Stock Valuations revisited by D Klein 05/01/10


Back in December I posted about a model I was working on with an eye on the following:

  1. how you can minimize the odds of suffering irreversible losses;
  2. how you can maximize the chances of achieving sustainable gains;
  3. how you can control the self-defeating behavior that keeps most investors from reaching their full potential.

So with the above in mind I’ve continued development of a model to analyze a company from various views, always keeping number one above in mind.  There will always be down markets but the idea is to buy in at attractive prices and be able to add to the positions when the markets inevitably swing downward.  Its only been four months and the model is still in the beta stage, i.e., undergoing constant changes but there are some interesting preliminary results.  The model is at: http://kleincody.web.officelive.com/IIExstockvalues.aspx 
I’ve tracked three test portfolios, grouped into discounts to the current price.

  • Portfolio one recorded stocks that fell into a discount range of 15%-20%
  • Portfolio two recorded stocks that fell into a discount range of 20%-25%
  • Portfolio three recorded stocks that with a discount over 25%

Each Portfolio has three subgroups, results on all stocks that pass or fail the earnings stability test, those that pass the earnings stability test and those that fail. The last line compares the gain/loss in the S&P over the same time period to results that passed the earnings stability test. Here are the results based on a short period of time:

15%-20%       20%-25%       >25%    
Ave Days Earnings stability test Portfolio Actual   Ave Days Earnings stability test Portfolio Actual   Ave Days Earnings stability test Portfolio Actual
25 All -0.7%   37 All -3.3%   37 All 8.9%
26 Pass 1.1%   17 Pass 1.5%   51 Pass 12.7%
17 Fail -7.9%   47 Fail -5.6%   9 Fail 1.4%
26 S&P 0.0%   17 S&P -2.0%   51 S&P 3.0%

Preliminary conclusions:  For all stocks a discount over 25% yields the best results, however there is a disconnect between stocks that passed the earnings stability vs those that haven’t. So far the best results are from stocks passing the earnings stability test with a discount of 25%+, but it’s interesting to note that all three discounts (that “Pass”) beat the S&P 500.  (Earnings Stability= positive earnings the last 5 years & last years earnings>4 years prior)

The problem, if this is a problem, would be finding stocks meeting this criteria, based on this model.  The time period is still too short to read too much into it but the preliminary trend is interesting especially when comparing it to the S&P over the same time period. Time will tell.  I’ll try and report back in a few months to see if the preliminary conclusions still hold water.

Once large discounts are identified by the model it should be obvious that further analysis is required to determine if a company specific event is responsible in which case the discount would not be real, i.e., one still needs to look at the company in depth (SEC filings etc) and decide for themselves if there is a true bargain to be had.

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About IIEX

Click "About" in the menu at the top for more information about the author. We also have a page at "Seeking Alpha" ( http://seekingalpha.com/author/david-klein ). Please Click on and read the "Disclaimer" in the menu at the top. Have a question? Contact us at iiex@live.com.
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