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How a university lecturer is beating the market

Kai Petainen, 39


University lecturer

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The portfolio

Includes shares in SanDisk Corp., Inteliquent Inc., Alaska Air Group Inc., Exterran Holdings Inc. and Hanover Insurance Group Inc.

The investor

Kai Petainen grew up in Sault Ste. Marie, Ont., and now teaches at the University of Michigan. His portfolio of U.S. stocks, as displayed on, has returned 18.3 per cent annually since February of 2003 – double the gain in the S&P 500 Index.

How he is beating the market

Mr. Petainen looks for stocks that are likely to attract buying by mutual funds. He feels that individuals familiar with the investing mandates of mutual fund managers may often be able to anticipate what stocks the managers are in the process of accumulating. For example, as a stock moves from small-cap to mid-cap status, mid-cap funds may ramp up buying.

Mr. Petainen also uses computer screens to scan stock market databases for companies with attributes that academic studies have found portend stock market outperformance. Mutual funds and other investors follow these studies, so it may be possible to anticipate their buying on this basis, too.

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The screens sift for companies with low price-to-earnings ratios, growth in earnings, stock-price momentum, and buying by insiders (among other things). A rather unique aspect of the screens is the use of criteria to weed out companies with dodgy accounting and finances – for example, those with "high accruals" (aggressive accounting) and low Piotroski F scores (poor financial health).

What further distinguishes Mr. Petainen's approach is the use of two services that estimate intrinsic values for stocks, one available from Applied Finance Group and the other from the eVal website. They are applied to whittle the 50 highest ranked stocks (as outputted from his screens) down to 20 value plays.

Best move

Years ago, Mr. Petainen purchased Mentor Graphics Inc. and within days reaped a 70-per-cent gain on a takeover announcement.

Worst move

Buying a triple-leveraged ETF tracking U.S. financials – within a week, it plunged 60 per cent.

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Mutual fund investors should be aware of what their funds hold. Often, the fund's name does not match what is in the fund. For example, a mid-cap fund may have only 50 per cent of its money in mid-caps.

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