Archive through July 15, 2007

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ody

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Post Number: 1257
Registered: 10-2006

Rating: N/A
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Thursday, July 12, 2007 - 02:02 pm:

Hilarius: interim report on Ody's selection, based on results obtained as per the end of trading on 11 July

BASIC CIRCUMSTANCES AND PURPOSE OF THE PROJECT (AS I RECALL THEM). The project found its origin in your finding that a selection of 10 stocks made by Rudy had performed outstandingly well over a period of something like 30 weeks. You encouraged others to nominate 10 stocks, so that we could conduct an experiment seeing how various selections chosen according to different methods and by different individuals might perform over a period of roughly 6 months.

MY OWN REACTION TO THIS AT INCEPTION. In contrast to Rudy, I had not got a list of ten stocks ready for the purpose. Rudy, for that matter, had not chosen them to be the subject of this experiment. I decided that there would be no interest whatever in my echoing his selection, and that I'd need to select another ten. As he and I select on similar grounds, this gave me both an opportunity and a restriction. The opportunity was to select ten stocks which would at least mostly differ from his, and to go for ultra-strong earners, as in this context I was interested to see how they would perform over 6 months. The limitation was that I needed to "skirt around" Rudy's stocks - all of which I admired and several of which I in fact had (or had had) in my portfolio. (Indeed, I think I had at some stage or other held ALL of them.) My selection was, from the beginning, not designed to "win" anything, and I was aware that I was choosing some very aggressive stocks. I add, too, that I would never have a portfolio consisting of the ten chosen, though I am happy to own several of them - along with many others that I see as "safer".

THE SELECTION. I now go through each of the stocks in turn to show how I selected them, and how they have performed. The general PRINCIPLES for selection were these: (1) the stock needed to have been in strong uptrend during the preceding three months and to show no signs of dithering; (2) it needed to have a robust history as shown by Stock Doctor (many are star stocks, while the few that aren't have records of strong earnings); (3) there needed to be a strong earnings forecast as per consensus; (4) preferably the stock needed to trade on a PEG below 1, or if it did not do that now then its future PEG needed to be below 1.
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CAB CHARGE (CAB). SD Star Stock. This has been a very strong company fundamentally and in market performance. I have held it for quite some time. PEG: 0.62. EPS growth for 07-08: 38.35% and 17.70%. Share price: 3 months= 9.912%, 1 month=-8.39.

COMMENT: I see nothing actually "wrong" with the stock or my selecting it. Quite recently, it has alienated the market somewhat because of a tendency to move into what are seen to be unfamiliar areas. However, the price had already started falling before that. A wise choice? In principle: yes - but the market seems to have turned against it, or it is just correcting.
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CREDIT CORP (CCP). A former SD Star Stock, and one widely admired. I have held this on and off. Has performed (even recently) very strongly, both fundamentally and in the market. PEG: 1.50, but forecast for June 08 is 0.83. EPS growth for 07-08: 24.37% and 26.35%. Share price: 3 months= 20.29%, 1 month= 7.49%.

COMMENT: I see no problems here.
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DAVID JONES (DJS). A former SD Star Stock, and one that has performed very well fundamentally and in the market, though analysts generally don't like it. I have had it for long. PEG: 1.04. For July of this forecast as 0.73, for next year 1.76. I am not alarmed by what may seem a "high" price, for this is one of those companies that does attract a premium. It has in any case not let me down. EPS growth for 07-08: 32.16% and 11.95%. Share price: 3 months= 13.83%, 1 month= 3.09%.

COMMENT: I see no problem here.
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INCITEC PIVOT (IPL). Stock Doctor sees its health as "marginal", but its growth profile is in fact terrific, and the market can see that. I have not held it for long, but admire it. It has performed very strongly, though recently its priced has "corrected". PEG: 0.35 (sic, with 0.11 forecast for Sept 07). EPS growth for 07-08: 171.27% and 10.24%. Share price: 3 months= 56.02%, 1 month= 15.20%. However: has been under pressure

COMMENT: It is a very strong company. The share price seems to be "correcting", but given the astounding fundamentals and the low PEG one would expect the share price to follow upwards, especially if they announce a good result. I am not worried.
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JB Hi Fi (JBH). A SD Star Stock. Has performed very well fundamentally and in the market. I have been happy to hold it of late, though I am not sure it will "last", given its specific activity as a retailer. Fine so far. PEG: 0.99 (forecast for June 07: 0.63). EPS growth for 07-08: 49.21% and 22.95%. Share price: 3 months= 42.14, 1 month 14.91%.

COMMENT: not showing any problem that I can see.
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LEIGHTON HOLDINGS (LEI). A SD Star Stock. Has been a stellar performer fundamentally, and continues to attract contracts. Performed VERY strongly in the market until recently. PEG: 0.57 (June 07 forecast 0.51). EPS growth for 07-08: 53.90% and 20.47%. Share price: 3 months= 17.72%, 1 month -0.11%. (But is down more than this for the very recent past.)

COMMENT: The price has fallen badly of late after what had been a COLOSSAL rise during most of this year. The fundamentals suggest, however, that a good result would lead to a further price rise. At present the market has obviously sold the stock down, but over time (whether in the next 6 months or not) LEI is likely to prove a strong winner.
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MERMAID MARINE (MRM). A SD Star Stock. For several months it performed very well in the market, but it has corrected significantly, and I no longer hold it personally (for that reason), though it remains in my selection. It is a strong company indeed, on its fundamentals. PEG: 0.05 (negligible; forecast for June 07 is 0.71). EPS growth for 07-08: 28.79% and 34.12%. Share price: 3 months= 20.06, 1 month= -4.67.

COMMENT: For the moment the stock is clearly out of favour, but this may well prove quite temporary. I sold because I don't like falling stocks and this company is still small - but I have no fundamental reason to doubt its recovery, whenever that may be.
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MELBOURNE IT (MLB). SD sees it as "strong". It has not performed as strongly in the market as it should, and ought (I feel) to go higher. The figures for it are in fact good. The PEG is at 3.95 at the moment, which seems very high, but it is predicted to be 0.37 for December. The EPS growth figures are excellent: 61.48% for Dec 07 and 24.10% for Dec 08. The company's record is a good one. Share price: 3 months= 2.70%, 1 month -0.78%.

COMMENT: The share price is disappointing. Perhaps the market sees the stock as too dear. Or are there other factors? I am not aware of any real weakness. The fundamentals actually seem good. The share price has done well over 5, 3 and 1 years.
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SMS MANAGEMENT (SMX). This company has in general performed strongly on fundamental grounds, though less so, perhaps, in the market. Of late its price has fumbled or fallen away. I held it briefly, but sold it again because of its falling price. But: it is a SD star stock, and fundamentally on good grounds. PEG: 1.09, but 0.63 forecast for June, and less for June 08. EPS growth for 07-08: 35.35% and 35.69%. Share price: 20.77 for 3 months, and -1.22% for 1 month (less in the last two weeks or so)

COMMENT: Given the company's excellent record and its huge forecast earnings it is probably just going through a minor "correction" (a lull) in is share price. Its prospects would seem to be excellent.
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STRUCTURAL SYSTEMS (STS). This is an "Emerging Star Stock" for SD, and one can see why. Its record has been excellent, and until recently is price had gone up hugely, but it is now obviously "correcting". PEG: only 0.30. EPS growth 07-08: 37.80% and 22.29%. Share price: 3 months= 12.10%, 1 month= -12.28%.

COMMENT: I am not myself holding the stock (held it very briefly earlier this year but didn't trust it though I should then have kept it). Of course its current fall is disappointing, but I must say I cannot see anything wrong with it. It just seems to be "correcting", though there may be some good fundamental reason why.
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IN SUMMARY ... my analysis suggests to me that these stocks as a group are actually inherently very strong: better than I had imagined them to be, as I thought I might have bought a few of them somewhat "recklessly". As I said before: I would not want a portfolio of just these. However: my general sense is that those that have gone down have done so for no good fundamental reason, but are just suffering from corrective action. I doubt that I or anyone could have predicted that specifically for these stocks rather than any others with strong earnings, and so far I merely see "fortune running against me", with the market selling off a number of high fliers. I have no figures specifically for the last fortnight, but think that if I did, they would show a worse sell-off than the 1-month figures that I have produced.

Whether those sold down will go up again during the period remaining before Christmas I can't tell. IF the market is going to go up during the second half of this year, there is no inherent reason why those fallen so far may not rise again. In a weak market, the "portfolio", consisting as it does of high-growth stocks, may come under further pressure.

It will be very interesting whether any specific reasons can be found why this particular group of stocks would have in a number of cases have fallen so significantly while until VERY recently they were going very strongly - indeed outperforming other similar growth stocks, or those that had fallen "by the wayside" much earlier. It rather seems that I chose stocks which were indeed VERY strong, but which have finally "snapped" during what is now by and large a corrective period (one of sideways trading). In simple terms: I think the portfolio - part of it, at least - is a victim of (hopefully temporary) profit-taking during a weak market spell. I find it hard to see why the selection might not have fallen to the extent that it has some time BEFORE the last three weeks - or, on the other hand, why it might not have done so AFTER them! Or, indeed, why it would, over some time, fall more than most selections of good growth stocks.

But I shall be very interested, Hilarius and others, in comments on what you see as cause and effect patterns in all this. As I have said before: these WERE chosen as extra aggressive stocks, although their fundamentals even now suggest that they still have a good future ahead of them, including e.g. Structural Systems.

ody

Member

Post Number: 1259
Registered: 10-2006

Rating: N/A
Votes: 0


Thursday, July 12, 2007 - 03:58 pm:

ERROR: WRONG STOCK - Sorry Hilarius and others

Strangely, I substituted DJS in my long analysis of my 10-stock selection for McMillan Shakespeare. I msut set this right:
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McMillan Shakespeare (MMS)

Stockdoctor sees this as strong after former "early warning" status. The stock has in fact done well, both fundamentally and on the market thought there - like several of mine - it has recently dropped somewhat. Its PEG, however, is 0.60, which suggests is is not too dear, and its projected earnings growth figures suggest otherwise: 14.90% for 07, and a whopping 35.94% for 08. This last figure attracted me particularly. The stock is also increasingly beginning to attract the attention of brokers and other commentators.

COMMENT: Although at present not exactly in favour, the stock has in all respects done well, and with any renewed interest in it its price should go up on its fundamentals, which are excellent. Again, this seems a stock that is subject to "correction" of sorts - but not because its price is actually too high or is prospects less than good.
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ody

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Post Number: 1261
Registered: 10-2006

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Votes: 0


Thursday, July 12, 2007 - 05:50 pm:

HILARIUS:

CAN ONE JUDGE THE QUALITY OF A PORTFOLIO FROM A FEW WEEKS' PERFORMANCE?

Hi Hilarius,

I re-post your own words as these appeared on 13 June (almost exactly a month ago) when you published the "rear view" charts for mrlunch and myself):
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Wednesday, June 13, 2007
Good Afternoon Messrs Lunch and Ody

Your chart is ready (remember it is a rear vision view and a new chart starts with everyone at 100% this Friday) :-

Ody I notice that 5 weeks ago your trend line started to show a magnetic attraction to the Hilarius Crazy Top 10 and began to spurn the Rudy Top 10

This must have been telepathy as I wasn't posting this type of material 5 weeks ago :-)

I hope Rudy's feelings are not being hurt at your deserting such a close relationship to his list
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My point is this. You yourself note in that post that my selection very clearly outperformed Rudy's for 5 weeks prior to 13 July. I am sure, by the way, that Rudy would not have been in the least "hurt" by this fact, just as I would not have been had I found myself in his position. One would only have such a sense if one thought a short-term performance meaningful, and I THINK I can speak for Rudy in suggesting that neither of us does.

Similarly, when I made my selection of ten stocks I did not expect to be ahead of his selection by any significant margin, or on the other hand necessarily to be behind it. I had no particular expectation at all, except that OVER A DISTANCE OF ABOUT 30 WEEKS, AND GIVEN THE STRENGTH OF THE STOCKS, I would have been surprised if the result had been poor. But in no way did I think that simply because my performance was ahead of Rudy's over a distance of five weeks I had selected stocks superior to his: such a period is to my mind far too short to enable such a judgement to be made.

In other words, using my own outperformance from a few weeks ago as an example, I would say that no importance can be attached to such a fact. And I actually have evidence on my side: namely the fact that during the last three weeks both Rudy and especially Resillent, both of them - like me - not acting as traders, have outperformed me. Whatever arrogant judgement of my superiority I might have had would by now have been knocked out of me: I could not on the one hand have argued that my 5-week performance showed me to be the better stockpicker and then have denied that status to them during the next three weeks.

If you were to make a case that you CAN judge the excellence of a portfolio from a few weeks' performance, I think you would have to be able to do two things: (1) you would have to be able to explain why my portfolio was certain to outperform the other two for 5 weeks prior to the commencement of our project, and (2) you would also have to be able to explain why, on the basis of foreseeable factors, it underperformed the other two during the last three weeks. And ideally you would also have to be able to show what will happen from here on.

I put it to you, in all seriousness, that this just cannot be done FOR THE SHORT TERM (I.E. JUST A FEW WEEKS) - not, at least, with people who are not engaged in short-term trading. One CAN, of course, see possible flaws or virtues in a portfolio with hindsight. One may also be able to form a reasonable assessment in advance, to the extent that I am on the record as having praised both Rudy's and Resillent portfolios before our project started. But that was not on the basis of how those portfolios had performed during a few weeks, but from an analysis of their stocks, which is quite different. I continue to have faith in my analysis, but not on the basis of what has happened during a very short period. I would NEVER claim that my outperformance of the other two during five weeks prior to the start of the project proves me to be a better stockpicker, and I am very glad I didn't, for I would have made a real fool of myself, going by the evidence so far!

So on this essential matter we still disagree, but I shall be keenly looking forward to your further comments!

mrlunch

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Post Number: 183
Registered: 09-2006

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Thursday, July 12, 2007 - 06:49 pm:

I think

If someone comes up with a selection of stocks that outperforms over a specific time period, be that 1 hour, 1 day, 1 week... 1 century, it proves this:

That person selected a bunch of stocks that outperformed over that time period. Nothing more, nothing less.

This appears almost stupid on the surface, but there is something deeper to it.

Now lets be more specific. Lets say someone can pick a bunch of stocks that outperforms the market in a given time period, 7 times out of 10. Here's what I think it proves:

That person can POSSIBLY select a bunch of stocks that outperform over that time period, about 70% of the time.

I say possibly because surely anyone can do it 50% of the time, any you only had to be lucky twice.

Now if the same thing occurred 100 times I'd upgrade that POSSIBLY to a PROBABLY.

I'd say most people would agree with something like what I've said, but clearly it would be long winded to preface every statement about someone's performance with something like this.

We all have different reasons for being here, and we all know what our own reasons are. I picked some stocks which I believe could double or halve or more. Meanwhile I've traded the crap out of most of them and moved on in many cases, and I'll draw my conclusions about performance along the way.

And let us remember the ability to choose stocks doesn't necessarily have much to do with the ability to make and keep profits.

hilarius

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Post Number: 2490
Registered: 04-2004

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Thursday, July 12, 2007 - 07:08 pm:

Ody

Firstly thank you for your comprehensive report covering both selection issues and some thoughts on subsequent performance

Your message ought to serve as a model for other participants

It will be interesting to discover .. even with the benefit of hindsight what worked and what didn't and I have to say that you have entered the project in exactly the right spirit

At the end when I hope we might all be celebrating (but quite possibly not if the market heads south) it will be interesting to see what lessons if any can be learned

One interesting possibility would be to create a portfolio called "The Best of the Losing Stocks" from all the participants selections, based on an assessment that their fundamentals remain strong and the potential for profit is now still greater than when they were originally chosen

This could be done in conjunction with a chart review to make sure that they are not falling through the floor with lower highs and lower lows

It could perhaps be better called "The Bargain Basement Portfolio" ... how ironic if it were to beat the best original selections !!!

It has been a long and sad day remembering the life of an Incredible Charts member, Suemac, suddenly taken from us and more particularly from her family. The service honouring her life was a moving tribute ...

So for the moment I am in need of quiet reflection

More later

With Good Wishes

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

hilarius

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Post Number: 2491
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Thursday, July 12, 2007 - 07:15 pm:

Mr Lunch

Thanks for your message

I will add another truism ... prolonged out-performance is somewhat more convincing than a short out-performance

Several people have made the point to me that real time trading/investing is a lot different to tipping

Yes, that is absolutely the case

If we look at the variables there are several :-

(1) Selecting
(2) Entering and Money Management
(3) Monitoring and Money Management
(4) Exiting

Studying each separately should be possible

If one is no good at (1) there may be difficulties ahead with (2), (3) and (4)

I believe one needs to get the basics of selecting right, in order to optimise benefits from the other aspects

With Best Wishes

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

resillent1

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Thursday, July 12, 2007 - 07:34 pm:

Mrlunch wrote “And let us remember the ability to choose stocks doesn't necessarily have much to do with the ability to make and keep profits.”

I want to second this because I think it is an incredibly important point.

When allocating time to different aspects of investing/trading it pays to know what aspects put money in the bank and allocate efforts accordingly.

The longer your time frame the more importance you are likely to place on stock selection however unless you are a true value investor intending to hold through complete market cycles (10 years+) then stock selection probably won’t be responsible for the biggest impact on the bottom line.

resillent1

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Post Number: 90
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Thursday, July 12, 2007 - 07:47 pm:

Hilarius,

Re your post 2491.

I suggest, that if a person is good at (2), (3) and (4) then over time the gravel will be sifted leaving only the gold.

hilarius

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Thursday, July 12, 2007 - 08:16 pm:

Resillent

Absolutely true ... I agree with you

Though if you were offered a high quality metal detector as part of step 1, and it regularly found more gold nuggets than before you had the detector, would you refuse to use it?

:-)

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

resillent1

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Thursday, July 12, 2007 - 08:45 pm:

Hilarius, I will gratefully accept your high quality metal detector whenever you wish to hand it over, and yes, I am constantly trying to build one of my own. However the point is that it would be a mistake to neglect other aspects because we place too much emphasise on stock selection.

hilarius

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Post Number: 2493
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Thursday, July 12, 2007 - 09:14 pm:

Resillent

After looking at your portfolio I was hoping for a loan of your detector :-)

Also I totally agree you with that a full toolkit of strategies, including money management and stops, and chart analysis will indeed assist in a better trading outcome ... I like your concept of a sieve which hangs on to the gold

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

mrlunch

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Post Number: 184
Registered: 09-2006

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Thursday, July 12, 2007 - 09:29 pm:

Lads, it appears we are in hearty agreement.

The stock market provides us with a treasure hunt, and using the aforementioned tools we go looking for treasure.

If we are lacking in one treasure hunting tool it must be made up for by the others in order to end up with a good loot - but