BI > JULY 2006

Portfolio Moves of the Good Stewards

A Profile in Success

Since its beginning in June 2000, the Good Stewards Investment Club of Garland, Texas, has been able to continually grow its portfolio. "When we started our club we didn't have a single member who had any experience in investing in the stock market," says the club's Carlton Bailey. But that didn't stop this club from receiving top honors in BetterInvesting's Investment Club Performance Survey in both 2003 and 2004.

"There is no secret to our success," Bailey says. "We relied on BetterInvesting. We followed their guidelines right down the line."

Members of Good Stewards look for the following when studying a stock: a five-year history, at least 15-percent historical sales growth, at least 15-percent historical earnings-per-share growth, a price-earnings ratio not much over 20 and debt not exceeding 30 percent of capital. During a stock study the club looks for an upside-downside ratio of at least 3-to-1, a price in the "buy" zone and a predicted annual return of at least 15 percent a year. A Value Line report also is required for any stock under consideration.

The club's complete porfolio can be viewed with the online version of this article. Of its 22 holdings, some of the best-performing stocks as of late April were PolyMedica Corporation (ticker symbol: PLMD), with a gain of 613 percent; Chico's FAS, Inc. (CHS), 477 percent; Garmin Ltd. (GRMN), 283 percent; Best Buy Co., Inc. (BBY), 168 percent; O'Reilly Automotive, Inc. (ORLY), 113 percent; and Standard Pacific Corp. (SPF), 101 percent.

To show how this club has nurtured its portfolio, let's look at changes made since May 2005. The comments are supplied by Carlton. (No recommendation is intended for any of the companies mentioned in this article. Readers are urged to conduct their own stock studies for any companies of interest.)

May 2005: Sold all shares of Affiliated Computer Services, Inc. (ACS). The club purchased ACS in November 2003 and sold it in May 2005 for a loss of 4.5 percent. "The main reason for selling ACS was not that it hadn't met expectations." It was that two of its top executives sold a large amount of ACS stock.

June 2005: Purchased additional shares of Bed Bath & Beyond Inc. (BBBY). "We felt that the stock was undervalued, and we could lower our overall purchase price that way. The SSG (Stock Selection Guide, the main stock-study tool of the BetterInvesting community) and Value Line (report) still looked very good." Bought Teva Pharmaceutical Industries Limited (TEVA) with money received from the sale of ACS stock the previous month. "We felt that medical is one of the fastest-growing (industries)."

July 2005: Purchased additional shares of Apache Corporation (APA). "We felt gas prices were going up more and more, and an energy stock would improve our portfolio. The new SSG and Value Line still looked good."

August 2005: Sold Investors Financial Services Corp. (IFIN). One reason for selling was to pay off a member who had moved out of state. "Since we were down 5 percent since purchasing it in November 2004, it was an easy choice to sell."

September 2005: Purchased Brown & Brown, Inc. (BRO). BRO was added to the club's portfolio for diversification. "We didn't have an insurance company in our portfolio. We have had BRO about six months, and it's up 76 percent."

October 2005: Received cash for shares of Priority Healthcare Corporation, which was acquired by Express Scripts, Inc. Sold Fossil, Inc. (FOSL). FOSL "had dropped from a 101-percent increase in May 2004 to a 25-percent increase from our purchase date to when we sold it." Also, Advanced Neuromodulation Systems, Inc., was acquired by St. Jude Medical, Inc. (STJ). Members followed through on the news by discussing a new Value Line report and SSGs to determine whether STJ met their criteria; the club now holds STJ. Purchased additional shares of Lowe's Companies, Inc. (LOW), with the proceeds from the sale of FOSL. "The SSG and Value Line showed that Lowe's was still a good buy."

November 2005: Purchased Coach, Inc. (COH), and additional shares of L-3 Communications Holdings, Inc. (LLL). "Coach is another retail stock, but we have done very well in the retail market. We think that L-3 is in a great spot with all of the homeland security problems we're having." Purchased Stryker Corporation (SYK). "SYK markets orthopedic implants, and since the baby boomers are adding millions of potential customers for additional sales, we feel that this is a good buy."

December 2005: Purchased additional shares of Lowe's. The club's decision was based on limiting the number of stocks in its portfolio. "We try to keep the number of our stocks at around 20 to 22, so we buy more of what we have." Purchased Starbucks Corporation (SBUX). In displaying some flexibility with its stock-purchasing rules, the club acquired SBUX, "even though the P/E was too high. Since SBUX is growing so fast, their stock is very popular right now, and we'll follow them very closely."

February 2006: Purchased MSC Industrial Direct Co., Inc. (MSM). MSC added a "new segment for our club, thus helping us keep our portfolio balanced." MSM increased 11 percent in two months.

March 2006: Purchased additional shares of L-3. Sold Fiserv, Inc. (FISV), and bought additional shares of FactSet Research Systems Inc. (FDS). "We purchased FISV in December 2003 and were up only 12 percent. We purchased FDS in August 2002, and we are up 67 percent. The two companies are very similar."

April 2006: Purchased Precision Drilling Trust (PDS). "This is an energy company and our first trust to purchase. Their pre-tax profits on sales went from 7.4 percent in 2002 to 13.8 percent in 2003, 16.4 percent in 2004 and 30.1 percent in 2005. Their P/E is 19.1 with a 9.1-to-1 upside-downside ratio."

Even though the club doesn't have a secret to success, its decisions reveal some sound practices from which we can all learn. These include:

• Set stock-purchasing rules and stick to them.
• Watch stocks owned closely.
• Know that it's OK to sell a stock.
• Add shares to current holdings when possible.
• Consider economic factors.

Ask Colleen your club question by writing to colleen@ColleenMulder-Seward.com. Colleen holds an M.B.A. from Wayne State University. Since 2000 she has served on the board of directors for BetterInvesting's Southeastern Michigan Chapter. Colleen also writes the Retirement Intelligence Information Services newsletter for retirementcalc.com.