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.

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August 9th, 2009

Traders’ Remorse Correction: Wait it Out or Ride it Out?

A loyal reader just wrote: “i was wondering how one would go about handling trader’s remorse. i got into this rally late. do you think it’s best to sit on the sidelines for the next month or so and let things correct, or take the chance and stay in.”

Great question and one that I’ve been pondering myself ever since writing on June 13 in “Summers, 2003 and 2009: Market Similarities and Differences“. In that piece, I went back to the recovery out of the 2003 Tech Bubble Crash bottom and found that the market back then went into a traders’ remorse consolidation also. I wrote:

“After straight up 26% over 4 months, the market lost steam and started to consolidate, a pause that lasted two months through the summer to the end of August. During that time, also, volume started to dry up (the red line in the volume bars) but OBV continued to move ahead indicating that demand continually exceeded selling. Over the summer, not only did the moving averages continue to improve but at the beginning of August, the 200-day crossed above the 300-day creating a perfect “Bull Cross” where the Index and its 4 moving averages were perfectly bullishly aligned.”

Another month and a half have passed and the similarities are still uncanny. The market continued to advance and is 9.4% higher since that post and 49.36% from the March 9 bottom. Here’s the 2003 bottom chart from that June 13 post. Note that top and bottom of the Traders’ Remorse channel (June and August, 2003) touch trendlines that, six years out to 2009 happend to be the neckline of the inverted head-and-shoulders and Friday’s close. The 2003 chart:

The chart as of yesterday:

While I don’t give much credence to Elliot Wave and Fibonacci Retracement theories (that same as their not thinking much of trendlines and moving averages) but I should point out that many are pointing to the fact that the Index today’s close represents an exact 38% retracement (of the distance between peak and trough), a key Fibonacci benchmark. Many, therefore, see this as a logical place for a pause.

Having said that, I looked back to see how individual stocks performed during this period in 2003 and found no typical reaction among individual stocks. As a matter of fact, the thing that best describes a “Traders’ Remorse” correction is that it all stocks don’t follow the Market. If those stocks that buck the trend and continue moving up lose their momentum, the Traders’ Remorse correction becomes a full, multi-month consolidation or, worse case, evolves into a top and full reversal.

Those stocks that had previously been in an uptrend may temper the slope or retreated slightly; those that hadn’t yet started moving up continued stayed flat or decline further. Those that had been above key moving averages may have tested those averages; those above trendlines tested trendlines. While the market declined 10% from the consolidation pattern top to bottom, there was no consistent mirror image in individual stocks. The phenomena was too short and not too steep.

I can’t advise you as to what you should do. It depends on:

  • the stocks you are thinking of buying and how strongly they’ve performed.
  • how closely you monitor the market, how you react to volatility.
  • how diversified your portfolio might be between stocks and other assets like ETFs and ADRs of foreign stocks and currencies, commodities and fixed income.

And then again, we could all be surprised, as we have been all along this year, by the market’s resilience. It could stall for a couple of weeks and then resume its upward momentum. So if you are having trouble sitting on the sidelines and are itching to get into the action, one Industry Group that have perfect bottom reversal patterns and seems to be anticipating the next round of stimulus spending are companies involved in infrastructure, like:

  • JEC
  • CX
  • FWLT
  • JOYG

February 16th, 2009

Seeds of Next Bull Market? Shippers and Heavy Construction

It’s time for a reality check to see how the base building I described on January 26 is progressing. The negative news reported over the airwaves, in the press and in blogs continues unabated. You can take a pulse of the general consensus by reading the headlines presented in such aggregator sites as The Kirk Report and Abnormal Returns. Last time, the list was from The Kirk Report; this list comes from this past Friday’s Abnormal Returns (for links to actual stories, click the link above):

  • Earnings have collapsed. How long before they return to trend?
  • Absolute return mutual funds have been anything but.
  • The wave of bankruptcies is nowhere near cresting.
  • Germany is having problems placing its debt.
  • Is the US doomed to make the same mistakes that Japan made?
  • Europe, especially Ireland, is in bigger trouble than the US.
  • No matter how you measure the employment picture, it is bad.
  • Economist aren’t stupid. They are simply trying to explain something, the economy, that is too complex for us to understand.
  • Curing the common cold will be just about as easy as preventing future market bubbles.

I’ve heard it said in the news business that “good news doesn’t sell papers” nor does it hold on to TV viewers so it shouldn’t come as a surprise if the media hasn’t yet be able to shake their case of the blues. A couple of weeks ago I prescribed that you take a look at the market’s internal dynamics as a palliative for a sure case of investor depression. So how do those measures stack up now after two more weeks full of bad news?

Interestingly, and surprisingly, they continue to improve:

More than a third of stocks have successfully crossed above their 90-day moving averages as compared with only a fifth a month ago. Nearly one of every ten stocks are now above their 180-day moving averages as compared with one of every fourteen a month ago. It’s a greater challenge for stocks to cross the slower and more removed 300-day moving average; improvement there has only been marginal.

Finally, a large number of regional banks reversed their Golden Cross status (the index above the 90-day MA which was above the 180-day MA) because of serious erosion in the prices of the group, other stocks have risen to take their place holding the count constant though relatively small.

I’ve written here fairly consistently since the end of last year (see October 22, 2008) that I believe the market is working hard to build a base after the huge 2008 collapse. I’ve warned that patience is need since it would take some time until we get an all clear signal. But in addition to the Industry Groups I mentioned previously that appear to be leading in the base building effort (Oil, Fertilizer, Steel, Healthcare, Gold) here are two more offering some interesting basing action (click on symbol for charts; note time scales may differ):

  • Shippers
    • DSX (Diana Shipping)
    • TGP (Teeky LNG)
    • GNK (Genco Shipping)
    • VLCCF (Knightsbridge Tankers)
    • TBSI (TBS International)
    • NAT (Nordic American)
    • ONAV (Omega Navigation)
    • SSW (Seaspan)
    • PRGN (Paragon)
  • Heavy Construction and Engineering:
    • FLR (Fluor)
    • JEC (Jacobs Engineering)
    • KBR (KBR)
    • ACM (Aecom)
    • CBI (Chicago Bridge & Iron)
    • PCR (Perini)
    • STRL (Sterling)
    • ENG (Englobal)

Notice the similarities among these charts as all appear to be forming chart patterns: symmetical triangles, ascending trianges, wedges, cups-and-handles, downward sloping channels, head-and-shoulders – a true charting eduction. The similarity is understandable since the herd is stampeding these stocks for the same underlying economic reasons (yes, “fundamental” and “technical” analysis do sometimes overlap).

But a word of caution is warranted. “Looks can be deceiving.” We are in the early stages of what we hope is the beginning of the first phase (i.e., accumulation) in a new market life cycle. If true, then the charts will turn out to be true reversal patterns but, if not, then they will merely have been consolidation patterns followed by further downside.

Chart patterns often look compelling but caution dictates that you first merely put these stocks on your watch list and only later, after you see a breakout above the suggested trendlines by significant percentages and on above average volume, should you put one or two in your portfolio.

It’s too early to say how high momentum will carry these stocks if and when they do break to the upside. Each will face their own unique headwind and resistance. But “where there’s smoke there’s fire”. All these stocks can’t be basing without some fundamentals to push them in the same direction.