Source: Tim Parker, Benzinga

Tim makes an interesting point and nudges us in the direction of an important question.

It’s not so important where Sonic Restaurants (SONC) are today in terms of expectations — although if you hold/follow SONC, you want to know that the return forecast is now 2.5% (thanks to the price surge brought to our attention by Tim) and that the company has a below-average quality ranking.

But we have to wonder whether we “noticed” Sonic before the price move?

We flagged SONC as “interesting” and it made our short list of study candidates back on 11/29/2011 — so we’d politely challenge the characterization that “nobody noticed.” Here’s the short list from that update:

Source: This Week Update, Manifest Investing, 11/29/2011

As shown on a current chronicle for SONC, the return forecast was elevated at stock price of $6.71 and the projected annual return was approximately 20-25%.

RSI Breaks, Death Crosses & Confirmations …

Observations:

1. The disruption period following the early 2005 relative strength break (RSI declining to less than 70 after a sustained period above 70) is not something that would surprise us.

2. The death cross (short-term trailing average breaks below long-term trailing average) circa Halloween 2007 basically “intervened” and disrupted (BIG) any potential recovery following an oversold break to the upside. As is often the case, carnage ensues — and carnage is exacerbated for poor and average quality stocks.

3. SONC was stuck in the carnage zone until a series of higher lows in the relative strength index (confirmation) materialized in late 2011.

4. SONC is still not potentially overbought (RSI = 68.6) but it’s getting there and with the projected annual return in low single digits, we’d be actively shopping for higher PAR replacements in any portfolios that contain SONC. (Those who deploy trailing stops should probably consider them — as a minimum — for SONC.)

We don’t operate under any pretense that we’re right all of the time. (Our target is to select outperforming stocks 60% of the time or more, that’s sufficient for differentiated superior performance — and can produce 3-5 percentage point relative returns over the long term.) But we do like to check historical “flags” and selections to see what we can learn. And that learning often includes huge doses of humility. We’ll be looking at some analyses that didn’t work out quite nearly as well … and seeing if dining on a little crow can bolster our long-term investing efforts too.

Thanks, Tim.