To see the screen and the results check out the post titled, Finding Warren Buffett Stocks To Buy With Buffetology
I will copy the screen here
5 Yr. Hist. EPS Growth >= “5?
Long-Term Growth Consensus Est. >= “5?
Avg EPS Surprise (Last 4 Qtrs) >= “0?
Previous EPS Surprise (%) >= “0?
Last EPS Surprise (%) >= “0?
12 Mo Trailing EPS >= “0?
Recent Price >= “0?
P/E (Trailing 12 Months) >= “0?
Price/Book >= “0?
ROI (5 Yr Avg) >= “15?
ROA (5 Yr Avg) >= “15?
Current ROE (TTM) >= “15?
Net Margin >= “.15?
Cash Ratio >= “1?
Quick Ratio >= “1?
Current Ratio >= “1?
Debt/Total Capital <= “10?
RESULTS
ALCON INC ACL
BAIDU INC BIDU
IMMUCOR BLUD
GOOGLE INC-CL A GOOG
GARMIN LTD GRMN
COACH INC COH
CTC MEDIA INC CTCM
COGNIZANT TECH CTSH
DOLBY LAB INC-A DLB
FACTSET RESH FDS
FLIR SYSTEMS FLIR
MINDRAY MEDICAL MR
HITTITE MICROWV HITT
STRYKER CORP SYK
SYNTEL INC SYNT
TERADATA CORP TDC
MICROSOFT CORP MSFT
Although some have low yields relative to others based on fundamentals, these at least seem to represent stable value picks with stable earnings.
Now I hope you did your homework and found out the actual price yield. There’s some that are under 10% per year average which isn’t a good time to buy them. The highest is still under 20%, but still a number of picks over 15%.
However, in this case study we are going to look at if we can gain an advantage by trading stocks that are worth earning long term as well.
The thing is that a stock that earns a certain amount per year with a certain growth rate generally is pretty black and white to how much it increases the value of the company. There is some uncertainty as to whether or not those numbers will continue, however, regardless, we should be able to identify stocks with stable predictable earnings with this screen, project price targets and see how a time period of trading that stock compares to what an average time period would look like.
For example, Microsoft has a trailing EPS of about 1.89, with an 11% growth rate. At that rate, it will have a trailing EPS of 5.36 by the end of a 10 year period. The total trailing EPS will add up to a total earnings of $35.14 per share. Divide that by 10 and you get 3.51 EPS per year on average. That is going to mean that the earnings to price yield per year is going to be about 3.51/30 or 11.7%
Now if we were to hold it for 10 years we could estimate that we would gain 11.7% per year. At the very least we can say that the company should increase in value by 11.7% and that should reflect in the stock price. Now what we are trying to do by timing it is going in and out of this entire group of stocks to see if collectively we can do better than that. The good news is that if timing has zero effect, we still will be trading in and out of stocks that should yield around 10% per year and more, and therefore we should still gain over 10% per year (minus fees) even if we “fail”. This essentially means we are technically trading with a saftey net.
This case study won’t neccesarily prove anything as there is too much volitility and randomness, but it may give us a picture as to whether or not we should attempt such a feat and help you decide what you want to do.
Now we need a more scientific way of coming up with price targets that aren’t going to be influenced by opinion and observation. Otherwise people will argue that what I thought was a breakout wasn’t confirmed, or I based my price target off of a pattern that wasn’t right. So I will use stockcharts.com as that is freely available to all so you can all run the same experiment. If you’d like, you can even tweak my fundimental screen, or run it years later by heading to zacks.com and checking out the stock screen.
Ideally, this isn’t something that should be done once by one person. It would be best if other people can independently study the same thing and determine whether or not it’s possible to time the market and if so, how, and share the results. Ideally I would like to see you use the same outline where you measure fundimental price targets as well as technical price targets and compare them.
Right Now I will share the info I have available on google’s version of excel via google docs..
Additionally, I have decided that as long as I am going to be tracking these stocks anyways, that I might as well run another case study. This other case study will be based on the advantage that long term options (may) have over short term options.
The spreadsheet on the technical trading case study is now available for all to view. Click to view the Technical Trading and Option Replacement Case Studies.
update: Although I did not update the spreadsheet, I independently found out I could find no noticeable significant advantage by using technicals to time a stock that already shows good fundamentals. That doesn’t mean that trading technicals don’t work, it just means that the technical picture may only provide a slight advantage over time, at least given the parameters of this test.
In reality I have found some chart patterns do much better than others, and being able to identify those chart patterns or finding a good fundamental stock is more important than trying to identify a stock with good fundamentals as well as technicals. In fact, during another technical case study, I found that with the exception of 2 chart patterns every single bullish chart pattern resulted in lower prices once the trend finally reversed. So chart patterns may allow a trade for a length of time based on the length of the chart pattern, but beyond that it better serves as a contrarian indicator. That is, a bearish charrt pattern, is a good one to consider buying on the way down after it gets near it’s price target, IF it has good fundamentals more so than a bullish chart pattern as when the bearish one finally reverses, it will end up higher than it started and the bullish one will end up lower than it started.
Other studies show that there are significant advantages that you can gain in the market by timing, it just requires the ability to be more efficient in pricing the market than everyone else collectively. The market does show anatomies to the efficient market hypothesis in a number of studies. As such, advantages should be sought out that exploits these anomalies whether it be by finding undervalued stocks, or finding stocks and getting in and out of them entirely quicker than institutions are able to with their entire stake (due to their entire stake generally being much larger than the average public).
Buffet once said, “Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn’t do any good to look at the cards.” AND “I’d be a bum on the street with a tin cup if the markets were always efficient.”
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