The system has worked pretty well over the last several years. From its inception on Dec. 31, 1986, through July 31, 2002, the S&P 5-STAR portfolio (those stocks with the highest ranking in the STARS system) returned a total of 940.7%, vs. the 276% gain posted by its benchmark, the S&P 500-stock index. (Like BusinessWeek and BusinessWeek Online, S&P is a unit of The McGraw-Hill Companies)
S&P also maintains a scoring system for stocks based on quantitative analysis, an investing discipline that uses only financial information derived from company balance sheets, income statements, and other sources. Using a proprietary model, S&P calculates a stock's weekly Fair Value -- the price at which an issue should trade at current market levels -- based on fundamental data such as corporate earnings and growth potential, price-to-book value, return on equity, and current yield relative to the S&P 500. Stocks are ranked in five tiers, with a Fair Value ranking of "5" indicating that the stock is significantly undervalued, implying the potential for more powerful price appreciation.
PRICE, VOLUME TRENDS. And S&P also gauges stocks from a technical investing perspective, looking at price and volume trends to help predict the future direction of a market or an individual security. One technical measure we look at is a stock's relative strength -- its momentum in relation to either other securities or indexes such as the S&P 500 or its own price activity.
The technical indicator that describes this is a relative-strength index (RSI). The higher the RSI number, the greater the degree to which the stock has outperformed the S&P 500 over a given time.
We thought we'd combine all three approaches in this week's screen. First we searched for stocks with S&P's highest qualitative ranking, 5 STARS (buy), meaning S&P analysts expect them to outperform the overall market in the next 6 to 12 months. Drawing from that list, we looked for issues with an S&P Fair Value ranking of 5. Finally, we screened for stocks with a 13-week RSI greater than 65, placing them squarely among those issues that have outperformed the S&P 500 index over that time.
Only five names made the cut:
Indymac Bancorp (NDE
KB Home (KBH
Nautilus Group (NLS
) Kaye is a portfolio services analyst for Standard & Poor's