When the most profitable clues are the obvious ones
There is so much information for investors, says this Canadian analyst, that you can easily miss the best stuff. He illustrates with four stocks.
It’s as plain as the nose on your face. You can’t miss it … but you probably did.
An informed investor is a successful investor.
But there are a lot of facts and figures out there. How much of it is really helpful, and how much is just too much information?
Sometimes, the real gem in the pile of information is sitting right in front of you, and you look past it. And that goes for professional money managers as well as private investors.
As Senior Portfolio Manager at Sprott Growth Fund, Mr. Peter Hodson has been down the information trail many times. It’s very easy to get bogged down in the details, he writes in Investor's Digest of Canada.
We start out by asking ourselves two questions, Mr. Hodson tells his readers, and even then we may not get the right answers. We may have to step back and look again to see what really matters.
The last tidbit
Investment firms run on a never-ending wave of information. The attempt to make sense of it all begins with two questions. Is it accurate? And is the information already discounted in the market?
The importance of the first question is evident. As for the second, says Mr. Hodson, “if information is already discounted in the market, then it is not really ‘new’ information and can effectively be ignored.”
Sometimes we just try too hard. “Investors make it their goal to constantly seek out that last tidbit of extra information that will give them an edge over others,” says this analyst. “I am not against this strategy and often practice it myself. However, sometimes the best information is staring you in the face, and if you are too bogged down in the details, you can miss some of the obvious flags out there.”
Here’s how this analyst found the information he wanted staring him right in the face with four different stocks.
How can you raise prices?
In all four of these cases, says Mr. Hodson, there is an obvious clue in plain sight and “in difficult markets, investors often ignore the easy stuff.”
For the first two stocks, the obvious clue is an increase in price. Netflix (NASDQ-NFLX), the DVD and online movie rental company, announced a price hike for its Blue-Ray DVD subscription service.
Metals producer Allegheny Technologies Inc. (NYSE-ATI) did the same for its stainless steel products.
Since everybody seems to be worried about deflation (a decline in prices due to a tight money supply), these are particularly interesting announcements in Mr. Hodson’s opinion.
“A price increase can indicate that customer demand is strong,” he says, “and the company may believe it can raise prices without alienating customers — likely the case with Netflix.”
It may also indicate supply shortages. With Allegheny, this seems confusing. The world is alleged to be awash with excess steel, the analyst states, so how can you raise prices?
“Maybe — just maybe, mind you — global steel demand isn’t as bad as we’re told.”
The prices of both stocks are well up this year, Netflix by more than 40 per cent (despite a drop last week) and Allegheny by more than 30 per cent. “You can bet investors will be watching these price increases carefully to see if they stick.”
Best-ever results
Sometimes it doesn’t matter who the company is, if the information is sufficiently spectacular to raise eyebrows.
Take Sybase (NYSE-SY). Here’s what caught Mr. Hodson’s eyes — “best-ever first-quarter results.” Wait a second, he asks, “aren’t we smack-dab in the middle of a global recession?”
You don’t even need to know what Sybase does, he adds, “to realize that, if the company can report record earnings in this economic environment, it has a pretty good chance of doing well in a better economic environment.”
The stock is up 38 per cent this year and 14 per cent over the past 52 weeks. And yes, Mr. Hodson does reveal the company’s stock in trade — it’s in computer software (the name’s a bit of a giveaway there.)
A day to remember
Canadian soft drink maker Cott Corp. (TSX-BCB) had a day to remember. On May 1, its share price went up 71 per cent!
The reason is clear to see. The first quarter showed a profit of $19.9 million compared to a loss of $21.3 million the year before.
Now when you look more carefully at the news release (and don’t get bogged down in the details), you’ll see two obvious signs that “may imply business is improving dramatically for the company,” says Mr. Hodson.
One, profit is up even though revenue declined. This indicates that the company is having success in its cost-cutting policy. Second, and even more obvious, this was achieved in the first quarter of the year, which is not a banner time for soft-drink sales.
“If we have a long, hot summer in North America and Cott can continue to control its costs, the next two quarters’ profit — encompassing the summer — could be substantial.”
Don’t stop doing your homework, Mr. Hodson tells his Investor's Digest of Canada readers. But while you’re looking over all the facts and figures, “don’t forget to sit back once in a while and look for the obvious.”
Once you look past all the trees, you may have one big profitable forest staring you right in the face.
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