V.10:3 (89-93): Selecting Stocks For A Portfolio by Donald Stewart and Kenneth Stewart

V.10:3 (89-93): Selecting Stocks For A Portfolio by Donald Stewart and Kenneth Stewart
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Selecting Stocks For A Portfolio by Donald Stewart and Kenneth Stewart

As redundant as it may sound, following the stock market is in reality following a market of stocks. And surveying a market of stocks can present a challenge. The brothers Stewart, using time series analysis, here present a ranking method to design portfolios. It was this method that they used to select five stocks to build one portfolio for each year since 1967. We show here their results.

The first law of the jungle is the survival of the fittest, no matter how the jungle is defined. In the economic jungle, companies take the place of animals, and investors need to be keen observers of which ones are fittest to win their own battle of investment survival. To choose the fittest companies for inclusion in a portfolio, we conducted a study and determined that only three sets of data have to be statistically analyzed:

 The annual dividend

 The reported earnings

 The total market value of the outstanding shares

The study's goal was to locate companies with above-average growth, identify consistent performance among liquid securities and build low-risk portfolios.

The first screen developed for the study was to determine the compound growth rate of earnings and dividends. For companies to qualify for the portfolio, they needed a 10% growth rate for both earnings and dividends. The growth analysis used six data points to cover five years of annual performance. The average annual percentage growth rate was determined by using least-squares fitting to the log of the data. The growth rate is the slope of the fitted line to the data. (See sidebar, "Determining growth rate.")

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