Abstract:
A method is provided for selecting a portfolio of securities for investment purposes. Specifically, the method utilizes three types of securities-related data: price appreciation, return-on-assets ratio, and price-to-cashflow ratio. A group of securities is ranked by price appreciation, return-on-assets ratio, and price-to-cashflow ratio; a number of the securities having the highest average rank are selected for investment.

Description:
BACKGROUND OF THE INVENTION 
   The present invention generally relates to a method for selecting a securities portfolio for investment. More particularly, the present invention relates to an investment strategy for selecting a securities portfolio based upon three criteria: price appreciation, return on assets ratio, and price-to-cashflow ratio. The investment objective of the method of the present invention is to provide an above-average total return from the portfolio. The method of the present invention seeks to meet this objective through capital appreciation. 
   A unit investment trust (UIT) is a professionally selected, diversified portfolio of stocks, bonds, or other securities that remains as a fixed portfolio throughout the life of the trust. Investors in a UIT purchase units, which represent an undivided ownership in the entire portfolio. Unlike mutual funds, in which the portfolio is actively managed and traded and continuously changes, UITs generally remain fixed for a predetermined period of time. Portfolios are designed to fill a variety of investment needs and risk tolerance levels. They fall into primarily two categories, equity and fixed income. 
   Equity portfolios are typically classified as either strategies or sectors. Strategy portfolios follow predetermined investment criteria for selecting the stocks for the portfolio. All strategies have three inherent qualities: 
   1. Simplicity: The strategies seek to out-perform specified indices by selecting portfolios using sound, fundamental screens that reflect the historical behavior of the securities. 
   2. Resilience: The strategies must show back-tested results and have staying power even through bear markets. 
   3. Discipline: The strategies dictate which stocks are chosen for the portfolio; no emotional judgments are made and the strategies always remain the same. 
   Heretofore, investment strategies have been illustrated in U.S. Pat. No. 5,978,778 issued to O&#39;Shaughnessy on Nov. 2, 1999 and U.S. Pat. No. 5,132,899 issued to Fox on Jul. 21, 1992. However, these investment strategies are not the same as the method of the present invention. 
   SUMMARY OF THE INVENTION 
   It is an object of the present invention to provide a novel security selection investment strategy. It is also an object of the present invention to automate the investment strategy of the present invention. 
   These and other objects of the present invention are accomplished in a security selection method that seeks to outperform a typical index by adhering to a disciplined investment process. The first step in this strategy is defining the universe of securities for potential investment. In one embodiment of the present invention, the method begins with using a database of stocks of companies listed in the Nasdaq 100 Index, which represents the largest non-financial domestic companies listed on the Nasdaq Stock Market&#39;s National Market. However, the present invention is not intended to be limited to just the Nasdaq 100 Index, or even to stocks; any type of security meeting the selection criteria may be utilized. Moreover, the present invention is not limited to any particular database of securities; any group of securities, including one developed by the user of the present method, could be substituted for the Nasdaq 100 Index of stocks. 
   The present method then selects securities from the group of securities based upon three criteria: price appreciation, return on assets ratio, and price-to-cashflow ratio. The first step involves screening for consistent growth by looking at the securities&#39; price appreciation. Securities may be evaluated by determining their statistical rates of price appreciation over various periods of time. A variety of statistical analyses, including least squares regression analysis, may be applied in evaluating the price history of each security. In one exemplary embodiment of the present invention, least squares regression analysis is performed to determine a statistical rate of appreciation of each security over both six-month and one-year periods. These securities may then be ranked by both these six-month and one-year statistical rates of appreciation. 
   The second step of the present method focuses on profitability. Securities are screened for profitability by ranking the securities in the group based on their return on assets. Return on assets is computed by dividing net income by total assets. 
   Lastly, the securities are screened for value by ranking them based on their price-to-cashflow ratios. Cashflow is computed by adding income (before extraordinary items) to depreciation and amortization. The price-to-cashflow ratio is computed by dividing the market value of the security by total cashflow. 
   These and other features of the present invention are discussed or are apparent in the following detailed description of the preferred embodiments of the invention. 

   
     BRIEF DESCRIPTION OF THE DRAWINGS 
       FIG. 1  a schematic flow chart depicting the steps in an exemplary method of selection of securities. 
   

   DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS 
   Referring to the FIGURE, a stock database  11  is formed by input of data using a conventional personal computer (not shown). The data input includes the names of, or a representation of, the one hundred (100) stocks that make up the Nasdaq 100 index. The names of the 100 stocks, or their symbols or other representative indicia, are stored in the database  11 . 
   In addition to the identity of the 100 stocks, other data related to each stock may also be stored in the database  11  in association with its respective stock name. Such information may include (1) the price appreciation, (2) the return-on-assets ratio, and (3) the price-to-cashflow ratio. 
   In the step indicated by the diagram block  13 , the stocks in the database  111  are sorted, or organized, according to the magnitude of the stock&#39;s one-year price appreciation value (“PAV”). Least squares regression analysis of the monthly price history of each security over the preceding 12 months is performed in computing the one-year PAV. The sorting may be done by organizing the stocks in descending order of the one-year PAV. The sorted stock names are written to File A, as shown in the diagram block  15 . 
   As understood, the only items of information necessary to create File A are the 100 stock names (or representations of the 100 stocks) and the one-year PAV for each stock. That information may be initially stored in database  11 . 
   In addition, the step indicated by diagram block  17  is performed in which the stocks are sorted, or organized, according to the magnitude of the stock&#39;s six-month price appreciation value (“PAV”). Least squares regression analysis of the monthly price history of each security over the preceding 6 months is performed in computing the six-month PAV. The sorting may be done by organizing the stocks in descending order of the six-month PAV. The sorted stock names are written to File B, as shown in diagram block  19 . The six-month stock price appreciation information may be initially stored in the database  11  such that stocks from that database are sorted (diagram block  17 ) and written to File B (diagram block  19 ). Alternatively, the stocks in File A could be associated with a six-month PAV such that they could be sorted (diagram block  17 ) and written to File B (diagram block  19 ). 
   The step indicated by diagram block  21  is performed in which the stocks are sorted, or organized, according to the magnitude of the company&#39;s return-on-assets ratio, computed by dividing net income by total assets. The sorting may be done by organizing the stocks in descending order of return-on-assets ratio. The sorted stock names are written to File C, as shown in diagram block  23 . The return-on-assets ratio information may be initially stored in the database  11  such that stocks from that database are sorted (diagram block  21 ) and written to File C (diagram block  23 ). Alternatively, the stocks in Files A or B could be associated with a return-on-assets ratio such that they could be sorted (diagram block  21 ) and written to File C (diagram block  23 ). 
   The step indicated by diagram block  25  is performed in which the stocks are sorted, or organized, according to the magnitude of the company&#39;s price-to-cashflow ratio, computed by dividing the market value of the stock by total cashflow. The sorting may be done by organizing the stocks in ascending order of price-to-cashflow ratio. The sorted stock names are written to File D, as shown in diagram block  27 . The price-to-cashflow ratio information may be initially stored in database  11  such that stocks from that database are sorted (diagram block  25 ) and written to File D (diagram block  27 ). Alternatively, the stocks in Files A, B, or C could be associated with a price-to-cashflow ratio such that they could be sorted (diagram block  25 ) and written to File D (diagram block  27 ). 
   After File D has been completed, the step indicated by diagram block  29  is performed in which the stocks are sorted, or organized, according to the magnitude of the company&#39;s average rank on the four lists in Files A, B, C, and D. (For example, a stock that happened to be ranked first in Files A and B, i.e., happened to have the greatest one-year and six-month PAVs, and was ranked second in Files C and D, i.e., had the second highest return-on-assets ratio and the second lowest price-to-cashflow ratio, would have an average rank of (1+1+2+2)/4 or 1.5.) The sorting may be done by organizing the stocks in descending order of their average rank. (A stock with an average rank of 1.5 would be listed ahead of a stock with an average rank of 2.0, etc.) The sorted stock names are written to File E, as shown in diagram block  31 . 
   After File E has been completed, the step indicated by diagram block  33  is performed in which a desired number (for example, fifteen) of stocks from File E with the greatest average rank on the four lists in Files A, B, C, and D are selected. Since the stocks are sorted in File E in descending order of their average rank, this selection is performed by identifying the first 15 stocks in the ordered list. As will suggest itself, other modes of selection may be used. 
   The identities of those 15 stocks are stored in File F, as shown at diagram block  35 . As understood, File F may be a file different from File E, or non-selected stocks in File E may be deleted to form File F. 
   In an exemplary embodiment, a portfolio of the top  15  stocks of File F will represent one series of a unit investment trust. With the deposit of the selected shares of stock, a percentage relationship among the securities in the trust&#39;s portfolio is established. In an exemplary embodiment, the selected securities are weighted by market capitalization subject to the restriction that no stock will comprise less than 1% or more than 25% of the portfolio on the business day prior to the initial date of deposit of said trust. 
   The trust will terminate on a mandatory termination date, which will typically be approximately 13 months from the initial date of deposit. Twelve-month termination dates are also contemplated. However, the duration of the investment vehicle is not limited to any particular length of time. 
   Some possible features and benefits of such a unit investment trust or other pooled vehicle or investment account can be summarized as follows (although these are not essential features of the present invention):
         Known Portfolio   The present method produces a specific portfolio giving investors the comfort of knowing what they own.   Diversification   Portfolios produced by the present method can be diversified across many different securities, offering a portfolio for almost every asset allocation need.   Low Expenses   Portfolios selected pursuant to the present method offer significantly lower expenses than other packaged products.   Daily Liquidity   Units may be redeemed on any business day at the redemption price, which may be more or less than the original purchase price. There is no cost to liquidate.   Professional Portfolio Selection and Supervision   Once the portfolio is chosen, the holdings of the portfolio are supervised, eliminating the need of individual investors to oversee each security.   Fully Invested in the Market   Portfolios selected pursuant to the present method have limited cash positions so more of the investor&#39;s money is working in the market.   Ease of Ownership   With one low minimum purchase, investors can own a diversified portfolio of securities without making a substantial commitment of time or capital.       

   The method of the present invention is not limited to the selection of securities for funding a unit investment trust. Securities may be selected for funding any type of pooled investment vehicle or investment account. The present invention could also be used in connection with variable annuities, open-ended mutual funds, etc. 
   Utilizing the Nasdaq 100 Index, under present market conditions the selected portfolio would tend to be concentrated in technology stocks. Technology companies are generally subject to the risks of rapidly changing technologies; short product life cycles; fierce competition; aggressive pricing; frequent introduction of new or enhanced products; the loss of patent, copyright and trademark protections; and government regulation. Technology companies may be smaller and less experienced companies, with limited product lines, markets or financial resources. Technology company stocks have experienced extreme price and volume fluctuations that are often unrelated to their operating performance. 
   In an exemplary embodiment, the following Table would illustrate one possible selected portfolio: 
   
     
       
             
             
             
             
             
             
           
             
             
             
             
             
             
           
         
             
               TABLE 
             
             
                 
             
             
                 
                 
                 
               Market 
                 
                 
             
             
                 
                 
               % of 
               Value 
               Cost of 
                 
             
             
               Number 
               Issuer 
               Aggregate 
               per 
               Securities 
               Market 
             
             
               of 
               of 
               Offering 
               Share 
               to 
               Capitalization 
             
             
               Shares 
               Security 
               Price 
               ($) 
               Trust ($) 
               (in million $) 
             
             
                 
             
           
           
             
                 
             
           
        
         
             
               62 
               Adobe 
               2.78 
               66.500 
               4123 
               7993 
             
             
                 
               Systems 
             
             
               262 
               Amgen 
               13.83 
               78.375 
               20534 
               39971 
             
             
               84 
               Apple 
               4.41 
               77.875 
               6542 
               12529 
             
             
                 
               Computer 
             
             
               51 
               Atmel Corp. 
               1.25 
               36.438 
               1858 
               3652 
             
             
               77 
               Biogen 
               3.64 
               70.188 
               5405 
               10550 
             
             
               50 
               CMGI 
               3.53 
               104.875 
               5244 
               9996 
             
             
               37 
               Comverse 
               2.70 
               108.250 
               4005 
               7716 
             
             
                 
               Technology 
             
             
               26 
               Microchip 
               1.07 
               61.313 
               1594 
               3118 
             
             
                 
               Technology 
             
             
               743 
               Oracle 
               22.96 
               45.875 
               34085 
               65311 
             
             
               46 
               Siebel 
               3.11 
               100.313 
               4614 
               9290 
             
             
                 
               Systems 
             
             
               376 
               Sun 
               24.98 
               98.625 
               37083 
               76982 
             
             
                 
               Micro- 
             
             
                 
               systems 
             
             
               200 
               Telllabs 
               8.22 
               61.000 
               12200 
               23929 
             
             
               35 
               VISX 
               1.58 
               67.250 
               2354 
               4288 
             
             
               74 
               Vitesse 
               20.6 
               41.375 
               3062 
               6350 
             
             
                 
               Semi- 
             
             
                 
               conductor 
             
             
               79 
               Xilinx 
               3.88 
               72.875 
               5757 
               11518 
             
             
                 
             
           
        
       
     
   
   While particular elements, embodiments and applications of the present invention have been shown and described, it is understood that the invention is not limited thereto since modifications may be made by those skilled in the art, particularly in light of the foregoing teaching. It is therefore contemplated by the appended claims to cover such modifications and incorporate those features which come within the spirit and scope of the invention.