Jubak's Journal
Recent articles:
• Reformed? Doesn't look that way, 4/3/2003
• The only indicator that really matters, 4/1/2003
• Fewer warnings could spell relief for investors, 3/28/2003
More...
| | Jubak's Journal
Fundamentals fail in a fluky first quarter
A look at the unpredictable period just past reveals that technical analysis trumped fundamental factors for finding the best performing stocks. And that trend may well continue.
By Jim Jubak
How hard was it for an investor to beat the indexes last quarter?
Certainly the opportunities were there. The top three performing stocks of the period all gained more than 150%. The top three stock sectors each appreciated by 15% or more.
Id argue, however, that while outperforming the indexes wasnt impossible in the quarter, it was terribly hard. Short-term returns are always highly random, and the top of any list of short-term winners is usually dominated by the stocks of companies that announced news that surprised investors and reversed expectations.
But this quarters results were even more random than usual. Thanks to the economic uncertainties that Ive outlined in my last few columns, and to manic fluctuations in investor mood depending on the daily war news, this quarters short-term results had even less to do with economic and business fundamentals than usual.
Let me use the results from the Jubaks Picks portfolio to make my case about the randomness of short-term results this quarter. In my next column, Ill look at the stronger connections between fundamentals and performance over longer time periods.
For the first quarter of 2003, Jubaks Picks was wildly profitable: After all was said and paid (including trading commissions), the portfolio gained a huge 0.3%. Thats about a $400 gain from the Dec. 31 value of this paper portfolio.
That beat the 4.2% loss turned in by the Dow Jones Industrial Average ($INDU) for the quarter and the 3.6% drop in the Standard & Poors 500 index ($INX). But it did trail the 0.4% gain in the Nasdaq Composite Index ($COMPX) for the period.
(The portfolio is now up 33% or so since I started it in May 1997. That compares with an 11% gain in the Dow Jones industrials over that period, a 3% increase in the S&P 500, and no change in the Nasdaq Composite.)
Now I could have easily trumped that 0.3% gain, which annualized comes to about 1.2%, or approximately the yield on the much less risky 3-month Treasury bill at the moment. I'd have had to manage to catch the huge swings in the stock market this quarter, say, by buying at the March 11 low of 7,524 on the Dow and selling at the March 21 high of 8,522. That one trade alone would have given me a 13% gain for the quarter.
Or if Id concentrated in the right sectors of the stock market during the quarter. For example, Internet-service stocks climbed a huge (no sarcasm this time) 22% for the period, according to Dow Jones. Pipeline stocks were up 18%, and toy manufacturers climbed 15%.
And I could have done even better if Id just managed to invest in the quarters best performers. How about Caminus (CAMZ, news, msgs), up 280%? Or Ask Jeeves (ASKJ, news, msgs), up 177%. Or Northfield Laboratories (NFLD, news, msgs), up 151%.
But while I certainly acknowledge that my stock portfolio could have done better during the quarter, the chore of finding outsized gains before they vanished was extremely difficult this quarter.
Predicting the unpredictable
To catch the March 11 low and the March 21 high, you had to predict the extreme shift in investor psychology to optimism once the bombing started and the shift to pessimism when the war began to look like it wouldnt wrap up neatly in two weeks. To do that, Id argue, youd have to have been able to predict not only the hit-and-run attacks on U.S. supply convoys that the Iraqis adopted but also the huge emotional response in the United States to those attacks.
Internet-service stocks rode higher in sympathy with the strong advertising gains shown by Yahoo! (YHOO, news, msgs), and the pipeline sector responded to continued buying interest by value investors attracted to the sectors predictable cash flows. Not exactly stunning surprises, but decidedly news-driven results. (Yahoo! was up more than 51% in the quarter.)
But would any investor have predicted that pipeline stocks would climb by nearly 20% while the shares of major oil companies would move up just 0.4%? Or that the predictability that made pipeline shares attractive wouldnt have done the same for food retailers and wholesalers? That food sector dropped 14% on accounting scandals at Royal Ahold (AHO, news, msgs). With projections for the economy vacillating just about daily between growth and no growth, sector performances had more to do with news in those sectors than with any economic trends that can be projected into the next quarter.
Picking up shares of any of the top 50 stocks for the quarter was just as hard.
The three best performers
Take the three best-performing stocks this quarter. Caminus, a company that makes software for energy trading, is the subject of a buyout offer from SunGard Data Systems (SDS, news, msgs). The stock gets an F from our StockScouter rating system on fundamentals and a D on technical factors. Ask Jeeves climbed in response to strong ad sales reported by Yahoo, but with far greater volatility since the stock trades just 1.2 million shares a day vs. Yahoos 10.5 million-share average daily volume. And Northfield Laboratories shares soared on news that the U.S. Food & Drug Administration had approved a trial of the companys blood substitute in pre-hospital emergency settings such as ambulances. But that news only drove the stock so strongly up because shares had collapsed on the FDAs rejection in 2001 of data from an earlier trial of the artificial blood. It doesnt hurt, either, that the company has only 14 million shares outstanding and that the stock typically trades less than 60,000 shares a day.
Thanks to our Deluxe Screener tool, however, we can take a more in-depth look at all the top stocks for the period.
First, I built a basic screen to give me a list of the top performers. You need just three criteria: By asking for year-to-date performance as high as possible, market capitalization greater than or equal to $100 million, and last price greater than or equal to $5 a share, you produce a list ranked by performance for the first three months of the year (plus a bit).
Then, to see how these stocks stack up against some fundamental criteria, I asked the Screener to display the current price-to-earnings ratio, earnings-per-share growth quarter over quarter, forward-year P/E and lastly a StockScouter rating.
Lessons from the top 10
Taking a look at the top 10 stocks, heres what youll find:
P/E ratio current? Only one company, No. 4 McMoRan Exploration (MMR, news, msgs), a small New Orleans oil and gas company, even has a price-to-earnings ratio (13). None of the other top performers do because they dont have positive trailing earnings for the last 12 months.
EPS growth quarter over quarter? Only one of the top 10 has produced positive earnings growth in the last quarter. Thats Ask Jeeves, with a 48% increase.
Forward year P/E? Not many of these companies look like theyre about to swing into the black in a big way next year. Based on analyst projections for next years earnings, only two, Ask Jeeves and Exult (EXLT, news, msgs), show positive P/E ratios. And at 31 and 47 times next years earnings, respectively, these stocks certainly arent cheap.
StockScouter rating? None of these top performers for the first quarter score better than five. Two earn ratings of just two.
You can take this exercise as far as you want with the other fundamental information available through our Deluxe Screener. But its certainly hard to find anything fundamental that would predict the short-term performance of these stocks.
The picture changes considerably, however, if you shift from fundamental to technical factors. I added the StockScouters technical grade and the 3-month relative strength rating to my screen, again in display-only mode.
Surprising grades
And heres what jumps out:
Of the seven stocks that get a technical grade from Scouter (that tool doesnt rate every stock in our database), none gets a rating below B and five earn A ratings. Eight of the 10 stocks earn perfect 100s on relative strength, and two rate a 99.
In other words, this group of winners for the quarter that shows so little relationship between performance and fundamentals seems to indicate a very strong connection between technical factors and performance.
Of course, on one level, thats a circular argument -- these stocks naturally would score high on technical factors now after the performance that they turned in over the last three months. To see if an investor could have picked out these stocks in early January on technical grounds, youd have to go back to look at what these technical factors looked like then.
Unfortunately, I cant reconstruct that history using the screener. But I can go back to build historical charts for the stocks to see what the three-month technical pattern looked like on Jan. 15.
If you do that for Ask Jeeves, for example, by building a chart for the period Oct. 15, 2002 through Jan. 15, 2003 with 10-day, 50-day and 200-day moving averages and Bollinger Bands to indicate the tops and bottoms of the stocks' ranges, you get a very clear picture of stocks moving up on increases in volume and consolidating on weaker volume, of stocks where the 10-day averages move above the 50-day and 200-day averages, and where the 50-day averages move strongly above the 200-day moving averages. All this is visible in October and November.
Triumph of the technicals
I havent been through the historical charts of all the top performers from the first quarter, but my tentative conclusion is that this group, so random on fundamental factors, could have been discovered by looking at technical patterns.
That doesnt mean that an investor using technical analysis would have been able to pick out only the top performers for the quarter. I have no way of knowing how many false leads this quarter presented to technicians. But I suspect, from looking at a sample of charts, and from the returns garnered by some prominent technicians, that the market was so choppy and so trendless that it offered up far more patterns that went nowhere than it did charts such as that of Ask Jeeves. In technical analysis, as in investing in general, hindsight is always more profitable than foresight.
Nonetheless, the apparent lack of connection between fundamental factors and short-term returns suggests that over the course of a quarter like this one, technical analysis has an edge over fundamentals when it comes to picking stocks.
In my next column, Ill take a look at the long-term, three-year record and see if fundamental factors do a better job at predicting winners over the long haul.
New developments on past columns
The only indicator that really matters
As measured by the number of people filing for unemployment, the economy continues to weaken. Thursdays report on initial unemployment claims for the last week of March came in at a disappointingly high 445,000. That was 35,000 above the consensus among economists and the highest level in a year. The jump put the four-week moving average, which smoothes out week-to-week volatility, at 426,500, an increase of 2,500.
Spot the winners, cut the whiners
Finally the deal is done. According to the terms of the deal restructuring Time Warner Entertainment, AOL Time Warner (AOL, news, msgs) will pay Comcast (CMCSK, news, msgs) cash and stock valued at $3.6 billion for its 28% stake in Time Warner Entertainment, a position that Comcast acquired through its purchase of AT&T Broadband. Comcast has said that it will use the proceeds to pay down debt, some of which it acquired in the AT&T Broadband deal. Comcast also received a 21% share of Time Warner Cable as part of the deal. That AOL Time Warner subsidiary is expected to go public in an offering timed for this summer.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: AOL Time Warner and Comcast. He does not own short positions in any stock mentioned in this column.
|
