Looking for Value Stocks?

[Arindam]

In the IBD tread, Andy comments that Quill’s Simon Sez method of making Buy/Sell decisions seems to be based on ‘value investing’ (really, ‘mean reversion’) and the IBD method is based on ‘momentum’. If that’s the case, how might one go about finding ‘value stocks’, aka, good candidates for Simon Sez?

FinViz offers a means to run technically-based screens. If you select “Stocks”, apply a common sense filter such as “Priced over $1”, and ask to see only those that are “RSI (14) Oversold(30)”, then 361 are returned today. That’s too many charts to look. So, sort the stocks by “Industry” and look at just the industries that might interest you.

When you hover the mouse cursor over the stock ticker, a 3-month chart appears in a popup window. If the stock is in a precipitous, waterfall decline and seems to be headed toward zero, PASS. But if the chart is “orderly” and prices seem to be merely very over-sold or even bottoming, then maybe you’ve found something that might be worth digging into both fundamentally and technically. Like, why are ALB, CX, TGLS, and JELD crashing and when might the selling cease? What about CE, GPRE, GURE? Why EAF, AVO, NWL, or EL?

Here’s the ‘snowflake’ for EL. (A forecasted growth rate of 33% is decent, right?)

Here’s where things get interesting. Notice the six upward waves and that the last one fizzled out pretty quickly.

Someone, for some reason, is selling this stock down very peristently. Why? In fact, the selling has pushed the price down to its Oct '23 level.

If a combo of fundamentals and techincals susggests that the price for EL won’t go much lower, then --possibly-- a low-risk entry point has been identified. In other words, if EL makes it back above $113-$114, then the higher probability bet is EL has bottomed and will go higher.

This same procedure can be applied to any stock. All is takes is a bit of charting and a guess that when things get too over-sold, the selling will cease and prices will recover. That’s when a value investor (or a Simon Sez trader) wants to be in there buying. Not agressively, but with an opening position that is appropriate to one’s account size, investing objectives, and tolerance for risk.

Charlie

[buynholdisdead]

@Arindam

This same procedure can be applied to any stock. All is takes is a bit of charting and a guess that when things get too over-sold, the selling will cease and prices will recover. That’s when a value investor (or a Simon Sez trader) wants to be in there buying. Not agressively, but with an opening position that is appropriate to one’s account size, investing objectives, and tolerance for risk.

But the only problem with that is you are hoping on the knife has stop falling. As with any method you really have no idea if that is the bottom. Also with all the supply side holding above the stock, like an avalanche in a snow covered mountain, you have to be afraid that something may give and drop you under a ton of sellers. There is no free lunch here.

Andy

[Arindam]

Andy,

Yes, as Yogi Berra quipped, “It’s hard to make predictions, especially about the future.” But actually, it’s quite easy to make predictions, and we make dozens of them in our daily lives as well as in our investing/trading lives. The trick --when payoffs are symmetrical-- is to be right more often than wrong. When payoffs are asymmetrical, then right/wrong ratios can be very skewed to the left, and the game can still be profitable.

In the case of making a bet on EL --vs your bet on ASPN – note carefully what I suggested. “Make the stock prove that it has turned itself around. Make the opening position small.” In the case of ASPN, you tried to hop onto a train that had already told you it was slowing down. By how much did it drop today? (-8%) or so, right? Luckily, you didn’t suffer the whole of today’s reversal. But your total loss on your ill-timed entry was (-10%) or so, right?

Look again at EL’s chart. What has been its biggest one-day move in the last four months? That begins to suggest what the risks are of an entry.

The mistake you momentum players make is to accept price risk to reduce information risk. By waiting and waiting to see what the stock will do and then belatedly reacting, you all but ensure that you will suffer a price reversal. Breakout players play the opposite game. They accept information risk to reduce price risk. But the queston to ask and answer is this. “When the market herself is telling an investor/trader what to do by the evidence she provides in the tape, how much information risk is there, really?”

Stan Weinstein used to say, “The tape tells all.” His partner in Stan’s early publishing days, Justin Mamis, covers these matters in his book, The Nature of Risk.

But as I also said (or implied) most of the choices an investor or trader makes aren’t his or her own but are the consequences of hard-wiring and genetics. We think we are making our choices freely about trading methods, etc. But we are fooling ourselves. How we invest/trade --whether we invest/trade-- was determined long ago in the w*mb. The trick --as Alex Elder argues, as Schwager’s series on Market Wizards demonstrates-- is to be fortunae enough to finally discover a good match for ourselves of Money, Mind, Market.

You think the IBD method is the key to fabulolus wealth, and for you it might well be. I just know the method is high-risk junk, not worth a second glance. I’m a "value player’, not a momo guy, and markets have vindicated that choice for me beyond what I could ever have imagined. But to each, his own, right? Or as I also like to say, “Caminate, no hay camino. Se hace camino al andar”

Charlie

Caminante no hay camino - Joan Manuel Serrat (Letra)

[buynholdisdead]

@Arindam

Yes, as Yogi Berra quipped, “It’s hard to make predictions, especially about the future.” But actually, it’s quite easy to make predictions, and we make dozens of them in our daily lives as well as in our investing/trading lives. The trick --when payoffs are symmetrical-- is to be right more often than wrong. When payoffs are asymmetrical, then right/wrong ratios can be very skewed to the left, and the game can still be profitable.

Charlie if it was easy you would have 10 million dollars.

@Arindam

In the case of making a bet on EL --vs your bet on ASPN – note carefully what I suggested. “Make the stock prove that it has turned itself around. Make the opening position small.” In the case of ASPN, you tried to hop onto a train that had already told you it was slowing down. By how much did it drop today? (-8%) or so, right? Luckily, you didn’t suffer the whole of today’s reversal. But your total loss on your ill-timed entry was (-10%) or so, right?

Ahh Charlie that is the thing. We all get stopped out. The thing is how much are you going to lose? Some are chicken little’s that lose a little but gain very small increments in their portfolios some are willing to make larger chances that gain much larger increases in their portfolio. But no my losses were not 10 percent like I said it was 9.5 %. I thought I made that clear Charlie.

@Arindam

The mistake you momentum players make is to accept price risk to reduce information risk. By waiting and waiting to see what the stock will do and then belatedly reacting, you all but ensure that you will suffer a price reversal. Breakout players play the opposite game. They accept information risk to reduce price risk. But the queston to ask and answer is this. “When the market herself is telling an investor/trader what to do by the evidence she provides in the tape, how much information risk is there, really?”

That is where you are wrong Charlie. You think that because it has hit your value price that is the furthest it can drop. So timidly you put a bid into a stock hoping that it won’t drop further. Value investor only bet on dying industries where they hope that they can catch a little increase in price. While the momentum investors invest in companies that are starting out and increasing in market share. Thereby having the world as their oyster.

@Arindam

Stan Weinstein used to say, “The tape tells all.” His partner in Stan’s early publishing days, Justin Mamis, covers these matters in his book, The Nature of Risk.

Stan Weinstein was not a value investor.

@Arindam

But as I also said (or implied) most of the choices an investor or trader makes aren’t his or her own but are the consequences of hard-wiring and genetics. We think we are making our choices freely about trading methods, etc. But we are fooling ourselves. How we invest/trade --whether we invest/trade-- was determined long ago in the w*mb. The trick --as Alex Elder argues, as Schwager’s series on Market Wizards demonstrates-- is to be fortunae enough to finally discover a good match for ourselves of Money, Mind, Market.

Well if that was the case Charlie, you wouldn’t argue so hard that only value investing was the way to go. As you should notice, nobody is trying to tell you your way of investing is wrong.

@Arindam

You think the IBD method is the key to fabulolus wealth, and for you it might well be. I just know the method is high-risk junk, not worth a second glance. I’m a "value player’, not a momo guy, and markets have vindicated that choice for me beyond what I could ever have imagined. But to each, his own, right? Or as I also like to say, “Caminate, no hay camino. Se hace camino al andar”

Charlie, you like to brag how much money you have. But what you don’t realize is that most of us don’t tell you how much money we have. Why do you think that is? I come from a back ground where the guy sitting next to you at the lunch counter could be a multi millionaire rancher. He didn’t seem more than the ranch hand working at his ranch. But trying to determine his worth never came down to money did it? That Charlie, is the true meaning of wealth. You will never hear me brag about the money I have and I am always willing to listen to other people. I am not an Idealogue, I find those people seem to have a limited knowledge in life and markets.

Andy