2. Stocks selected by ValuEngine Valuation Model
3. Location of Undervalued Stocks on the SOM
4. Momentum of Undervalued Stocks
5. Undervalued Stocks Cluster In S3
6. Alpha/Beta of Singapore Stock: Straits Asia Resource
7. Alpha/Beta of Solarfun Power
8. AlphaBeta of KKR Financial Holdings
9. Alpha/Beta of Sanmina-Sci
8. AlphaBeta of KKR Financial Holdings
9. Alpha/Beta of Sanmina-Sci
For explanation on technology, methodology and terminology, see: http://www.technifundamentals.com/2010/07/explanation-page.html .
Have you ever wondered why stocks which are undervalued can test your patience with regard to their performance? I mean when you read recommendations by broking houses and analysts....
This is because stocks can be out of equilibrium with their fundamentals for a very long time. This is due in part to the daily market noise caused by short term traders who play by momentum and liquidity, and by the over/under reaction caused by the availability of instantaneous information. It is now even worse when high-frequency algorithmic trading accounts for 30-60% of trade volume, depending on the Exchange. We take a look at stocks selected by ValuEngine's Valuation model (the nodes of the SOM that are labelled 'vl') and examine their longer term fundamental characteristics as well as their short term technical characteristics.
Image 1: A technical outlook for the DJIA after yesterday's Close using the Rahul Mohindar technical analysis model shows that the DJIA is still in the Bullish zone, and the upward move is still intact as indicated by the Blue-colored price bars as well as the Blue arrow. Third window from top also shows the most recent bar is still above the Red take-profit line. So we can go ahead with stock selection for Long.
Image 2 are the stocks selected by ValuEngine valuation model and the Pink highlighted stocks are shortlisted for our technical analysis.
Image 3 shows the location of the stocks on the SOM, [South-East corner and labelled 'vl']and the scale at the bottom of the Valuation map shows Valuation +/- % from Blue to Red. So the undervalued stocks are dark Blue.
Image 4 is a map of the Momentum attribute and the more Red the higher the momentum. We can see that our Undervalued stocks have a high Momentum. But this momentum is a long term momentum of 12-months rate of change.
Image 5 shows that L stocks of the ValuEngine Valuation, Growth and Quality models are neatly positioned in cluster S3 thus confirming that the cluster is homogenous.
Images 6-9 plot the 21-day Alpha and 21-day Beta of a stock. *Refresher: Alpha is the intercept of the linear regression line of a stock with its market Index and Beta is the slope of that line. Roughly speaking, Alpha level is an indicator of a stock's 'resilience' versus the market. And Beta is an indicator of a stock's sensitivity to the market's movements. The choice of period for Alpha/Beta determines the values you get and the volatility of Alpha/Beta. There are many dis-advantages for using such a crude measure as Alpha/Beta, among the most important of which is that it assumes linearity in the markets. But Alpha/Beta is the most direct way of measuring changes, and gets right to the root of the matter unlike traditional technical analysis indicators. For this article U.S stocks are measured against the DJIA and the Singapore stock was measured against the Straits Times Index (STI). In the charts, the 'price chart' of the Index against which the stock is measured is superimposed on the stock's rpice chart.
Image 6 shows the Alpha/Beta of a stock on the Singapore Stock Exchange: Straits Asia Resources. This stock was selected based on a technical analysis screen-nothing to do with fundamentals. Note the high violatility of its Alpha/Beta lines and how as at yesterday Beta is going down while Alpha is going up- a strong sign of resilience to market movements.
Image 7,8,9 shows stocks selected by fundamentals criteria of Valuation: Note that their Alpha/Beta lines are much more tame compared with the Singapore stock. This is despite the fact that these stocks not only are undervalued, but have high momentum and Beta [see Beta column in image 2] too. It's just that the time period selected for calculating momentum and Beta is a long time viz one year.
Now we have to wonder if investing strictly by fundamentals is a good idea in the light of core changes happening in the investment environment. With derivatives,algorithmic trading, 1000 trades a second, and the inter-connectedness of all financial markets, your stocks never have a chance to get near the fundamental valuation they have. And you don't have the time to wait and wait. The analysts can write all they want about P/E ratios, M/B Ratios, Cash Flow and so on but in the short term they all don't matter. And as for the long term, as Keynes said, "in the long run we are all dead". Is Warren Buffet style of investing for dinosaurs? Why not forecast the direction of movement just for tomorrow, and if no earthquake, political scandal or North Korea cause an external shock to the system, then tomorrow should be fine. Stay tuned to this Blog.....
