Scottish System Picks 12 Strong, Cheap Stocks

In the past 11 years, the method has reportedly outperformed the benchmark indices by 5 percentage points a year. In 2000, 2001 and 2002 it outperformed by an average of 20 percentage points, though last year that meant a -2% result during a period when the S&P 500 fell 24%.

The value-plus-momentum approach seems an especially fitting formulation today as investors struggle to put their retirement portfolios back together. It may be comforting to lean on a battle-tested system to choose a handful of stocks of varying sizes and sectors that are historically cheap but perhaps won't remain so for long.

Currently, Valu-Trac puts all major indices, taken as a whole, in its "avoid" category -- but that's not to say that individual stocks shouldn't be considered, says Erik Hess, chief research analyst for the system in the U.S. He says current buys in the S&P 500 include Bristol-Myers Squibb (BMY Quote), Washington Mutual (WM Quote), Thermo Electron (TMO Quote), SBC Communications (SBC Quote) and Eastman Kodak (EK Quote).

Sells include Teradyne (TER Quote), Broadcom (BRCM Quote) and Allstate (ALL Quote).

Before proceeding with more current picks and pans, let's pause to understand how and why the system works.

Why Falling Value May Be Good

Valu-Trac founder Millar was investment adviser to the Abu Dhabi Investment Authority in the mid-1970s when he found himself in need of an objective, unemotional methodology for choosing stocks in the wake of his own generation's bone-crushing bear market. Inspired by the work of value guru Benjamin Graham but concerned that price-to-earnings and price-to-book ratios failed to account for differences between industrial sectors, national accounting standards and interest rate environments, he spent years inventing a methodology ultimately called "intrinsic value yield," or IVY.