February 19th, 2007

Industry Groups and Watchlists

Someone once said that “if you’re doing what you like then it’s not going to seem like work”. The stock market seems to be a game to me; it’s as good as going to Las Vegas with greater control than mathematical odds of winning. For me, spending time trying to figure out the market isn’t work and I spend many hours at it. It becomes habit forming, almost obsessive. So 3-day weekends and the 9 market closing days this year, like this President’s Day, can seem painfully long.

One of the first steps in rationalizing my efforts was to come up with a chart filing system (assigning charts to various logical watchlists, that is). First, I created a separate watchlist for each of IBD’s 197 Industry Groups (click here for a complete list).

I’ve heard said and now firmly believe that while the market’s overall direction controls 50% of a stock’s action, its industry group controls another 30%. This leaves 20% for factors specific to the individual stock. In other words, with a diversified portfolio (which is always a good strategy to preserve capital), you’re doing great if your portfolio can consistently produce average annual returns that are 20% better than the S&P-500. If you continually concentrate your holdings in the best performing industries, you might be able to produce returns even more than 20 better than the S&P500. This should your goal. Striving for even higher returns would only indicate that you’re assuming to great a risk for those returns.

The primary organization structure of the nearly 7000 stocks in TC2007 are the Industry Groups. Worden Bros. assigns stocks into 239 industry groups, data that they purchase from Hemscott Data. I discovered, however, that their assignment of companies to industry groups is often inconsistent with categorizations in IBD. Take, example the 120 stocks categorized as apparel and footwear manufacturers or retailers in the two databases. There are 22 inconsistencies or errors:

Stock

Hemscott/TC2007

IBD

BEBE

Apparel Clothing Mfg

Retail-Clothing/Shoe

BFLY

Apparel Clothing Mfg

Internet-E-Commerce

BWS

Textile – Footwear & Access

Retail-Clothing/Shoe

CHKE

Conglomerate

Apparel Clothing Mfg

COH

Textile – Footwear & Access

Apparel Clothing Mfg

CWTR

Specialty Retail-Other

Retail-Clothing/Shoe

EBHI

Apparel Clothing Mfg

Retail-Clothing/Shoe

HMRZF

No Chart

Retail-Clothing/Shoe

INNO

Textile Mfg.

Apparel Clothing Mfg

JWN

Apparel Stores

Retail-Department Stores

KUHM

No Chart

Retail-Clothing/Shoe

MOV

Recreational Goods-Other

Apparel Clothing Mfg

OO

Sporting Goods

Apparel Clothing Mfg

ORNG

Recreational Goods-Other

Apparel Clothing Mfg

POSH

Apparel Stores

Internet-E-Commerce

RVI

Apparel Stores

Retail-Department Stores

SGC

Apparel Clothing Mfg

Commercial Svces-Misc

TJX

Department Stores

Retail-Clothing/Shoe

TLF

Textile – Footwear & Access

Apparel Clothing Mfg

VELC

Textile – Footwear & Access

Metal Prod-Fasteners

VLCM

Textile – Footwear & Access

Apparel Clothing Mfg

WACLY

No Chart

Apparel Clothing Mfg

Now that’s too high a percentage of discrepancies for confidence in “industry” graphs or other data. For example, BabyUniverse (POSH) in TC2007 is categorized as an Apparel Store but in IBD, an Internet E-Commerce company. According to the profile in Yahoo Finance, POSH:

“ operates as an online retailer of baby, toddler, maternity products, as well as furniture in the United States. It offers various baby, toddler, and maternity products, including accessories, apparel, bedding, furniture, and toys and gifts. The company was founded in 1997. It was formerly known as Everything But The Baby, Inc. and changed its name to BabyUniverse, Inc. in 2001.”

Volcom (VLCM) is another example of a discrepancy; TC2007 has it categorized as a Footwear and Accessory company but IBD calls it an Apparel Clothing Manufacturer. The Yahoo Finance profile says:

“Volcom, Inc. engages in the design, marketing, and distribution of clothing, accessories, and related products in the United States and internationally. Its products include t-shirts, fleece, bottoms, tops, jackets, boardshorts, denim and outerwear, combines fashion, functionality, and athletic performance primarily for young men and women. The company offers accessories to the boardsports of skateboarding, snowboarding, and surfing. It also offers various other accessories, including hats, wallets, ties, belts, and bags. As of December 31, 2005, Volcom operated 1 Volcom branded retail store in Los Angeles. It also offers its products through online. In addition, the company sells music under its Volcom Entertainment label. It offers its products primarily to retail stores.”

Another example is Movado which TC2007 includes in Recreational Goods-Other (along with Steinway, Singing Machine and Orange 21 …. design, development, and marketing of products for the action sports, motorsports, and youth lifestyle markets worldwide. It offers various product categories, including fashion sunglasses, women-specific sunglasses, performance sport sunglasses, snow goggles, and motocross goggles) and IBD includes in Apparel Clothing Manufacturing.

These discrepancies aren’t unique and there are examples in all the Industry Groups. So I decided that in order to fully utilize the research and data found in IBD I would have to replicate the IBD Industry Groups in 197 TC2007 Watchlists.

to be continued ……..

Subscribe below or click here to learn more about help for navigating turbulent markets.
  • Financial Freedom

    Long time no see chartist. Been busy counting money??
    Well good to see ya back.