Stocks called LIVE on Switzer – 3rd October 2011

I have been asked to explain how I came up with the stocks that I mentioned in this TV interview with Peter Switzer on Monday 3 October and how the process differs from the techniques that I use when asked to comment on Your Money Your Call (YMYC) shows on Foxtel’s Sky News. So here goes…..

Firstly, on YMYC I use a combination of SPA3 and generic technical analysis techniques. Where possible I will use SPA3 indicators to determine whether a caller’s stock is an open SPA3 trade or not and if not, because the caller desires commentary, I will use generic technical analysis techniques to provide a view on the stock’s prospects. SPA3 has a medium term horizon which is approximately 3 weeks to 3 months out but can last longer if trends persist, such as with Iluka (ILU) and Forge (FGE) which lasted 11 months and 10 months, respectively.

SPA3 is a mechanical system hence any stock on any given day will either be an open trade or a closed trade. All of the stock picks that I have provided on YMYC and Market Moves over the past 3.5 years have been SPA3 entry signals on or near the date of the respective shows. SPA3 purely uses technical analysis as a basis for its entry signals.

Now to the techniques used for the stock selections in the video clip with Peter Switzer. Here I used our long term methodology, Intelligence combined with simple long term generic technical analysis techniques to determine the longer term prospects of stocks, starting with a blank page. This is a problem that all not-so-active investors face.

I started with the Fundamental List from our Intelledgence product which contains a list of fundamentally sound stocks divided into four categories, viz, Gold, Silver, Bronze and Qualifier. The list is updated monthly via an objective process of analysing all the available adjusted EPS, adjusted DPS and RoE (Return on Equity) for every listed stock on the ASX. Our business has used the same fundamental analysis process since 1995 which has shown to work very well, particularly when combined with technical analysis, which is what the Intelledgence product does but with a long term horizon, and hence is a less active methodology with average hold periods of over 12 months.

I sorted the list by Intelledgence’s proprietary Performance Index and exported it as a Watch List into our technical analysis software and then quickly stepped through the list looking for price action that had retraced from highs after a large run-up over the last 2 – 3 years. A short list of 22 stocks was created which I then sorted by Earnings Yield (EY). The logic here is that a high EY can indicate a stock that is oversold relative to its earnings growth. Be careful because stocks that have a very high EY could be on the way out due to a change in fundamentals that haven’t yet found their way into reported accounting data, which is why analysis of price action is required. This is why EY is not used as the first filter.

A comparison was then done of the PE Ratio for each stock to its Long Term compounded EPS Growth, or Medium Term of Short Term EPS Growth, which ever was applicable depending on whether the stock is in the Gold, Silver, Bronze or Qualifier fundamental category. The logic here is to determine whether the stock is fundamentally undersold relative to its current price.

The technical process is explained in the 12 minute video clip.

That’s it! This process suits a not-so-active investor that would like to use some discretion involving both fundamental and technical analysis. The whole process took less than 2 hours and should be repeated whenever a long term position is required in a portfolio. Intelledgence can also be used purely mechanically to manage a near passive long term portfolio as it generates mechanical entry and exit signals and calculates position sizes.

The stock picks mentioned in the TV video clip are: DTL, TGA, ANG, MTU, MMS, MND, JBH, SOL, BKW, LYL, CDA and CLH. Others mentioned as being left off the list are: NHC, SMX and ARP. Others not mentioned that came close didn’t make the final list due to reasons explained in the video clip are: CPB, FXL, FWD, BKL, RHC, CCL and MTS.

The stocks should be monitored on a weekly basis for a change in fundamental status, like dropping off the Intelledgence Fundamentals List, or for a long term technical exit signal such as a fall below a quarterly low or a long term momentum indicator.

The following stocks can be investigated as examples. On 26 May 2009 I did a similar exercise on Peter Switzer’s show and selected the following stocks all of which, bar CRG and ASB, went on to perform very well over the ensuing months and some only provided exit signals very recently: AMM, ANG, ASB, ASL, CRG, FLX, IPL, LEI, MND, SMX, SRV, UGL, WOR.

Double-click inside the box or click PLAY below to view the footage.