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By Kai Petainen (Guest Contributor)

Using academically inspired quantitative analysis, here are 10 longs and 10 shorts for 2010.

Pick some stocks, go to an island and come back in a year and see how they did. That's the premise behind an annual stock competition that T.J. White holds each year on Marketocracy's Web site. Dividends are paid, some companies go bankrupt, others are acquired, and basically everyone stays away from the Internet, as they catch fish, drink rum, mingle with the locals and hope that their stocks outperform the others. It's a fun hypothetical game, and in the spirit of that game, I thought it would be fun to pick 20 stocks for 2010: 10 long and 10 short picks.

How have I performed in the competition in the past? Well, in 2005 I chose Tesco Technologies (TESS), Shiloh Industries (SHLO), NewMarket Corp (NEU) and Meridian Resource Corp (TMR) and delivered a poor return of 0.5% vs. 3.0% for the S&P 500. I turned it around in 2006 when I chose Adams Resources & Energy ( AE - news - people ), Ameriprise Financial (AMP), Saia , Stepan Company (SCL) and Books-A-Million (BAMM) and had a superb fourth-place return of 45.2% vs. the S&P 500 of 13.6%.

In 2007, I chose Aegon N.V. (AEG), Encana (ECA), Pioneer Companies (acquired by Olin Corp) (OLN), KT Corp. (KTC) and AstraZeneca (AZN) and had a respectable return of 9.2% vs 3.6% for the S&P 500. The unfriendly year of 2008 wasn't kind to me, and my picks of Brasil Telecom (BTM), Miranda Gold (MAD), China Petroleum (SNP), Validus Holdings (VR) and Venteco PLC (VTO) had a dismal return of -40.4% vs. the S&P 500 at -38.8%.

In 2009, I chose BCE ( BCE) Chinacast Education (CAST), Nova Chemicals (NCX), Koninklijke Philips Electronics ( PHG) and Allianz SE (AZSEY). They had a return of 67% vs. the S&P 500 at 23.5%. Overall, I'm quite happy with my returns, but how will I do this upcoming year? I'm not sure, but it's fun to try.

How Did I Pick the Stocks?

I started my search for stocks via FactSet's incredibly versatile quant screening tool. Through FactSet, I was able to make a simple, quick quant screen and in the spirit of 2010, I chose these 10 factors.

For the long picks, I was ranking stocks based on: Low price-to-earnings (P/E) ratio, low price/book, high Piotroski score, low F-Score, low accruals, insider buying, low short interest, earnings momentum, sales growth and institutional buying. Basically, stocks looked good to me, would generally have a "value", "quality," "smart money" and "growth" story associated with them. I would not look at news, technical charting analysis, bid/ask spread, transaction costs, product quality, analyst research reports, taxes, risk, beta, political factors or economic macro variables. The analysis would follow a quant/value based approach, and to which I do acknowledge there are certainly some pros/cons associated with that approach. Short picks on the other hand, generally (not always) had a: high P/E, high price/book, low Piotroski score, high F-score, high accruals, insider selling, high short interest, negative earnings momentum, low (or very high) sales growth and institutional selling. That first cut, produced a series of stocks and from there it was onto some valuation analysis and creating some target prices.

Valuation analysis was performed using The Applied Finance Group's quantitative (AFG)-valuation model. Each stock was placed through their default assumptions. If the stock passed, I ran another valuation using a discount rate of 8% and a CAP (competitive advantage period) of 10 years. For the long picks, I chose (what I considered to be) conservative valuations, and for the short picks, I chose the optimistic valuations.

What about the Market?

I'm not an economist, I have no idea what will happen in the upcoming year. I won't even pretend to know, but for fun I attempted a valuation of the market. Each component of the Dow Jones was valued, target prices were created and that in turn created a valuation for me. How accurate is this? I have no idea, but I figured if people could make valuation targets for the Dow of 5,000, 20,000, and other seemingly random numbers then it wouldn't hurt to try. So, hypothetically, just for fun, an optimistic target for the end of 2010 for the Dow is (and I have virtually no confidence in this) 10,082. Are you a pessimist? Dow 8,140.

My 2010 Picks

So, here they are, my 10 Long and 10 Short picks for 2010 and some target prices. Feel free to disagree, and at the end of next year, I'll come back and see which ones I got right, and which ones I got wrong. Now to escape to an island, mingle with the locals and create some sand castles.

To view Mr. Petainen's 10 long and 10 short ideas for 2010 on Forbes.com and how they score according to his criteria Click Here!

Kai Petainen
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Tozzi Finance Center Manager
Ross School of Business

With 3 Quarters of 2009 now in the books, we thought it would be timely to provide a list of the top 20 performers in the S&P 500 so far this year to give investors an idea of which stocks have been doing well. Along with the list of top 20 performing companies, we have also provided a breakdown of the average return by sector as defined by AFG vs. the entire S&P 500 index to show which sectors have been leading the way. Also by using The Applied Finance Group’s (AFG's) research and valuation model we have provided further analysis on 4 of the top performing companies, 2 that we find attractive going forward and 2 that we find unattractive, based on valuation attractiveness, expected improvement in economic profitability and the overall investment attractiveness, which is based on various criteria AFG uses when identifying long/short opportunities.

Top 20 Performers In S&P 500 YTD (Total Return)

2009 YTD Sector performance (average return %) in S&P 500

 Here are a few companies from the list of top 2009 returns and we view these companies going forward based on valuation, Economic Margin Improvement, and other criteria AFG uses to value securities.

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