If you’ve been following along since last October, you’ve probably seen a number of selections that seem to have been snake bite victims. The most recent injured stock is Infosys Tech (INFY) down some -21% this morning as the company admits that they’re tired of “lingering economic malaise.” We’ll be watching the 16-17 analysts who cover INFY to see if forecasts for 2013 and 2014 weaken materially in days ahead.
As I shared with Cy Lynch this morning, in honor of one of the best lines delivered by Ricardo Montalban (Khan) with respect to his adversary William Shatner (Captain Kirk) this portfolio TASKS ME
The outperformance accuracy of Core Diem is now 13% with a relative return of -11% after this morning’s carnage. (Cognizant Technology lost ground in sympathy with their industry peers at INFY.) Ugh.
But this condition is really nothing new — as Cy consistently and persistently reminds (as do Ken Kavula and Hugh McManus quite often) — TIME is not a 4-letter word. Our mettle is tested.
This current market surge is full of flaky stakes making new highs. As a case in point, today’s rage is Rite-Aid (RAD) with their quality ranking of ZERO as the stock price soars from $1.50 to $2.25. Nope, there’s no decimal place missing.
We’ll continue to add a stock per day to Core Diem going forward and look forward to the day when we celebrate a positive relative return.
Flake at will. We continue to believe that seeking high-quality companies when they’re comfortably in the sweet spot (our version of Graham’s margin of safety) is still a pretty good idea and that TIME is on our side.
As many of you know, the average low total return forecast made available by Value Line ranks among our favorite market barometers. We continuously compile and calculate this average based on the standard edition of the Value Line Investment Survey. Therefore, the results on display here (forecast vs. actual) get pretty compelling.
Another 91 days … another result to report. For the quarter ended 3/31/2013, we compare the 4-year low total return forecast from 3/31/2009 (20.0%) versus the 4-year actual annualized return for the Value Line Arithmetic Index (28.6%).
It’s the shape that matters — and the forecasts four years ago were of the “back up the truck” variety.
Anybody who was able to turn and run in the opposite direction of the herds running for the hills back in March 2009 is distinguishable by the footprints on their forehead and the smile on their face.
This week’s Value Line update includes quite a surge for a number of companies. Take a look at the accompanying “Materially Stronger” list in the 3/29/2013 update. As a reminder, an appearance on this list means that the Value Line analyst has “step changed” the long-term low price forecast by 20-25% since the last report 13 weeks ago. And in the case of Issue 6 companies — relatively few of them are in our sweet spot or better, AFTER the bump. But they’ve gone from a return forecast dripping in red ink to in most cases, low to mid-single digits.
MORTICIAN: Bring out your dead!
[clang]
Bring out your dead!
[clang]
….
CUSTOMER: Here’s one — nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: What?
CUSTOMER: Nothing — here’s your nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: Here — he says he’s not dead!
CUSTOMER: Yes, he is.
DEAD PERSON: I’m not!
MORTICIAN: He isn’t.
CUSTOMER: Well, he will be soon, he’s very ill.
DEAD PERSON: I’m getting better!
Insert [Value Line analyst] for CUSTOMER and you’ve got a pretty good rendition of the situation for many of the Issue 6 companies.
We have no difficulty imagining the gaggle of Issue 6 analysts in a group huddle with someone in a leadership position imploring the lot of them that these stocks aren’t dead yet. And the result of that group hug was a collective reassessment of expectations for the materials and homebuilding companies in their coverage.
In defense of the analyst gaggle, analysis of companies that have been subjected to a depression is quite challenging. The difficulty factor that accompanies normal cycles (variable frequency and amplitude) is compounded by a bath tub effect where it becomes difficult to envision “the other side.” We talked about this during the March Round Table citing conditions at Bank of America (BAC). In a nutshell, the banking industry went from a collective return on equity (along with significantly damaged book values) of 15-20% to 0-5% during the Great Recession. Many have recovered or are expected to recover to the 8-10% range — but it’s still a mystery as to how robust or rapid the recovery will be … or whether historical levels will ever be seen again.
But the current recovery is a work in progress. That is, until the next time the wheels come off and the analysts resume “bringing out their dead.”
Momentum is powerful and addictive. It can be hard to perform a selling analysis on a company that has been so good to you and your portfolio that you’re considering naming your next child or grandchild after the company. We’ve often wondered if we could build a monitoring method that could use relative strength indices and overbought breakdowns as another component of our portfolio-centered approach that is based on return forecasts and quality rankings.
We continue our exploration and vigilance using these long-term charts, starting with the company with the highest RSI at this time, Pfizer (PFE). The case studies will also include McDonald’s (MCD), Stryker (SYK) and Apple (AAPL).
We’ll close with an answer to the question: “It’s down 36% from its highs, would you buy Apple right now?”
Pfizer (PFE) has delivered a fairly massive advance — during a period when it went “non-core” with low and uncertain growth expectations over the last several years. The stock price has basically tripled in four years.
We’re reminded that a company can maintain an overbought condition (RSI>70) for months and even years … but we’ll be monitoring PFE going forward for the day when an excursion takes it to a value less than 70.
Just for kicks, a side-by-side comparison of the chronicle for Pfizer (PFE) displaying the elevated return forecasts at the price bottom, the convergence point (mid-2010) shown in the preceding image … and a steadily improving quality ranking.
Roll Call
So … are any of the stocks in neighborhood of 70 displaying “breaks” below 70 — making them sell consideration candidates?
We’ll start with the companies with return forecasts (PAR) less than the market median (MIPAR) at this time. We see that five companies cry out for a closer look. And since these would be more “challengeable” in portfolios (more likely to reside among the lower PARs in portfolios), it’s probably prudent and timely to do this on a continuing basis going forward.
The long-term RSI for 3M Company (MMM) is still increasing. We’ll be watching.
McDonald’s (MCD) is interesting. I hope none of you mind while I “think out loud” while trying to learn and decide with respect to the long-term potential value of monitoring from this perspective.
Observations:
1. I’ve shown three of the RSI breaks since 2008, denoted with the red arrows.
2. The concept is that we’re not surprised to see either a stock price decline or a disruption accompanied by an “extended trading range” following one of these turbulent disruptions.
3. The magnitude of the stock price correction and/or duration of the trading range seems to be somewhat proportional to the amount of geometric area (shaded green) preceding the price break. Note the subdued disruption in late 2010/early 2011.
4. We also know that we can be less concerned with high-quality core stocks and that RSI dips are less destructive so long as the long-term (60-month) trend, denoted in blue here is strong and increasing from left-to-right. (This is very consistent with our core holding and quality emphasis “theology.”)
5. I need to do more research regarding the RSI=50 level/threshold. Are the “reflections” or bounces at RSI=50 typical? Is there a chance that these reflections are signals (see mid-2009 and 4Q2012 & subsequent price advance) that the extended trading range could be waning or ending?
I hope the Danaher (DHR) 10-year chart will help illustrate why we’re scratching our heads over this. The magnitude and duration of the price corrections following the RSI breaks on this chart seem to be quite “proportional” to the overbought areas.
Community favorite Fastenal (FAST). It’d probably be fascinating to take a look at community sentiment (particularly the hand-wringing variety) during the relatively few disruptions over the last ten years. Note that FAST navigated/mitigated the bear market period exceptionally well during 2008-2009.
More research nudged on the RSI=50 breach moment shown here …
Leave it to community favorite Stryker (SYK) to be among the most colorful of this stroll.
1. The RSI, although near 70, is still an increasing trend.
2. Stryker (SYK) spent an extended period at the top of the MANIFEST 40, fueled by accumulation trends following that price correction in the middle of this display.
Shine Off The Apple?
And we’ll wrap up for now with the $64,000 question and one that many of you are waiting for: What does Apple (AAPL) look like?
Observations:
1. Apple is the most widely-followed stock in the MANIFEST 40.
2. The strength of that long-term (5-year trailing average) is massive.
3. That leads to a situation where AAPL was “potentially overbought” for a significantly extended period. See the RSI area from early 2010 to late 2012 — a period of over two years. This serves as a powerful reminder that under the right conditions, a stock can be overbought for a long time.
4. The area of the disruptions (stock price decline in combination with the duration of the trading range) does seem to correlate with the RSI areas and sharpness (rate of decline) of the overbought RSI condition.
During the most recent Round Table I was asked if I would sell (or buy) Apple as a long-term investor.
My short answer was that I didn’t think it was time to buy (yet).
We also want to point out that we strongly urged a trailing-stop mentality (if not programmed stops) for Apple in a series of articles a little over a year ago. Those of you who heeded that suggestion, you’re welcome.
This series of charts provides my longer answer to the question posed by the webcast attendee.
Take a look at the current area of disruption on display here for AAPL. Compare the preceding overbought RSI area, rate of RSI decline, etc. for the previous corrections. The extended period where RSI>70 leads to a pretty good size green-shaded area with an amplitude similar to previous episodes.
I think the yellow-shaded area is going to get materially larger for AAPL as this chart rolls forward. The only way for that to happen is for either (1) a continued price drop or (2) an extended trading range … or (gulp) a combination of both.
We’ll certainly be watching for a gain back above RSI=50 that is sustained. But I think it’s far more likely that the stock price for AAPL could continue to decline to the point where RSI is less than 30. I’d be vigilant for price surges to the upside to reduce my position over time — all the while waiting for the reversals that will put an end to the disruption area shown here.
We’ll continue with more long-term RSI snapshots in the Manifest Investing forum and will certainly flag any that deserve to be “flagged” and hope that any ensuing hypnosis will lead to focused vigilance … and an incremental benefit to our long-term returns.
Has re-entry into equities begun and are you in that number?
Intriguing headline from an advertisement on Seeking Alpha this morning.
Answer: Uh, no. That would have been the case THREE YEARS AGO.
We have an idea that you might want to try. Invest regularly in leadership companies with the highest quality rankings. At any price? Heavens no. Shop diligently and WAIT for the best return forecasts.
Our audiences are sometimes skeptical about the “average investor returns” suggested by the DALBAR research. With ads like this one this morning — really?
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.
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.
Expecting Alpha 