Louis Navellier, who is based in Reno, Nev., likes to stack the odds in his favour. However, he makes his bets in the U.S. stock market, rather than in the casinos for which his head-office city is best known.
Navellier is a quantitative investor who, like a blackjack player, takes calculated risks. But his is a far more complex game, where the rules are always changing.
“Our stock-selection method is dynamic,” says the manager of Clarington Navellier U.S. All Cap Fund. “We’re always trying to adapt to the market environment.”
Navellier, 42, is president and founder of Navellier & Associates Inc., which manages about US$7 billion using his proprietary computer-driven methods. His firm, whose clients include corporations, foundations and unions, screens more than 9,000 stocks to come up with a select list of about 30 names.
There are three stages in Navellier’s screening process, which is conducted weekly. The first stage involves assessing which stocks have superior risk-reward characteristics. Key criteria include: excess return independent of the market, as defined by the alpha statistic; volatility as measured by standard deviation; and an alpha/volatility ratio that punishes stocks, even top performers, that appear too risky. About 450 stocks make Navellier’s first cut.
The second stage of the process seeks to identify 150 stocks with the fundamental characteristics that are most closely associated with superior performance. There are 38 fundamental criteria, including both growth and value characteristics, which are weighted in the model according to prevailing market trends.
Among the criteria are positive earnings revisions, sales growth, earnings momentum, liquidation value to price, and capital-expenditure growth. “We use whatever works on a trailing one- to three-year basis,” says Navellier, who updates his model quarterly.
The stocks that survive Navellier’s final stage of screening are those that work best together. A portfolio-optimization program combines stocks to achieve the highest expected return relative to risk. “Properly constructed, a 30-stock portfolio is just as safe as a 100-stock portfolio,” says Navellier, who heads a staff of 85, including 15 investment professionals.
Currently, as it often has been for Navellier, the “sweet spot” for stocks is the mid-cap sector, which he defines as companies with market capitalization ranging from US$2-billion to $US10-billion.
Among the main mid-cap positives that Navellier cites are strong earnings growth, attractive price-earnings/growth ratios (PEG) and “massive” accumulation by institutions over the past year. By contrast, he says there is an “earnings recession” among large-cap stocks, historically high PEG ratios, and outflows by institutional investors.
So far, what has worked for Navellier in the long run has yet to prove itself in the $218-million Clarington Navellier fund, which opened for business in late January. Over the past six months to Oct. 31, the fund has lost 9.9%. The median U.S. equity fund is down 0.3%.
Navellier, who graduated with an MBA in finance in 1979 from California State University, Hayward, has been in the investment business since 1980, when he began producing his MPT Review newsletter as a sideline to a job with the Federal Home Loan Bank.
Over the past 15 years, says Navellier, the newsletter has been ranked as a top performer by Hulbert Financial Digest, a widely followed rating service. Since the early 1980s, Navellier has combined newsletter publishing with managing money for individuals, pension funds and institutions.
Along with screening for the top 1% of stock picks, as defined by his methodology, Navellier is equally rigorous in weeding out laggards. Though his portfolio turnover will vary depending on market conditions, he won’t hesitate to sell if he sees deteriorating quantitative or fundamental measures. “I’m running a portfolio like a sports team. We sell good stocks to buy better stocks,” he says.