This Week's Guidepost

Why worry about fundamentals? Just give me neat rolling patterns!

We’ve been talking about making picks and then following their performance. Good business management will always hold our feet to the fire, ”How’d we do?” We spoke of the Breakout picks made last December 15th and the technical indicators that helped our choices. Stochastics, Price, Moving averages and On Balance Volume (OBV) all contributed to our selections. That same watch-list looks like this, seven weeks later:

BBC has pulled ahead of the pack, which was in 3rd place two weeks ago, with CANI falling from a dramatic first place lead. We will discuss next week its fall and how we fared with our protective exit strategies to capture its earlier increases. Anyway, not a bad set of returns. But last weeks discussion focused on the technical stuff. How about our constant reference to the importance of fundamentals?

1. Fundamentals are the economic, financial, and operating factors that influence the price of a company’s stock. This includes first and foremost, company earnings, or earnings per share (EPS). Fundamental analysis is the attempt to determine the true value of a stock and to look for undervalued and/or overvalued cases to help direct our action. If a stock is undervalued, it tells us "hey, its worth more than the price, we may want to consider a buy." On the other hand, if a stock is overvalued, we probably ought to keep our money in our wallet. This is all quite different from technical analysis which asks the same questions (...overvalued or undervalued?), but based primarily on price and volume activity.

2. The simplicity of a rolling stock strategy is just that, simple. Buy low and sell high! Or as someone said, “If the price goes up, sell, if the price goes down, don’t buy!” But simple isn’t bad. Someone else said, “...brevity is elegant.” So lets not throw the baby out with the bath-water, but keep it as simple as we can. Lets stack the cards in our favor by using both technicals and fundamentals to guide our actions. The fundamentals that we believe are important are shown in the following table for our Breakout picks on 12/15/00.

   

3. The financial newspaper, Investor’s Business Daily, in our view, provides the quickest (simplest) way to learn how a company’s fundamentals stack up. They have a “SmartSelect” feature that compares company fundamentals to every other listed stock. We use the six comparisons above to evaluate every pick we make, every week. Here’s what they mean:
   EPS = Earnings per share: Measures both a stocks short and long term earnings growth rate, compared to all other companies. A rating of 94 means it outperformed 94% of all other stocks.
   RS = Relative Strength: Measures a stocks relative price change in the last 12 months compared to all other stocks.
   IGRS = Compares the industry group relative strength during the past 6 months to other groups. It is better to be in an industry group (or sector) that is currently on the up-take, since that will help pull even laggards along. A = best performing industries, E = the worst.
   ROE = Sales, Profit Margin, and Return on Equity combined into one simple A to E rating, a good measure of the Management capability of a company.
   Ac/Di = This is an IDB special formula that measures the accumulation/distribution of a stocks price over the past 13 weeks. This asks the question, are institutions accumulating (buying) or distributing shares (selling). It senses what the big money is doing relative to the company’ shares.
   P/E = Price Earnings Ratio. See our book, “Provident Investing,” for a discussion of the P/E.

4. This is an easy task. Pick up an issue of the IDB at a newsstand, or the public library, or have it delivered to your home. Why? This helps tilt the action favorably in our direction. As you can see from the previous table, these five Breakout picks had good fundamentals to accompany the technical patterns we liked. Does that make all our picks winners? No, but it puts a bias under all that we do, a positive bias that means our odds have just been improved. Remember how thin the difference is between winning and losing in the market. Lets push as many chips to our side of the table as possible.

5. For instance, look at the chart below. This ticker showed a good rolling pattern back in November last year. It gave us one good roll, but look where it went. Its fundamental ratings were 54-17-C-D-D.

   

6. Compare that to one of the 12/15/00 picks, as shown below. This was rolling nicely between $25 and $30 but jumped to a new, higher level after the pick was made. Its fundamentals ratings were 98-78-A-A-D.

   

7. So, think of the value we’ve shown for careful fundamental analysis, with our technical price patterns, as we roll our way to greater returns. This is not the holy grail of perfect investing. It improves our odds. That is why we believe our product is worth the price. Stay tuned.

It is our intent to help our subscribers understand market strategies well enough to make informed decisions and understand the risks.

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