PROVEN
A.I.M. STOCK SELECTION METHOD USING
VALUE LINE INVESTMENT SURVEY
(The stock shown is not a recommendation, but an example of how the stock selection method works.)
If you've used AIM at all, you have found it has a contrary nature. Not every investment will necessarily be compatible with AIM's Personality. So, are there things about AIM and a potential investment we should know so as to be able to pre-judge their compatibility? Maybe we should act as a marriage councilor before the ceremony instead of afterwards.
Over the years I've found certain information in Value Line Investment Survey that has proven to be useful in selecting stocks for use with AIM. When I consistently follow these guidelines I seem to have very good success as an AIM manager and investor. Most Public Libraries will have Value Line available and it's usually available at most full service and some discount brokerages as well. Value Line can be purchased in paper form, on CD-Rom and also by subscription to their internet site. It's quite expensive, but the on-line and CD-Rom versions offer some database screening options that you can't do easily with the paper versions.
1) BETA - High BETA stocks seem to do well with AIM. This is true of very Low BETA stocks as well. I like to see BETA above 1.25 or below 0.75. It's the ones in the middle that seem to not have the volatility to drive a successful AIM account. I prefer Value Line's BETA value over any of those found on the internet.
BETA = 1.15, a little lighter than I like, so let's see if our other values give us a better clue.....
2) To verify a stock's volitility, you can also use the very top of the Value Line page where it shows the annual price range. Here I like to see frequent years of 2:1 price ratios. So if the low for the year was $10, I'd like to see a high that same year of $20. It really doesn't matter which direction it's going as I know that AIM can do wonderful things in between.
Price History confirms plenty of room for AIM to maneuver. In each of the recent years, the price has ranged larger than 2 to 1. The higher the ratio, the more work AIM gets to do.
3) Yet another confirmation of a stock's general volatility is shown in the lower right hand corner as "Stock's
Price Stability. This statistic can range from a low of 5 to a high of 100 with 100 being the most stable and least effective for AIM. Generally I like stocks with a Stability value of "25" or less. Those stocks will have more frequent and deeper cycles allowing AIM to effectively use its accumulated Cash Reserves.
Stock's Price Stability shows it being nice and low at 20. This confirms that the unstable nature of the price should act as a driving force for AIM's trade activity.
4) Insider Buying and Selling: If there's an indication of insider selling, I like to see that it is usually associated with their own options exercising. After all for many executives, their options are a significant part of their total compensation. If three insiders sell and there were also three options exercised that period, then I don't worry. Insider buying never upsets me!
Insider selling corresponds exactly with employee stock options being issued. This is good.
Since this is a bit subjective, I though maybe three comparisons would be good for helping on this idea. All three of these companies are in the same industrial category and all the reports are from the same issue of Value Line. If there's a problem it is that the data, when reported in Value Line is already quite out-of-date. So, don't weigh this too heavily. Just remember that if the pattern is that the company usually has more selling by insiders than the number of options being delivered, then probably it will continue into the future.
TQNT shows "Sell" decisions mostly following with options delivery. This I consider "fair," but there's no buying.
PMCS shows fairly regular excess "Sell" activity above the number of option awards. With no buying I'd consider this "poor."
CY by comparison shows several "inside" buying decisions being made over many recent months. I'd rate this a "very good."
So, if you were considering all three of these stocks as possible purchases for use with AIM and all had essentially the same results in all the other screens presented here, then CY's inside buying could be used as the tie-breaker.
5) Generally a company with low debt does better than a debt ridden company during recessions. This is because they aren't beholden to banks or bond holders when it's hard to turn a profit. So, low debt can aid survivability. How much debt should we allow before we start raising red flags? It's harder to pin down than you might think.
If a company borrows money and uses it to produce earnings of a much higher percentage, then it's money that was wisely borrowed. If a company borrows money to build a big new headquarters so it can hire a bunch of staff, expand its Sales, General and Administrative Expenses, it's managers are probably more interested in their own egos than your welfare as a shareholder. A general rule would be that less than 25% Debt is good for survivorship. If it's much higher than that take a look at how the debt is structured, when it was borrowed, when it's due, and try to discern if it is being used productively.
Note - sometimes companies offer "convertible debentures" or convertible bonds. These usually pay reasonable rates when first sold and have a "conversion" kicker that can add to their attractiveness on high growth stocks. The other nice feature about them is that they can, at times, be purchased at significant discounts to their face values. If you can buy a 5% conv. bond due 2015 at a discount of 25% from face value (bonds are sold in $10,000 increments) it means the effective yield to you is 6.67% and there's appreciation of 33% at maturity!)
So debt can be good or bad. Don't just look at the dollar value or the percent of capitalization, but how it is structured.
Zero debt, Capitalization consists of 100% Common Stock. It should be a survivor.
6) Growth: I like to look at Sales (Revenue) and Book Value Growth as a place to judge a company's performance. I don't look much at earnings by comparison. Strictly speaking, AIM doesn't care whether a company is growing or not as it really just needs a price range to trade. However, Growth Stocks tend to have greater volatility than do mature company stocks, so growth itself acts as a sort of filter. Generally I'm looking for stocks to double their revenues and book value every 5 years. This requires an annual growth rate of a little more than 14% per year. So, look for stocks that have historically had higher than 14% growth in these two categories. Eventually earnings should also track this. Also look to see if Value Line thinks the projected rates will stay in this same range.
Revenue and Book Value Growth. Historically both have been over 20% per year, well above my base line. Both book value and revenue growth are expected to slow in the coming 3-5 years, but should be close to doubling again.
7) To double-check the growth rates, take a look down the right hand side of the page to the spreadsheet lines for Book Value and Revenues. Here we should be able to verify a doubling at least every 5 years. If Revenues are growing but book value is flat, then take some time to find out why. Sometimes a high Dividend rate will keep Book Value flat even while Revenues are growing. This is okay if you're on the receiving end of that dividend. It will be part of your total return.
Actual historical growth rates confirm a frequent doubling of revenues and book value - on average less than every five years.
8) If I'm going to invest my hard earned money in a company, I like to also see the officers and directors doing the same. The National Association of Investment Clubs uses a "rule of thumb" of each officer owning at least their annual salary's worth of stock. So, if the President gets paid $500,000 per year, he should at least own $500,000 worth of their stock. You won't be able to find that sort of thing out without getting the company's proxy statement. Value Line will show you the sum total of insider ownership as well as other very large stockholders. Generally the higher the insider ownership, the better for the investor.
Officers and Directors own over 15% of the outstanding stock. This is excellent.
9) As a final item to consider I like to look to see what the R&D expenses are when reviewing "technology" type companies. This is also shown in the window above. Remember, if a company is spending money on R&D, it has a direct effect on earnings. Of course we want the company to be getting effective returns on their R&D, but that's usually shown in the growth of book value and revenues. If nothing else, check to see what their peers are spending on R&D as a percent of Revenues. This data is right here in Value Line.
R&D Expense is 18% of sales meaning that they are spending heavily. Their growth rate shows that this money is being well spent.
Looking at the price and trade history of my CGNX account shows that AIM has had plenty of activity in the last three years. A total of 28 AIM directed trades in that period (about one trade every six weeks on average) have generated a handsome profit as indicated in the Stacked Bar Graph at the bottom of this next image. It has more than doubled in total value while still being well below its former high and not much higher than the starting point. So, AIM has been successful in "trading" this stock after it was selected and periodically reviewed with this method.
Please feel free to email me if you have further questions on this subject.
www.aim-users.com/vlis.htm