Print this

Email this

Submit a Question

GO BACK TO "RETURN OF THE FORTUNE 40"

FORTUNE may love its new portfolio of 40 stocks, but technical analysts may view it with a more unforgiving gaze.

The magazine's portfolio, designed to beat the S&P 500 over a year, was based on screens for value and growth developed by ValuEngine and Zacks Investment Research respectively; financial criteria including low debt ratios and cash flow rising with earnings; and a preference for companies that grow largely without acquisitions or acquisition-related debt.

But Wall $treet Week with FORTUNE decided to also look at the FORTUNE 40 from the standpoint of a technician -- someone who evaluates stocks based on the charts of their price movements. Richard Suttmeier, chief market strategist for Joseph Stevens & Co., combined his technical analyst's eye with the aforementioned ValuEngine screen to evaluate each pick in the FORTUNE 40. Among Suttmeier's thoughts and observations:

• Twenty-three of the portfolio's 35 stocks appear overbought, meaning their price seems too high. Suttmeier describes a stock as a technical "buy" when price momentum is rising and the weekly close is above its 5-week moving average, modified slightly.
• Eight of the FORTUNE 40 stocks have a relatively mediocre rating of three on a fundamental ranking system developed by ValuEngine. Suttmeier generally avoids stocks with a ValuEngine rating less than four.
• The FORTUNE 40's heavy reliance on medical-related companies should serve it well if deflation takes hold in the economy.
• But the portfolio seems under-weighted in technology and financial stocks.
• The lack of Internet stocks is a surprise.

Keep in mind that Suttmeier believes a stock can be technically overbought and still be a good investment. For example, he likes biotech firm Invitrogen and memory chip maker SanDisk, even though both stocks are overbought, under Suttmeier's definition.

Observers zeroing in on corporate fundamentals might argue that a company's profit picture can be more important than its market value. "While some of these companies are at their (stock price) highs, the evidence suggests that their earnings are continuing to grow, which makes us feel less scared," FORTUNE writer David Rynecki said on Wall $treet Week with FORTUNE's June 6 show.

In any case, almost no market observer would recommend buying stocks based purely on a magazine article or TV show. Even FORTUNE isn't telling people to run out and buy stocks simply because they're in the 40. "We're not saying this is the ultimate stock-buying list," Rynecki said.

Nevertheless, it's worth wondering how the FORTUNE 40 would do against the S&P 500 in the real world, where transaction costs matter.

No mutual fund has a specific FORTUNE 40 offering, and it has no proxy such as an exchange-traded fund, so replicating the portfolio requires 40 separate transactions. That will cost at least $200, based on a $5-per-trade cost at the broker with the lowest overall cost as measured by online research firm GomezAdvisors. Meanwhile, you can buy a set of S&P depositary receipts (SPDRs), which are designed to track the S&P 500, for one-fortieth the cost because it requires only a single $5 trade.

Recovering that $195 difference in up-front costs isn't easy. To cover the expense gap and simply match the SPDRs' overall return on a $10,000 investment, FORTUNE's portfolio has to outperform the S&P 500 on paper by at 1.95 percentage points. That requires a significant improvement in the FORTUNE 40's inaugural performance: The 2002 edition of the returned 12.7 percent, compared to the S&P 500's 11.8 percent, for a paper advantage of only 0.9 percent, or less than half of what was needed to cover the magazine list's higher costs.

And that's just to match the S&P 500. Beating it would require FORTUNE to be more successful than the overwhelming majority of professional money managers, most of whom consistently underperform broad market indices.