The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

CHAPTER 10

The Selection Process

Do not hire a man who does your work for money, but him who does it for the love of it.

Henry David Thoreau

To be a successful stock investor, an individual must follow a disciplined approach. There are literally thousands of publicly traded companies. No investor can examine them all. Fortunately, through focusing on the five major sectors of the economy, the list of potential investments is dramatically reduced. In fact, I recommend that you limit your buy list to about 300 publicly traded companies (see sector chapters). Within these 300 firms, you will find plenty of attractive candidates. The following criteria should be used:

Diversify across the Major Recommended Sectors

• Select 10 to 12 health care stocks.
• Select 8 to 10 consumer staples stocks.
• Select 8 to 10 energy stocks.
• Select 4 to 6 technology stocks.
• Select 4 to 6 financial stocks.
• Select 2 to 5 stocks in other sectors with a high safety rating.
• Select companies of a large size (5 billion market cap >).
• Select companies that are leaders in their field and possess a strong financial position as rated by Standard & Poor's.
• Select companies that are No. 1 or No. 2 within their respective industry in market share, debt levels, profitability, and FCF yield.
• Select companies that have a P/E or P/S ratio below their 5-year average.
• Select companies that possess a PEG ratio less than 1.5 (for health care, energy, staples, and financial stocks) and less than 2 (for technology stocks).