on capital of
50.2%, which ranks 120th. Those strong scores make Lincoln the
38th-most attractive stock in the market, according to this model.
Fuel Systems Solutions, Inc. (
This New York-based firm makes alternative fuel components and
systems that involve propane and natural gas. Its products are used
in a variety of vehicles and industrial applications, and are
designed to generate savings, reduce emissions, and promote energy
Fuel Systems is another small-cap ($600 million) that gets 90%
scores from both my Fisher- and Greenblatt-based models. The
Fisher-based approach likes its 1.32 PSR, as well as its 8%
debt/equity ratio. Fuel Systems has also been growing earnings
rapidly over the past two years, despite the recession, and has an
inflation-adjusted long-term EPS growth rate of more than 57%.
The Greenblatt-based model, meanwhile, likes Fuel Systems' 14.1%
earnings yield, which ranks 65th of the thousands of stocks I
track. The firm also has an excellent 42.3% return on capital,
which ranks 166th. Overall, this model sees it as the 35th-best
stock in the market.
Disclosure: I'm long LINC, BCPC, ROST, and ARO.