December 11th, 2012

Our Discipline: A Case Study in MED

As I’ve written here often, I believe the best approach for the typical individual investor is to manage their portfolios employing the following three steps: 1) a well-founded, unemotional approach to market timing, 2) the notion of industry group rotation and 3) diversification that spreads risk among a fairly large number of individual stocks (i.e., investing approximately equal amounts among stocks in the portfolio).

Put another way, the portfolio management effort down to answering the following questions: How much money should be put at risk in the stock market at any particular moment and, if new money is to be put to work, which stocks should be added to the portfolio? 

I solved the first question for myself several years ago.  I collected data back to 1963 on the daily S&P 500 Index and, by asking a series of “what-if” questions determined when it would have been better to have invested money in the market making an average return than having it sit idle on the sidelines.  Or, stated in the reverse, when would having money sit on the sidelines been better for long-term returns than had it been invested earning an average market return?  The analysis resulted in my Market Momentum Meter, an unemotional barometer of market sentiment, that allows me to shut my ears to all the media noise and hype about what they claim is “Breaking News” and focus instead on the truth about conditions conducive to momentum-driven markets over the past 50 years.  Following the Meter’s signals over the long run, investors could have avoided market crashes while still taking advantage of the bull market runs.  I can attest to the fact it helped me avoid the worst of the 2007-09 Financial Crisis Crash.

Once the Meter signals that it’s relatively “safe” to put new money to work in the market,  I use a two-step approach for finding the stocks best for carrying that risk.  I scan all stocks to find those that meet one of four different sets of criteria and, once having narrowed down the population of publicly-traded stocks, I look at their charts to find those that might have a good chance of crossing above levels that stymied their past advances (in other words, those that look like they could soon breakout across significant, long-term resistance trendlines). The first stocks to breakout are first in line as investment candidates.  The discipline requires me to sometimes be fairly active and at other times to do nothing but unemotionally watch the Portfolio run with the market or sit idle safely protected in cash.

The debate/negotiations in Washington has brought us again to a crucial market pivot point.  The Meter indicates that when market conditions look as they do today it might have been best for us to have money invested.  I have begun running those scans to begin finding those stocks that look like they’re ready to trigger Buy Points in their charts by crossing above key resistance levels.

While 75% of the stocks currently in the Portfolio show gains and 69% have outperformed the S&P 500 since their purchase, few have delivered the sort of results as has MED since its purchase last March.  I had never heard of Medifast when it dropped through one of the Scans and presented a compelling chart.  When I purchased the stock, I wrote in the Instant Alert to Members that the stock is “a product of yesterday’s Stocks-on-the-Move scan.  It has formed an inverted head-and-shoulders reversal pattern at what I hope will be the bottom of a multi-year descending wedge pattern.”  Since then, the stock has advanced 95%:

As the usual disclaimer says, “Past performance is no guarantee of future performance”.  But, I believe in the discipline and am using it today to find the next batch of stocks some of which, with some patience and luck, will hopefully deliver what turns out to be the outstanding performers over the next nine months or a year.

Technorati Tags: , , ,

May 30th, 2012

FAST: Revisited

When I get disgusted about the market, frustrated that everything seems to be moving so slowly and despondent when charts fail to deliver as they promised, I turn to some prior posts and revel in those prognostications that worked out.  An example of one of those is the case of FAST (Fastenal) which I wrote about on February 4 in a piece entitled “Two views from the Heart and the Mind“.  The post was spurred by an analyst who indicated that FAST was over valued based on his analysis and he recommended it be sold; the previous FAST close was 48.30.

I took a different approach and looked at the very long-term chart for FAST and found that the stock was approaching the upper boundary of a 17 year ascending channel.  I concluded that

“An unequivocal ascending channel since 1994 with parallel trendlines and, yes, FAST is approaching the upper trendline.  If the stock continues to rise at its current rate then, after another 16% move higher, it will touch the upper boundary at around 56.  A slower ascent will allow a slightly higher touch point.  My conclusion is that one can get another 16% gain before the “overvaluation” becomes an issue.”

The chart I used was (click on images to enlarge):

Nearly four months have passed since that post and I must admit that we were both correct. FAST is currently at 44.60 so that other analyst was correct, the stock is down 10% since his call. However, I was correct also. FAST actually almost did touch the upper boundary; it hit a high of 55.05 on March 27, seven weeks after the above sell recommendation. That was a single point away from what I saw my target and 14.0% higher than the 48.30 sell recommendation price:

So when you begin to lose your confidence, you need some moral support, you feel like you’re being pulled in many directions in the battle of the bulls and bears, then it never hurts to look at your successes.  No one is going to give you moral encouragement, pat you on the back or give you that ego boost …. you have to do it yourself.

Technorati Tags: , , ,

February 4th, 2012

FAST: Two Views from the Heart and the Mind

I’m always intrigued by those who go to lengthy extremes when comparing the Fundamental and Technical approaches to analyzing stocks.  For me it’s rather simple; I consider the Fundamental approach as the one using the heart while the Technical approach uses the head.  Fundamentalists point to their belief and their feelings about such factors as future earning results, growth rates and valuation multiples.  Technicians point to actual historical trading results and project those results into the future assuming all conditions remaining constant.

A  perfect example was a recent post by Chuck Carnevale entitled “Fastenal (FAST): A Vivid Case of Overvaluation. Carnevale’s case is that

“From 1994 to 2008 the Fastenal Company grew earnings from $.6 a share in 1994 to $.95 a share by 2008, resulting in a 23.7% compound annual growth rate. The normal PE line depicts a trimmed (the highest PE and the lowest PE trimmed) average PE ratio of 36.3, this simply indicates that the market has often priced this company at a peg ratio in excess of one. On the other hand, it is clear from the picture that the stock price often moved above and below the normal PE, and in many cases traded at its orange earnings justified valuation line…

 

…since calendar year 2010, Fastenal Company has grown earnings at the average rate of 33.9% per annum. This accelerated earnings growth should be considered as coming off of the low base which was created by the recession of 2008. Furthermore, we believe this accelerated earnings growth greatly attributes to the company’s current abnormally high PE ratio of 37.8. In other words, the market is valuing this company very optimistically..

 

…assuming that the estimates from the various analysts are within reason correct, then we would argue that this high-quality company, with no debt on its balance sheet, and a great record of earnings growth, is nevertheless very expensive today. We believe this is also apparent in the context of the fact that there are numerous other companies with similar operating histories, and dividend yields that are trading at PE ratios one-half to one-third of what is currently being awarded to Fastenal Company. “

Carnevale includes a number of tables and charts depicting the relationship between the earnings and sales growth with the stocks price history from 1994 to 2017 … yes 2017 to make his case.

As an individual investor, I like to keep things simple.  Why pay good money for expensive services to give me all sorts of information about individual companies and their stocks without talking about market conditions or the rotation of the big money into various industry groups?  It would be better to make my own decision using basic and readily available charts like this one on FAST:

An unequivocal ascending channel since 1994 with parallel trendlines and, yes, FAST is approaching the upper trendline.  If the stock continues to rise at its current rate then, after another 16% move higher, it will touch the upper boundary at around 56.  A slower ascent will allow a slightly higher touch point.  My conclusion is that one can get another 16% gain before the “overvaluation” becomes an issue.

Technorati Tags: , , ,