When stocks give a good performance
Judging stocks by price momentum has it ups and downs, says a U.S. advisory, but it can point to a bright future, as several stocks show.
Performance is a word that analysts love.
Stocks don’t just “perform,” they “outperform” or “underperform” or even “market perform,” which makes them sound a little bit like the organ grinder’s monkey at the fair.
There are analysts who swear that a stock’s price momentum is the most important thing investors can look at. You’re in the game for the returns you get, so look at the returns a stock can give.
And there is logic in this. Basically, you buy stocks you believe will perform well on the market and increase the value of your investment.
One leading U.S. advisory does not disagree. When you measure stocks strictly by their market performance, it says, the results can give you a good indication of where you should be putting your money.
Dow Theory Forecasts, whose system has evolved from the original Wall Street technical wizard, Mr. Charles Dow, has crafted a number of sophisticated measurements for stocks.
Unfortunately, says the advisory, performance scores have stumbled in the past few years in the wake of the credit crisis.
But it’s not giving up on its performance scorecard. It is still turning up some strong buys, like one Canadian stock and two others it recommends.
Past performance
Like the fine print says, “past performance is no guarantee of future returns.”
But this advisory, which gauges stocks from almost every angle (momentum, quality, value, financial strength, earnings estimates, and performance), has seen a successful pattern in performance.
To arrive at a Performance score, it takes into account “a variety of total-return measurements for periods of up to one year. Total return reflects capital gains, dividends, and the reinvestment of dividends.”
From 1994 to 2007, the Performance score did very well. On average, the top one-fifth Performance scorers on the S&P 500 Index bested the average stock on the index by 1.5 per cent.
But the last two years “have served as a brutal reminder of the old adage about past performance,” sighs the advisory. Stocks that had high scores slid down. Stocks with low Performance scores moved up.
The advisory expects this to be reversed. “We can also take comfort in the fact that price-momentum strategies have worked for more than 80 years, although they tend to generate large swings in performance.”
Stocks that have lagged
Performance is best judged over a relatively short period of time, says the advisory, a year at most. It does not use three-, five- and 10-year returns in its calculations.
Indeed you can almost take the opposite tack. “Historically, buying stocks that have lagged over the past three and five years has been a wining strategy.”
And many good stocks have lagged in the past two years. Since the stock market began its rally in March 2009, “the high quality stocks we favor have not led the pack.”
As is often the case, small caps lead the way in the market recovery that has been rudely interrupted in January and again in May.
In fact, one study of market performance going back to 1927 declared that 2009 was the worst year for momentum investing, “generating losses more than triple those of the next worst year.”
But these numbers suggest that “the recent poor returns may reflect extreme market conditions than a new trend,” adds the advisory. It fully expects stock price trends to help it select stocks that top the market.
One Canadian entry
The advisory has a table of stocks entitled “Appealing Stocks with Solid Performance.” The list has one Canadian entry, Rogers Communications (TSX-RCI.B; NYSE-RCI). The advisory made this its featured stock in mid-April, as we duly reported (see Daily Buy-Sell Adviser, April 19).
Rogers is trading at $36.10 and yielding 3.5 per cent on its $1.28 dividend, but it is not one of the stocks featured in this article.
The first of these is DirecTV (NYSE-DTV), which cruised to record highs in March, April and May. The shares are up almost 14 per cent for the year and have held their ground in the recent correction.
DirecTV is pinning its future growth on 3-D TV, and will help sports network ESPN televise the first major league baseball game in 3-D in July. Nearly 100 million American paid for TV service last year, an increase of 3 per cent (not surprising in a sluggish stay-at-home economy) and satellite providers like DirecTV are gaining ground on cable companies.
This stock is a Focus List Buy (best buy for the next 12 months) and Long-Term Buy (best buy for the next 24 months). It trades at $37.69 and pays no dividend.
Varian Medical Systems (NYSE-VAR) is another stock that takes all of its momentum from the share price. It doesn’t pay a dividend, either.
It makes cancer diagnostic products and X-ray tubes. Demand is picking up overseas. Orders for both oncology and X-ray products have been moving up briskly and so has the stock.
The shares have increased by 8 per cent annually over the past five years and a healthy 50 per cent in the past 12 months.
Varian is finding a great deal of interest in its new linear accelerator, which shoots custom-shaped radiation beams at cancerous tumours. This should account for many new orders in the next few years.
The stock is a Focus Buy and Long-Term Buy. It trades at $50.09, down slightly during the market correction.
Unlike some analysts, this advisory does not think you should put all your eggs in the past performance basket. There is more than one way to judge a quality stock.
But in the end, a good stock is like a good car. If it doesn’t keep moving forward, it’s not a keeper.
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