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meleke's picture
WHAT I LIKE

I promised someone that I will write my thoughts. So here I go.

(Again, sorry for my english, I prefer to write in spanish but I know no one would read this)

As most of you I like value.

If I could manage a mutual fund I just took the lowest decile of Price/Book Value and I would filter them out according to an excellent Piotroski paper.

This simple strategy has beaten the market in very long track records.

Actually, I don't manage millions. Neither I have several millions in my account Frown, so the Piotroski experience looks quite risky to me.

Problem 1.

The lowest P/BV decile is filled with microcap stocks that as a whole will outperform the market, but taken one on one, oh man, every stock is a black box which can deliver the most amazing return or become a even cheaper, even more valuable stock (= halve its price).

My portfolio allows room for 5-10 stocks, pick the tenbagger and you're rich, but this looks rather difficult.

Problem 2.

With millions in my account sure I'd have time to screen, rank, do the maths, read the SEC fillings and invest as is written in the books. But again, time is our enemy. With a day work to pay my food I don't have plenty of time to such a vast amount of work.

Despite this, the www offers the lazy investors plenty of sites that make the work for you (just pick your payroll, sir). Theo was true when he said that paper and pencil was needed to really understand the bussines you are joining when investing.

For lazy investors, here is the list of the lowest decile stocks which scored 9 (top score) according to Piotroski F-SCORE at the end of March

ticker     name                                              p/bv   
CDL      Citadel Broadcasting Corp.             1,0   
CRV      Coast Distribution System Inc.        1,1   
CVTI      Covenant Transport Inc.                1,1   
CXR       Cox Radio Inc.                               1,0   
GMR     General Maritime Corp.                  1,4   
GTN       Gray Television Inc.                       1,1   
KND       Kindred Healthcare Inc.                  1,0   
LGN       Lodgian Inc.                                   1,4   
TMR      Meridian Resource Corp.                0,9   
VNT       Nacional Telefonos de Venezuela  1,1   
PKX       POSCO                                           1,1   
PLPC    Preformed Line Products Co.          1,4   
SFN      Spherion Corp.                                1,3   
TU        TELUS Corp.                                   2,4   
TWX     Time Warner Inc.                             1,2   
UGP      Ultrapar Participacoes S/A              1,8 

(Some interesting names, isn't it? Cool)

Problem 3

I pay my food in euros. It's long to explain why I believe that the USD will fall like a stone in the coming years, anyway I believe it.

Here in Europe we don't have those excellents screeners (as reuters or msn) for european equities. (If anyone knows if it exists, for free of course, tell me and you will have a friend in Spain). Too much reading and too much pencil is needed just to walk the first step.
So, let's going to forget micro-caps.

Nowadays what I like are mega-caps, mega-brands, platform companies.

Stocks like WMT, INTC, MSFT or GE.

In the next post (now is getting late for me) I will explain you why and I'll bring some metrics. I hope it will be interesting.

Take care out there, the bear is showing its crawls.



By meleke at 2006-05-15 12:52 | Stocks | meleke's blog


RE: What I Like

Hi Meleke,

What about stocks like EMMS and WLV?  Were they value or Piotroski trades?  I noticed you added them to your portfolio and within a very short period of time they both had massive jumps.  Did you know that was going to happen?  Seems much like Momentum trading.

RE: Piotroski
I totally agree with your thoughts on Piotroski.  I too have bought Piotroski book value stocks in the past and what I learned is that you must buy the basket.  You must buy at least 20 to 30 stocks.  Otherwise, you run the risk of losing a ton of money.  Stocks trading under book value are often companies with poor economics or that are financially distressed; and in those situations they might already be trading at fair prices or could go much lower.  That is why it is important to diversify - especially if you buy stocks based just on screening.  You cannot pick 10 Piotroski stocks and expect to produce the same stellar results as illustrated in Piotroski's paper.  Sure you might get lucky and find a 5-bagger, or most of your 10 picks might fair well, but if a couple of them turn on you that would be disastrous to a concentrated portfolio.


RE: Mega-caps
I like all your picks there too.  WMT, INTC, and MSFT are trading at much too low multiples.


RE: US Dollar
Agreed.  The dollar is going down.  This seems inevitable.


RE: Screeners
The screener problem seems to exist for every country.  Even Canada has very limited tools for screening stocks, especially compared to the US.  There is a major opportunity here to build a product especially since investing in emerging markets will become more and more popular as the years go on.


-theo
By Theo at Tue, 2006-05-16 12:08 | login or register to post comments

Thanks for your words Theo.I

Thanks for your words Theo.

I pick for my portfolio what I don't dare to pick in the real world.

I just screen some charts (yes, read again: charts, this is price&volume) and if I like how they look I add it to my portfolio. WLV, EMMS or POPE where 3 lucky shots.

I know nothing about the stocks I buy/hold/sell. I mean: nothing, nada. Just their name and their past price&volume.

I remember few weeks ago, when I tried to do my usual homework (financial statements, cash flows, ratios, SEC fillings and so on) for one of my portfolio stocks and I get really scared about their numbers, ratios and so on. I thought, who in hell is brave enough to hold similar &%~€·!!â–’?

I'm finishig part II, it will be ready in 2 days. I hope.

Another must read in the meantime:
The power of cash flow ratios

meleke
By meleke at Tue, 2006-05-16 12:39 | login or register to post comments

RE: Thanks for your words

Hi Meleke,

Thanks for the clarification on your stock picks.  I'm surprised those 3 picks were luck - your timing was perfect.

Thanks for the cash flow link.  That was a good read and I learned a lot.  I have several other articles to post on cash flow as I too think it is extremely important.


-theo
By Theo at Wed, 2006-05-17 10:57 | login or register to post comments

screening etc

Meleke,

i think you raised several interesting questions. How should one use a screen to invest in stocks ? Should it be a list where due diligence is to be performed on each stock, and the screen is simply a place to start doing your homework. Or should the screen be the end-all for all homework, like the Magic Formula Investing where you invest in a whole list of stocks and hold them for a year and then repeat. I think both has it's merits, however the second type needs a strong leap of faith.

I have tried backtest.org to test out some ideas, and I am surprised that some of the common conventional wisdoms do not necessary hold out, eg. low PE or low bookvalue does not necessary equal to that higher returns than the S&P 500.  Usually an additional ingredient like a catalyst is added and the results are magnified, for example, if you click on the url below and choose years 1986 and 2005, you will find that over long term the results is around 16% CAGR (for all months, even though Jan is higher at 18%) while the volatility as measured by the GSD is the same with the S&P 500.

http://www.backtest.org/value16-17:h12SBmcpG50XcpeL15XenwG13XcdyG.1T25

Whereas if you choose the bottom 25 stocks of low PE, the long term returns measured by all months is only 13% but with higher volatility.

http://www.backtest.org/low%20PE:h12SBmcpG50XcpeL15B25

cheers!

raytoei
http://boards.fool.com/Profile.asp?uid=158501944
By raytoei at Wed, 2006-05-17 12:48 | login or register to post comments