Miners that perform well in any market

INVESTMENT EDITOR

WHAT ARE WE LOOKING FOR?

Mining stocks that will lead the rally if commodity markets recover, while at the same time can stand up better if the rally loses legs.

LAST MONTH'S

RECOMMENDATIONS

Yin Luo, quantitative strategist at Macquarie Securities, recommends a portfolio strategy each month for this column. For March, he recommended a strategy of buying a basket of U.S. stocks with the most conservative asset growth profile and shorting stocks with the most aggressive asset growth. His system of choosing stocks preferred companies that increase their retained earnings and cash, while decreasing reliance on external financing activities (debt and equity offerings) and investing in operating assets.

Unfortunately, the market recovered strongly in March and it wasn't the right time for this strategy. His recommended long/short portfolio lost 10.9 per cent in the month, underperforming the one-month Treasury bill yield of 0.02 per cent. Since he started to contribute to the column, his strategy has outperformed the benchmark in 16 out of 22 months.

THEME FOR THIS MONTH

After falling sharply since mid-2008, commodities are trying to make a recovery. As Mr. Luo says, "timing the market is very difficult, but stock selection is more reliable." Together with his colleague Javed Jussa, Mr. Luo looked for factors that would help him select commodity stocks that should do well in any market. They should perform strongly if the market continues to recover and they should do relatively better if the recovery turns out to be merely a bear market rally.

His five most useful factors for picking Canadian mining stocks turned out to be: positive analyst revisions, positive earnings surprises, five-year earnings growth, strong return on assets, and improvement in trading volumes.

sadams@globeandmail.com