Harry Domash's Winning Investing


Moneymaking Research Tidbits

“As goes January, so goes the rest of the year.” It turns out that more often than not, that market axiom is true. According to a recent report, over the past 150 years, the stock market averaged an 11% gain from February through December when January recorded positive returns and averaged a 3% drop during negative January years. Over the past five years, the market gained 9%, on average, from February-December, during positive January years and dropped 14% in down January years.

That was one of many intriguing tidbits I picked up by browsing through the Investing Notes section of the free CXO Advisory Group site. (www.cxoadvisory.com). Here are a few more.

Employment vs. Stock Prices
Another recent study found that the stock market generally moves opposite to employment figures. That is, an increase in unemployment signals future stock market gains, while a decrease in unemployment predicts a down market.

Jim Cramer Tips
A study found that stocks that CNBC TV personality Jim Cramer recommends buying average a 2% gain on the day after the show, but then drop back 2% over the next 30 days. However, stocks that Cramer advises selling drop 1% on the day after the show and then drop another 3% over the next 30-days.

Morningstar Fund Ratings
Morningstar (www.morningstar.com) rates mutual funds from one to five stars, where five is best. A study found that, on average, the higher the rating, the higher a fund’s likely future return. However, although five-star funds record higher absolute returns than three- and four-star funds, five-star funds are usually more volatile.

Consequently, the study concluded that, taking risk into account, the star ratings are best used to rule out low rated (one- and two-star) funds, but are not particularly useful for discriminating between three-, four- and five-star funds.

Don’t Confuse Me With Facts
A study found that individual investors are almost two times more likely to believe information confirming rather than disproving their prior beliefs.

Sell in May?
The oft-repeated adage “sell in May and go away” seems to be good advice, and not just in the U.S. A study found that, over the 34-year period from 1970 through 2003, the return for a world stock index during the November to April period beat May-October by almost 8%, on average, annually. Alas, the effect doesn’t happen every year. In one out of three years, May-October beats November-April.

Cash Still King
Total assets are the value of cash and everything else owned by a company. A recent study found that stocks of firms with the highest percentage of cash to total assets outperform low cash to asset ratio stocks. You can find the information you need on Yahoo’s Balance Sheet report (finance.yahoo.com). Calculate the ratio by comparing the Cash and Cash Equivalents balance sheet line to total assets.

Shrinking Assets Best
Speaking of assets, intuitively, you’d think that growing assets signal a healthy company, and hence, a good stock. But in fact, a recent study found that stocks of firms with the lowest percentage asset growth over the past 12-months substantially outperform high asset growth stocks. Indeed, asset growth rate (lower is best) to be one of the best predictors of future stock returns. Why?

Events that increase asset values such as acquisitions and new stock sales tend to be followed by periods of abnormally low stock returns, while events that reduce asset values such as share repurchases tend to be followed by periods of unusually high returns. The affect is most pronounced for smaller stocks (small capitalization), but still substantial for large-cap stocks.

Better Value Gauge
Many studies have found that, on average, value-priced (out-of -favor) stocks outperform growth stocks. Most investors use the price/book ratio (share price vs. book value) to define undervalued stocks (the lower the ratio, the more undervalued the stock).

However, research has found that the enterprise value/EBITDA ratio displayed in the Valuation Measures section of Yahoo’s Key Statistics report works better for selecting undervalued stocks. If you’re a numbers person, enterprise value is book value plus debt and EBITDA is earnings before deducting interest, taxes and various accounting write offs.

Score Predicts Stock Drop
Researchers Craig Nichols and M. D. Beneish devised the “O Score,” which measures a stock’s overvaluation. The score ranges from zero (least) to five (most overvalued). The study found that stocks with O Scores of five dramatically underperformed the market over the next 12-months. They calculate the score by assigning one point to each of these indicators: 1) likely earnings overstatement (net income rises, but operating cash flow drops), 2) high sales growth, 3) low operating cash flow to total assets, 4) recent large acquisition, and 5) unusually high levels of new stock sales.

Rather than trying to come up with absolute pass/fail values, use these factors to compare stocks that you own, or are considering buying. For more details, use Google or your favorite search program and search for “Identifying Overvalued Equity.” Here's a link to the report.

The research summary is only one of many free features offered by CXO Advisory that will help you make better investing decisions. Check it out.

published 11/22/09

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