A friend of mine has begged me for at least a year for a column on a particular topic. Not an expose of all the thieving chief executives whose comeuppance has punished the lousy stocks he owned over the past few years. And not a piece explaining

Dow 30

underfunded pension liabilities.

No, the piece my friend and probably thousands of others still want to read would end up with a headline like this: "Ten $5 Stocks to Buy Now!"

It's hard to believe, after all we've been through, that the life-affirming human penchant for getting rich on an investment of pennies still thrives. But since we're all about service here at SuperModels, this week I finally ran my screen for Fantastic Fivers with high hopes of finding a few cheapos worth the pocket change.

Here are the results. But I can't give them my strongest recommendation, because this is still a bear market -- and in bear markets, it pays to be a net seller of stocks, not a buyer.

More Hedges on a Volatile Market

What I can recommend instead is a hedged portfolio made up of five to 10 top StockScouter long recommendations for October and five to 10 top StockScouter short recommendations. This strategy has worked extremely well over the past year and a half, yielding positive results in every month since its inception in July 2001. It's different from the hedge portfolio that I recommended in my

Sept. 18 column, in that it is designed to be completely turned over every month, rather than once a year. And it's different from the long-only 10- and 50-stock StockScouter portfolios that I have proposed before, in that it is market-neutral.

I'll get to the new names in a moment, but first let's look at the results for the strategy in September. They were strong. Using the 10 high-volume StockScouter longs and 10 high-volume StockScouter shorts that were published in my

Sept. 4 column, a hedged long/short portfolio of 20 stocks would have yielded a return of 9.8%, not including transaction costs. A 10-stock portfolio of the top five longs and top five shorts would have yielded an 8.3% return. In contrast, the

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fell 11% in the month.

As you can see, none of the longs performed particularly well. But as a group, they fell less than half as hard as the broad market. The shorts, on the other hand, performed extremely well -- falling more than twice as hard as the broad market. And that is what you are looking for in a hedged portfolio: longs and shorts that independently beat their benchmarks and in combination offer you a way to make money no matter which way the market turns.

The longs in the hedged portfolio for October are an undiversified bet on energy. This is a result of our StockScouter month-trading strategy, which seeks top-rated stocks that are in the most favorable market-cap, sector and investment style groups. In October, the only favorable market-cap, sector or investment style group is energy. Shorts, on the other hand, are a little more diversified. They're mostly technology, with a couple of drugmakers, a personnel agency and a conglomerate thrown in for good measure.

There is a great deal of risk inherent in all types of trading, so this type of portfolio is clearly not for everyone. Short-selling is particularly dangerous, as prices can quickly whip up and sting inexperienced traders. It's also possible that both longs and shorts will lose ground. Paper-trade the concept for a few months before trying it with real money, to see if it suits your temperament. I will keep track of the results myself and report back at the end of the month.

Cablevision Revisited


column on

Cablevision Systems


predictably generated a lot of debate among readers, and I heard from many who disagreed strongly with my point of view.

Said Henry M. Garelick: "Your analysis of Cablevision neglects the vital step of placing a fair market value on the assets and subtracting the liabilities. I think that if you did this with an appropriate level of diligence you would realize that Cablevision has an abundance of assets in excess of its share price. True, the company has cash-flow problems that need to be sorted out, but there seem to be a number of parties interested in either their cable systems, cable channels or both. The likelihood that they will be unable to sell off some assets to cope with their cash-flow problems and reduce their debt is very small."

Said a private New York institutional money manager, who asked not to be identified: "The investment case for CVC is straightforward: You have to believe there is no fraud. You are comfortable that there are no liquidity triggers to force bankruptcy. And you estimate the asset value well in excess of the stock price.

"As for the first issue, in today's climate, who really knows? But my 20 years of industry experience tells me that the Rigases at Adelphia were in a class by themselves. On the second issue, I think that recent actions put it to bed. The buy-in of unleveraged Rainbow Media, the FCC statement on the NextWave spectrum and, to a lesser degree, the sale of Clearview Cinemas and the closing of The Wiz stores. On the third issue, my back-of-the-envelope calculations suggest that 3 million cable/Internet subscribers in one of the best footprints in the country, doing about $1 billion in EBITDA, equals a value of $10 (billion) to $12 billion minimum; Rainbow, net of MGM and NBC interests, would yield approximately $3 billion in a sale to potentially interested parties like Walt Disney, Viacom or General Electric; the value of Madison Square Garden, Fox Sports networks, the Knicks, the Rangers, Radio City Music Hall, net of any payoff to Rupert Murdoch, would net about another $1 billion in a sale; add a Northcoast PCS Spectrum sale for another $500 million.

"Put it all together and you get total gross assets of around $15 billion. Now subtract debt of $6 billion, preferred of $1.5 billion and you get a $7.5 billion net equity value. Divide that by 300 million shares and you get $25 a share. So really, a near-term target price of $15 is quite achievable and reasonable."

The crux of both of these arguments is that the fair market value of Cablevision's properties is higher than the market believes. But even if that's true, does that make Cablevision a good investment? According to this line of reasoning, fair market value for Cablevision today equals the discounted value of future cash flows. Yet current cash flow and earnings are negative. If current cash flows and earnings are a predictor of future cash flows, then what is the present value of a negative cash-flow stream? It's negative, or at best, zero.

So their argument boils down to ignoring the fact that Cablevision has such incompetent management that it can't make money running these businesses -- and hoping that someone else will run the business much better. That is a certainly possible. But it makes the investment extremely speculative in a market environment that generally frowns on guesswork. You have to wish upon a star that the controlling Dolan family sells its properties and that prospective owners will offer generous multiples to EBITDA. There have to be safer ways to make a buck.

While Jon Markman cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to

7jonmail@microsoft.com. At the time of publication, he did not own or control shares in any equities mentioned in this column.