The relative strength index (Stockcharts.com RSI) is a significant momentum indicator that we’re using to identify overbought (RSI > 70) conditions as well as oversold (RSI < 70) potential buying opportunities.
As we’ve noted, we’re tracking a long-term version of this indicator, using a trailing 12-month RSI in conjunction with 10-year monthly charts. We think that RSI breaks — when RSI has been greater than 70 for a prolonged period and then breaks back below 70, that’s it is a moment worth noting and time for portfolio-centered consideration.
With our median return forecast at 6.7% (nearing historical lows) and the relative strength index for the Value Line Arithmetic Average at 71.9 — we thought it might be worthwhile to check for some overbought/weakening stocks. We’ll do this on a continuing basis, inspired by Barry Ritholtz’s relatively infrequent “Look Out Below!” posts on his Big Picture blog. In this case, it’ll be Look Out Below: Individual Stocks edition. When Barry signals a macro-economic seismic event, it’s worth paying attention and at least checking or double-checking your capital preservation status if you’re in that mode.
We open with Carriage Services (CSV). Carriage Services currently has the highest relative strength index, RSI (94.8) — based on the long-term perspective shown here.
A few things …
There’s an element of poster child morbid poetry here. Carriage Services provides death care services and merchandise in the U.S. The company operates two segments: funeral home operations and cemetery operations.
The Value Line low total return forecast for CSV is 1% (based on a stock price of $13.00). Accounting for the change in stock price and long-term horizon, the low total return forecast is now -8.1%.
We know that an elevated RSI is just one component (puzzle piece) of a bigger picture. We also know that companies can remain in an “overbought condition” for weeks, months, quarters and in some cases — years.
That said, we’ll be monitoring all of our covered companies for a “retreat” from overbought — watching carefully for that long-term crossover from RSI > 70 to RSI < 70.
Note that the decline for Carriage Services (last RSI crossover) at the onset of the Great Recession (Halloween 2007) reached a monstrous 91% drop in stock price. We think it might be prudent to at least be aware of these conditions … and that a considered decision (selling, trailing stops, options, etc.) seem pretty worthy and potentially rewarding over the long term.
And lest you worry about the long-term investing selections made by your peers, Carriage Services only shows up on 0.02% of all subscriber dashboards at Manifest Investing.
We’ll be taking a look at our entire batch of companies … and flagging those (particularly our community favorites) for indications of potential Look Out Below! vulnerability.
The companies with the strongest fusion ranking (combination of fundamental and technical analysis factors) this week are: Aerovironment (AVAV) and United Healthcare (UNH).
Aerovironment has been under fire in recent weeks and the stock price has sagged while growth, profitability and valuation characteristics have slightly deteriorated. After accounting for the reduced expectations, AVAV still ranks among the best opportunities among our covered companies. We have the projected annual return (PAR) at 15% with a quality ranking of 89 (11th highest percentile) after this week’s refresh. Morningstar has a fair value for AVAV at $34.
Materially Stronger: United Therapeutics (UTHR), Quality Systems (QSII), Davita (DVA), Biomarin Pharma (BMRN), AllState (ALL)
Materially Weaker: Select Medical (SEM), Posco (PKX), Amedisys (AMED), AK Steel (AKS)
Market Barometers
The average Value Line low total return forecast is 6.9%, down from 7.2% last week.
The Value Line Arithmetic Average reached an all-time high last week, joining the Dow Jones Industrial Average at the party — but much more quietly. All-time highs are nothing new for this all-of-the-above average of the types of stocks that we routinely pursue, study and own. In fact, this composite made it “back to even” 2-3 years ago and we celebrated and noted that our Tin Cup model portfolio recovered equally quickly at the time.
On this 20-year chart, we’re reminded of the swoons that followed (1) 1998 and Long-Term Capital Management, (2) the 2001-2003 correction and (3) the 2007-2009 Great Recession. We’re also reminded that peaks in relative strength index (RSI) are not the sole piece of the puzzle … as there are periods when successive peaks accompany a continuously advancing bull market. That said, any time the RSI has been “north” of 70 and retreats to 70, we’d urge high-alert status because the vulnerability of significant price corrections is elevated. (A big picture version of “Look Out Below”)
Derek Jeter’s (2) play kept the Yankee dynasty alive in 2001. Many veteran sportswriters regard this play as the most “heads up” play they’ve ever seen. Note that Jeter is behind home plate as he follows through. It was impossible, picture perfect and simply unforgettable. Giambi (7) was tagged out inches from home plate. Source: http://www.espn.com
Now that pitchers and catchers have reported … followed by the rest of the team … and the World Baseball Classic is underway, we revisit this gem from our own Cy Lynch from March 2007.
It’s a reminder of the virtues of practice (and paying attention) in investing — through the eyes of baseball and spring training:
If you’re new to investing, Cy Lynch captured the essence of “practice … practice … practice …” with this classic celebration of baseball’s annual rite of Spring Training.
For the players, Spring Training is far from glamorous. It’s an often monotonous, even grueling time. Fielders take ground ball after ground ball practicing so that they are in the right place when it counts. Pitchers, not known for, or relied on for their hitting ability, practice bunting over and over so that it becomes second nature. Attention to detail. Routine. Second nature.
For a spring training drill, Yogi Berra instructed his players to “Pair off in threes.”
Seriously, it’s the spectacularly routine things that matter most.
Indeed. If only we could achieve a nation of investors “mad enough” about the futures made possible through a lifetime of successful long-term investing …
With the Dow Industrial Average reaching new all-time highs over the past couple of days, we’re still reminded that we’ve only returned to a “place” where we were five years ago before the bear markets and corrections set the stage for recovery.
And it’s during times like these that it also makes sense to remind ourselves of the long-term perspective for stocks. It’s important to build and maintain expectations — continuously calculating and checking operating results as the days roll by. And yes, it’s OK to lean on Orson Welles (and Benjamin Graham) for a reminder that the fundamentals still do … and always have … mattered.
This month features the top percentile of all stocks covered at MANIFEST on the basis of quality (our combination rating of financial strength, earnings stability and relative growth and profitability forecasts). It’s not the customary sixteen stocks or so … but these twelve quality champions are formidable and worthy of a closer look and automatic/perpetual pounce pile status.
Overall Market Expectations
The median projected annual return (MIPAR) for all 2400+ stocks followed by MANIFEST (Solomon database) is 7.2% (2/28/2013). The multi-decade range for this indicator is 0-20% and an average reading since 1999 is 8.5%.
Companies of Interest
With the median return forecast hovering at 7.2%, less than the historical average and nearing historical lows, it makes sense to shop on the top shelf. If prices continue to surge absent any strengthening of fundamentals, the return forecast could get significantly lower. The subtle whittling of expectations (no slashing) continues as we begin the first quarter updates for 2013. Invest in the best (highest quality) but only when they’re suitably on sale.
The top shelf company with the highest fusion rating (combination of fundamental and technical analysis scoring) is Cognizant Technology (CTSH). Cognizant is well-positioned within its industry with a strong track record and stands to benefit as the global recession turns to recovery.
Mesa Labs (MLAB) continues to score well and is one of our favorite companies from this year’s batch of promising small companies from Forbes.
The recent price swoon in Coach (COH) leaves the company with the lowest price-to-fair value ratio (76%) from Morningstar and Standard & Poor’s (83%) among the companies on the top shelf. The price reduction also generates an annualized low total return forecast of 16.4% at Value Line. There’s a rumor floating that somebody thinks all of the purses are a bit pricey … but those crowds of trampling shoppers and a legacy of results suggests that the whole company might be worth buying. I don’t think the price tag hanging on the company is $40-something.
Those return forecasts across the board look pretty good on the top shelf … not a bad idea to start there.
The average low total return forecast for Value Line’s Issue 3 is 6.6%, dwelling below the group average (7.2%) of all of the companies in the Value Line Investment Survey.
So the opportunities are clearly fewer and in this case, farther between. Keep in mind that we generally restrict the quality ranking to the top two quintiles (Quality > 60) for purposes of this list. It might not hurt to brush up on either your Portuguese or French for the companies that survive and bubble to the top of this week’s return forecast screen:
And while you’re brushing up on your French, take note that the long-term low price forecast for Blackberry (BBRY) ratcheted up from $7 to $14 this week. To all you doubters and haters of the company-formerly-known-as-RIMM, you might look up pendulum in your French dictionary. How do pendulums fit when it comes to deep value speculation?
Materially Weaker: Petrobras (PBR), Rhino Resource (RNO), Newfield Exploration (NFX), PVR Partners (PVR), Consolidated Energy (CNX), ConocoPhillips (COP), New Jersey Resources (NJR)
Market Barometers
The Value Line low total return forecast held steady at 7.2%, staying at last week’s levels.
A New Barometer to Ponder
We might think of it as another log on the market barometer fire, but Chicagoland Conference keynote speaker Chuck Carlson offered up one of his favorites for the audience to consider. He tracks the percentage of stocks above their 200-day trailing average as an indicator to get either (1) more cautious in a frothy market or (2) more adventuresome while everybody else runs for the hills. This graph is published in Investor’s Business Daily but it’s also available for FREE and at your fingertips at any time by graphing $NYA200R using www.stockcharts.com as shown here.
During the depths of the Great Recession the percentage of stocks trading above their 200-day trailing average dropped under 2%!!! See circled area on the multi-year chart. When everyone else panics, study your companies carefully and find your wallet. At the opposite end, spending some time above 80% or 90% can portend a correction. We’re currently hovering near 80% and vulnerable to a correction at the present.
Chuck Carlson is a community favorite and long-time champion/advocate for individual investors and what we try to achieve. We’ve featured his Dow Theory and low cost investing work often over the years. And in Chicago, we got to see him respond to a devastating case of laryngitis — nearly rendering him without a voice. But the show must go on and it did … Chuck delivered to an appreciative gathering of long-term investors. Thanks, Chuck.
It’s that time of year. It’s in the air. You might even say it’s in the wind.
Whether we wrap the theme around March Madness or simply the advent of educational event season, we spent the weekend in Chicago at an investing conference developed and delivered by a coalition of local investment education volunteers. The Chicagoland Investment Conference was well done and kudos to the team. Ken Kavula and I are honored to be invited and included in the festivities.
Howard “Bunny” Mack. Photo Credit: Deb Severson
Speaking of madness, I’m not sure we can take the master of ceremonies (Howard Mack, President – Chicagoland Chapter) all too seriously when he’s trotting around wearing Trix rabbit ears (General Mills presented at the event) while channeling Playboy bunnies and referring to the closing Stock Talk panel participants as “Three Stooges” but he did. Seriously, the crowd seemed to enjoy the banter and discussions as Ken Kavula, Mark Robertson and Doug Gerlach shared some thoughts and stock study ideas to take home.
Ken Kavula reminded the audience of successful selections made at one of the inaugural Stock Talk panels at the Chicago National Convention for NAIC held in Schaumburg a few years ago. See BINC Stock Talk 2008
Most of all, this Stock Talk panel reminds and underscores why-we-gather and emphasizes the power of what-we-do gathered in community, sharing and exploring investment ideas.
Doug Gerlach, Ken Kavula and Mark Robertson. Photo Credit: Deb Severson
Ken’s suggestions for the audience included Mesa Labs (MLAB), NIC (EGOV) and Aerovironment (AVAV). EGOV innovatively pursues IT projects for predominantly state (and local) government agencies — seeking to optimize and improve things like making it easier to drive away with a new driver’s license.
Doug’s study roll call included Echo Global Logistics (ECHO), Yandex (YNDX) and SodaStream (SODA) — and yes, he tied sulzer bottles into the Stooge theme. His final selection was Mistras Group (MG), a worthy engineering & construction company to study.
Any study of ECHO might also include: CH Robinson (CHRW) and Expeditor’s (EXPD).
Mark’s selections included Qualcomm (QCOM) courtesy of Houston’s Anne Manning and the Mid-Michigan Round Table (our monthly stock discovery webcast), AFLAC (AFL) and the hospitalization of the duck … and a nudge to study Cognizant Technology (CTSH) and to explore the other candidates in our Ivory Soap Stock Screen.
At the end of the day, Howard removed the rabbit ears (probably went home and tried to see if they improved his TV reception) and can rest assured that he, Dean Hartley and their Chicago team favorably affected the investing future of at least one person several times over.
A screen searching for stocks Warren Buffett (BRK.B) may be interested in turned up 28 names, but only one – ADM – is a current Berkshire holding.
Most likely to catch the Oracle’s eye from the rest of the list, writes Jack Hough in Barron’s — Screening For Stocks Buffett Might Buy , is Sysco (SYY), Cummins (CMI), and Illinois Tool Works (ITW). [Seeking Alpha]
On closer examination, we’d concur on Sysco (SYY) but I’m not so sure about most of the others.
A few years ago I wrote an article that took a look at Coca-Cola through the eyes of Warren Buffett and our stock analysis methodology … as he might have seen it back in 1988-89.
The bottom line is that he appears to embrace quality and projected returns as we’d expect any disciple of Graham to do.
And in that regard, I don’t think there are 28 companies on his list. At least not these 28 companies:
Expecting Alpha 