Playing Pure Value for a +14.5% Pure Profit

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Many traders have asked me the same question during my 40 years of trading. What is the key to being successful?

Over the years, I have seen a lot of changes in the market, but one strategy has stood the test of time: seeking out attractively valued stocks with strong charts. I especially like established companies with low price-to-earnings (P/E) ratios in strong uptrends.

This is one reason the Rydex S&P 500 Pure Value ETF ( RPV ) interests me. RPV is an exchange-traded fund that seeks to replicate the S&P, and is currently comprised of 98 of the most attractively valued stocks in the S&P 500. The average holding of the ETF has a P/E ratio of 13.5. In contrast, the current P/E of the S&P 500 is 16.7.

RPV's one-year performance ranks in the top 1% of its large-cap value category. For 2009, RPV returned +53.4%. In comparison, the S&P 500 returned +23.4% for the year.

RPV stands out because it is a "pure play." Stocks included in this ETF are pure large-cap value plays only. The fund does not include small- or mid-cap value stocks.

RPV's holdings include 11 different sectors, from financial services to healthcare to consumer goods. Financial services account for the largest piece of the pie, about one-quarter. Utilities and Energy follow at 14.0% and 13.6%, respectively.

Tesoro Corporation ( TSO ) , a petroleum refiner and retailer, is the top holding. Other well-known companies among its top 10 holdings include Sears (Nasdaq: SHLD) and Valero Energy Corporation ( VLO ) -- a pick I described in last week's Double-Digit Trading .

RPV typically reflects the movement of the S&P 500. However, since the S&P bottomed in March 2009, the ETF far outperformed the index . The S&P hit a low in March 2009 at 666.79 and has risen by +71%. In contrast, RPV hit a low of $8.46 and has increased +194% during the same period --nearly three times the increase of the S&P.

Technically RPV has broken out of a bullish ascending triangle formation. The triangle was formed by the uptrend line and resistance, which was at roughly $24.



Two weeks ago RPV climbed back above its rising 10-week moving average, showing bullish momentum.

If the S&P continues to rally, RPV is likely to move higher. In this case, it will probably not encounter resistance until around $29. If the S&P corrects, RPV will likely find trendline and lateral support around $23.20.

The indicators are also bullish. MACD is about to cross over its trigger line, giving a buy signal. The relative-strength index ( RSI ) has been trending upward for nearly a year and is well above its current trendline, a bullish sign. Stochastics has reached overbought levels; however, strong securities can stay overbought for prolonged periods of time. So far, stochastics has not given a sell signal.

Fundamentally, RPV is attractively valued. On many metrics it boasts the best valuation of its peer group.

The ETF has a trailing P/E ratio of 13.5. The S&P's trailing P/E ratio is 16.5.

The price to sales (P/S) ratio of its portfolio holdings is 0.23. This is lowest P/S ratio out of all 32 large-value ETFs. In comparison, PowerShares FTSE RAFI US 1000 ( PRF ) has the second lowest P/S ratio at 0.49, more than double RPV's. The Vanguard Value ( VTV ) ETF has the third lowest P/S ratio. At 0.84, RPV also has the lowest price-to-book value ratio of its holdings compared with its large cap value peers. The next lowest price-to-book value is PRF at 1.25.

Given RPV's solid fundamentals, attractive valuation, and technically bullish chart pattern, it could be a worthwhile addition.


Editor
Double-Digit Trading

P.S. What's the best of the best? I did technical analysis on all 98 stocks in the Rydex S&P 500 Pure Value ETF and then fundamentally analyzed ten of the companies with the most attractive charts. I selected the best of these ten companies and I reveal the name of this stock in this week's issue of my newsletter, Double-Digit Trading.


Disclosure: Melvin Pasternak does not own shares of any security mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Stocks

Referenced Stocks: PRF , RPV , RSI , SHLD , TSO , VLO , VTV

Melvin Pasternak

Melvin Pasternak

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