In the past week, I came across an article in the Globe and Mail which highlighted an investment approach that sounded strangely familiar. The strategy was based on a paper entitled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers,” authored by Chicago accounting Professor Joseph Piotroski. The paper focused on stocks with high book/market ratios (the inverse of the price/book ratio). Mr. Piotroski realized that some high book/market stocks might be inexpensive for good reason – financial distress. These we would like to avoid.

To compensate for this risk, Piotroski ran high book/market stocks (those in the market’s top 20%) through a variety of accounting-type tests to make sure they were on solid financial footing. Mr. Piotroski showed that from 1976 through 1996, a portfolio that was long high book/market stocks that passed his tests, and short those that did not, would have produced a 23% annualized return – more than double the S&P 500’s return over that period. One Canadian fund manager who is now employing a 10-stock Piotroski-inspired portfolio stated in the article that it has been the best performer of his Canadian portfolios this year. Strangely enough, 2 of the 4 stocks mentioned from the portfolio are current BUY recommendations from KeyStone.

Of course this is why the strategy seems so familiar. It has been used for half a century as part of the tool box for some of this world’s most successful investors including, an investor you may have hear a little bit about, Mr. Warren Edward Buffett.

It is part of the strategy we have employed at KeyStone for the past 14 years.

While not revolutionary, we thank the Globe and the professor for highlighting the dramatic success this type of company specific investing can produce long term in a focussed growth stock portfolio. True, it is not as sexy or easy as following a pair of squiggly trend lines on a graph that will purportedly lead you to some euphoric truth about a stock. But, it works.

In fact, a modified version of this strategy was used in our “2012 Cash Rich, Profitable Small-Cap Stock Report” – Highlighting Great Cash Rick, Cash Producing Takeover Opportunities. The report has produced tremendously positive results and we are currently preparing our 2013 version for release.

Each year, the Special Report literally takes months to complete as we scan through all TSX and TSX Venture listed Micro to Mid-Cap stocks (with a weighting towards the mid-range Small-Cap stocks) using our own blend of fundamentals, cash flow, current cash, etc. and narrow our list down to about 65 individual companies on which we perform statistical analysis and management interviews if necessary. From here, we narrowed our list to 14 companies from varying industries to highlight in our report.

The Results for 2012

In the 7 Months since our Cash Rich, Profitable Small-Cap Report was published;

1. 12 of the 14 Stocks Highlighted Have Posted Positive Gains

2. 4 of the 14 Stocks Highlighted Have Already Been Acquired (Takeovers) – Miranda Technologies   Inc. (MT:TSX), La Mancha Resources Inc. (LMA:TSX), WGI Heavy Minerals Incorporated (WG:TSX), and Lifebank Corp.

3. 7 of the 65 Total Stocks Already Been Acquired (Takeovers)

4. Strong Gains Achieved in an Environment when the S&P/TSX Composite Index has Gained Only 3.8% Year-to-Date.

Sign-up for our Small-Cap Research Special Offer today via our special offer to gain access to our 2013 Cash Rich, Profitable Small-Cap Report – Do not miss out this year!

It is gratifying to see that we are looking for value and growth in the right areas and with the right methodology.

Invitation to an “Evening with Michael Campbell”

Finally, we end this week’s edition with a personal invite from our friend Michael Campbell who is hosting an evening with market prognosticator David Bensimon.

Date: Wednesday, October 10, 2012

Time: 6pm-9pm

Place: The Hyatt Regency, Vancouver

Click here for a personal invitation from Michael Campbell: http://moneytalks.net/featuring-david-bensimon.html