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September 12, 2008

Fundamental - Early "Ike" Update
by Bill Rempel

Fundamental is a moderately low-beta, moderately low-turnover trading plan for stocks traded on major U.S. exchanges. It focuses on providing above-market returns over the longer term while keeping a variability of returns that is similar to the market's risk profile.

Information is as of the close on September 12, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current weights and holdings. The initial target was a buy of 5% weights per position. See my previous post on this system. Sort is alpha order by ticker and weights are rounded to the tenth of a percent.

Alcon, Inc. (ACL) 4.5% weight
Accenture Ltd. (ACN) 4.7% weight
Apollo Group, Inc.(APOL) 6.1% weight
Aeropostale Inc (ARO) 5.3% weight
Anheuser-Busch Cos. (BUD) 4.7% weight
Cal-Maine Foods, Inc (CALM) 3.4% weight
CF Industries Holdin (CF) 5.4% weight
Colgate-Palmolive Co (CL) 4.8% weight
Dell Inc. (DELL) 4.1% weight
Corporate Executive (EXBD) 4.1% weight
Graco Inc (GGG) 5.1% weight
Herbalife Ltd. (HLF) 5.9% weight
Block (H & R), Inc. (HRB) 4.5% weight
J Crew Group Inc (JCG) 4.5% weight
Royal Kpn Nv S/Adr (KKPNY) 4.8% weight
Microsoft Corporatio (MSFT) 5.7% weight
Polaris Industries I (PII) 5.9% weight
Partner Communications (PTNR) 6.1% weight
Terra Inds Inc (TRA) 4.7% weight
Waters Corp. (WAT) 5.4% weight

Cash 0.2% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $90,405.64
Gain, Past 4 Weeks: -5.71%
Gain, Year to Date: -14.38%
Gain, Since Inception on 11/12/2007: -9.59%

Coincident with the May update, I made changes to the "earnings quality" screening process, with the goal of reducing turnover on a month-to-month basis. Turnover since has been four positions, two positions, and last month, six positions. This time, the turnover is 4 positions. Granted, it's not a lot of data points, but approximately 20% turnover monthly is about what's expected from backtesting with the new filters.

The following stocks in the Fundamental portfolio went ex-dividend in the past four weeks: EXBD, HLF, HRB, MSFT, PTNR, and TRA.

Total dividends = $220.92 on the tracking portfolio. This amount has already been added to the returns shown above. Dividends paid will remain in cash until needed for a new purchase. Note, commissions are expensed at $10.00 per trade when accounting for returns.

Changes To Model Allocation

Fundamental screens for stocks that meet basic criteria, such as earnings and revenue growth, earnings quality, and debt-to-capital rations, then ranks them by ROE to hold the top 20. As a result of this regular four-week evaluation, the portfolio is making the following changes.

Remove the following stocks from the list:

Cal-Maine Foods, Inc (CALM) 3.4% weight
Dell Inc. (DELL) 4.1% weight
Block (H & R), Inc. (HRB) 4.5% weight
J Crew Group Inc (JCG) 4.5% weight

Including the cash percentage of 0.2%, this allows approximately 16.7% of the portfolio to be allocated equally to the new purchases, with an unfortunately somewhat light target of 4.2% of equity each.

Add the following stocks to the list:

Coach, Inc. (COH)
Kellogg Co (K)
Landstar System, Inc (LSTR)
Altria Group Inc (MO)

If this system were to be initiated today, the target allocation would be a buy for 5% weight holdings of the twenty stocks listed in Model Allocation, with the substitutions listed above.

Tracking

Shares of the stocks listed above will be sold, market at open on Monday. Based on portfolio total value and closing prices on September 12, 2008, enough shares of the replacements to comprise a 4.2% each allocation to the portfolio will be bought, market at open on Monday. Since the portfolio has no room for full allocations, I will round any fractional shares down in the share calculation for buys.

If you'd like to become of member of The Rempel Report, you can register here. At The Rempel Report, I track model portfolios for five different mechanical trading systems, as well as my personal portfolio, and disclose all results (good and bad) at regular intervals. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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