August 3rd, 2012

PEP vs ZMH: Technical vs Fundamental Analysis

We’re all often warned that we should be carefully about information we find on the internet.  Sometimes it’s true, sometimes it’s strictly opinion, sometimes it’s offered with some ulterior motive and sometimes it’s just inaccurate opinion.  Take for example the daily email midday alerts from Cramer’s theStreet.com.  The one today included a piece entitled “Katz: Two Names Continue to Impress.  The headline worked because it caused me to open the link.

Katz leads off with the following statement:

“In the second quarter, I recommended PepsiCo (PEP_) and Zimmer Holdings (ZMH_). Both companies recently reported better-than-expected earnings for that quarter, but their stocks followed very different trajectories. PepsiCo shares rallied to a recent high of $72.76, while Zimmer’s share price declined a bit to $58.70 based on a modest revenue shortfall and some market-share loss in the U.S. I continue to like both names, with a particular emphasis on Zimmer in light of the stock’s recent price decline.”

Katz goes on to repeat each company’s fundamentals like products, market share, sales and earnings growths and dividends history.  While he likes PepsicCo from a fundamental perspective, he is disappointed in Zimmer’s financial performance and marginal market share erosion.

But comparing PEP and ZMH is truly like trying to compare an apple to an orange.  They are in radically different industry groups and their stocks have dramatically different volatility and dynamics.  The only thing linking them is the performance of the stock market (remember, “the stock market drives 50% of a stock’s performance”).  Since he mentions only in passing the stock performance of each and that’s essentially all that we’re interested in, I’ll offer the two charts (click on image to enlarge):

PEP

ZMH

What’s interesting about these two charts (as contrasted with the long-winded fundamental analysis presented in theStreet.com offering), is that:

  • The stock market action impacted both stocks similarly
  • Both stocks have completed a right triangle and currently are at the neckline
  • Where they differ significantly is in volatility.  As expected, PEP has been about half as volatile as ZMH, a trend that might be expected to continue as the market soon breaks into new high territory.

TheStreet.com piece states that “This is a free preview of commentary that originally appeared in Real Money – the premium investment information service from TheStreet that delivers investment strategies from a veteran team of Wall Street pros, including Jim Cramer.”

With information like that above, why would you want to subscribe to their service?  I, for one, would rather rely for my investment decisions on seasoned technical analysis.  By the way, if your bullish you’d put your money into ZMH and if bearish into PEP; at this stage of the market’s correction, my bet would be with ZMH