Kelley Wright & Geraldine Weiss

Without intending to take away anything away from the sensational job that Kelley Wright is currently doing since taking over as managing editor in 2002, no review of IQ Trends can do justice to the newsletter without also discussing Geraldine Weiss, who founded investment Quality Trends in 1966.

In fact, she was the first woman to successfully publish a financial newsletter since the infamous Evangeline Adams in the 1920s - whose stock market newsletter was based on astrology. Geraldine's service, however, relied on groundbreaking investment analysis.

As a woman, Geraldine had to hide behind the name "G. Weiss" for much of her publishing career. She said, "For many years, readers believed their advice was coming from a man." 

She did not, as she says, "come out of the closet, so to speak, until 1983," when she was invited on Lou Rukeyser's Wall Street Week. By then, she says, "I had been in business long enough that people were making money following with my service. At that point, they wouldn't have cared it if was written by an ape!"

Geraldine almost single-handedly championed the concept of dividends as a primary determinant of stock value. The LA Times once called her the "Grand Dame of Dividends". Personal Investing magazine called her "The Dividend Detective". Under any moniker, she was the financial community's strongest advocate for basing one's investment decisions on dividend yield. 

While many advisors shift their strategy depending on the current investment environment, IQ Trends - under both Geraldine and now under Kelley - has remained a bedrock of conservative investing.

The service steadfastly counsels investors in a proven strategy that despite changing market trends has remained among the market's most successful strategies for four decades. 

At the end of January 2002, after one of the most difficult periods in market history, IQ Trends was the #1 performing newsletter on a risk-adjusted basis among all the services monitored by the Hulbert Financial Digest. As of May 2006, and now four years under Kelley Wright, the service still hold the #1 rank in 20-year, risk-adjusted performance.

IQ Trends follows an investment strategy that bases investment decisions on the historic levels of yield. For example, let's consider IQ Corp. One must first understand that a stock's yield moves inversely with its price. 

Let's say IQ Corp. trades at $20 a share and provides a dividend of $1 per share. The stock would then have a current yield of 5%. If the stock rises to $40 - a 100% price gain - the yield would drop to 2.5%. If, on the other hand, the stock fell to $10, its yield would double to 10%. (These levels are extreme, but I am using them to simplify the concept.)

Over time, according to the IQ Trends theory, stocks show parameters of yield that mark historic bottoms and tops. Again, from our example, let's assume that over the past 20 years of its trading history, every time IQ Corp.'s yield dropped to 2.5%, investor sold, while each time that its yield had risen to 10%, investor bought. In this case, IQ Corp.'s stock would have yield parameters of 2.5% at the low end and 10% at the high end, providing an indication of whether or not the stock - on an historical basis - was over or undervalued.

The "theory" is that if the 10% yield level attracted investors on numerous occasions in the past, then it is likely that this level will again attractive investors if it is reached. Indeed, the long-term charts that IQ Trends publishes along with its recommendations strongly supports the idea that stocks, over the long term, do in fact fluctuate between historical yield-based parameters of valuation.

In addition, note that in the above example, the yield is based on the dividend and the ratio of the dividend to the stock price. If IQ stock always maintained its $2.50 per share dividend, its undervalued level would always remain at $10 and its overvalued level would always be $40. 

However, over time, companies change their dividend payments based on their optimism or pessimism regarding the business prospects. IQ Trends updates these yield parameters to reflect any changes in the stock's payout. Each issue provides a detailed list or undervalued and overvalued yield parameters for each and every one of the 350 blue chips stocks that it covers.

Kelley Wright explains this process, "When a stock is in the overvalued area:

1) Downside risk is great, since the price will ultimately decline to undervalue.
2) With characteristically low dividend yield, further appreciation is usually restricted unless a dividend increase raises the price levels at overvalue.
3) A sale should be made to preserve profits and prevent shrinkage of capital.

On the other hand, he adds, "When a stock is in the undervalue area:

1) Dividend yield is historically high and the price is comparatively low.
2) Downside risk is minimized because an unlikely higher yield would result from a drop in price.
3) Substantial price appreciation potential exists in the range from undervalue levels to overvalue levels.

How did this system develop? Geradline notes that she found her "calling" after reading Benjamin Graham's Security Analysis and The Intelligent Investor (Unquestionably, two of the most important investment books every written.). 

From reading Graham, Geraldine developed an understanding that dividends alone were the true mark of value. Unlike earnings - which can be manipulated - dividend were a real reflection of a stock's worth. Earnings may help a company grow, but dividends are "real money" that a company gives to its shareholders. 

She had always been very clear on one point: "Dividends are the hallmark of a blue chip stock. If a company doesn't pay a dividend, it's a speculation."

Supported by Graham's focus on value, Geraldine began the long process of developing her own investment theory. She explains, "I studied many stocks and reviewed their historical trends. I realized that each had its own profile of value, based on specific levels of high and low dividend yield. After a great deal of research, I noticed that these levels of yield were repetitive. They were different levels for different stocks, but for each individual stock the parameters were indeed repetitive."

Because the system is based on dividends, it almost by definition must focus on larger cap, more established companies. Few  small caps or aggressive growth stocks pay dividends, generally preferring to reinvest corporate funds into long term growth. 

More mature companies, however, tend to reward shareholders through the distribution of dividends. As such, only dividend paying issues have the chance of falling under IQ Trends "select blue chip" list. Kelley explains that in order for a stock to qualify for this designation, it must meet 5 out of 6 criteria:

1) The dividend has been raised five times  in the last 12 years; 2) It carries an S&P quality rank in the A category; 3) It has at least 5 million shares outstanding; 4) At least 80 institutional investors must hold the stock; 5) There have been at least 25 years of uninterrupted dividends; 6) The earnings have improved in at least 7 of the last 12 years.

In all, Kelley notes, "The stocks that meet this criteria are a representation of the highest quality and most prosperous corporations in the country. But the process doesn't stop there. From among the "select blue chip" stocks, the service provides a second set of criteria to isolate its top recommendations:

1) The stock must be undervalued as measured by its historic dividend yield.
2) Dividends raised at a compound annual rate of at least 10% over the past 12 years.
3) It must sell for two times book value or less.
4) It must have a p/e of 20-to-1 or below.
5) It must have a dividend payout ratio in the 50% area (or less) to ensure dividend safety with room for growth.
6) Debt must be equal to 50% or less of total capitalization.

These are stringent requirements that weed out all but the most financially sound companies. But remember, this service is not looking for a lot of stocks. It simply seeks the best value-oriented, conservative blue chips that concurrently reward shareholders with above average dividends. 

To succeed with this strategy, Kelley Wright and IQ Trends do not need many holdings - just the right ones. In fact, at times, very few stocks meet these criteria. At times, none do.

Part of my goal with TheStockAdvisors site - and with this section in particular - is to help explain the investment process behind the various newsletters, and to help put a face behind the services. 

Few investors realize the importance that individual advisors place on developing a successful system and the care and concern that they have for their subscribers. At IQ Trends, there are indeed people and personalities behind the system that deserves our notice.

 Throughout the 1990s, the service was co-edited by Geraldine, along with her son Gregory, whose editorial skills impressed all within the advisory world. In 2001, he lost a 10-year battle with non-Hodgkin's lymphoma. 

Few anecdotes come close to expressing the true dedication and concern that advisors have for those who follow their advice than a comment once shared by Geraldine. She said, "Shortly before Gregory died, he whispered from his hospital bed, 'Did the issue get out on time.' I assured him that it did."

A few years back, I was thrilled to recently read commentary from Geraldine in the newsletter on its 40th anniversary, as I had not spoken to her in over a decade and it is reassuring to know that she is doing so well. 

In the anniversary issue, she said, "Since 1966, I have written about one thousand articles, made hundreds of speeches, appeared on countless radio and TV shows, and co-authored two investment books. All of those words can be reduced to two sentences: To be successful in the stock market, one should confine investment selections to high quality, dividend-paying blue chip stocks. Buy them when they are 'Undervalued' (based on historic profiles of dividend yield) and sell them when they are 'Overvalued.'"

From its long heritage under Geraldine, its growth under Gregory, and its ongoing success under the skills of Kelley Wright, IQ Trends represents everything I consider most valuable about the investment newsletter business: editorial quality, dedication to investor education, and a consistent and successful, well-defined and time-proven approach to long term investing. Within the newsletter world, IQ Trends is truly one of the "select blue chips."