Scottish System Picks 12 Strong, Cheap Stocks

Tenacious infantrymen of the Royal Scots Dragoon Guards played a key role in liberating southern Iraq from a cowardly dictator in the past month, so perhaps it is appropriate that tactics developed by a Scotsman should now take on the task of liberating investors from a more resilient foe: the great millennial bear market.

Widely distributed at elite financial institutions for the past decade but little known to the public, the Valu-Trac method of separating strong stocks from weak ones derives its market-beating strength from a cunning combination of fundamental and technical analysis.

Simple in its results but complex in its formulation, the methodology developed by Highlands investor R. Peter W. Millar is prized among professionals for its applicability across countries, industries and inflation regimes over the past two decades.

In the past three years especially, Valu-Trac's clandestine tactics have done an admirable job of helping fund managers on both sides of the Atlantic identify the best and worst members of the three main Standard & Poor's indices -- the large-cap S&P 500, the S&P MidCap 400 and the S&P SmallCap 600 -- as well as the Dow Jones Industrials, the Nasdaq 100 and the FTSE 100.

At any given time, about 4% of each group are considered an immediate buy, about 15% are rated an immediate sell, while the rest are rated hold, neutral or avoid. Ratings change as often as monthly, but history shows that buy-rated stocks typically remain in model portfolios for 12 to 18 months.

Value Plus Momentum

What's unique about Valu-Trac's method is that it helps investors identify stocks that are both cheap relative to their own history and to the market and that are also under accumulation by an early cadre of buyers. It thus attempts to avoid both the "value trap" of die-hard value investors -- which is to purchase cheap stocks without regard to whether anyone cares or not -- as well as the "momentum trap" of growth investors, which is to buy rising stocks without regard to whether they represent anything more than hopes and dreams.

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