2. Turbo-charged ADRs in Cluster S4
3. ADRs that behave like DJIA Blue-Chips
4. Turbocharged S4 ADRs have high Beta
5. But Turbo-charged S4 ADRs have high 12-month Return % too
For explanation on technology, methodology and terminology, see: http://www.technifundamentals.com/2010/07/explanation-page.html .Let's leave the weekly market outlook aside for the moment, because the forecast horizon is as cloudy as ever. But continuing from last week's theme that DJIA stocks are widening their gap with S&P500 and slowly forming a cluster of their own with its unique characteristics: This week, we look at ADRs. Now, there are ADRs and there are ADRs. With globalization and the strong growth of the emerging economies, their bigger ADR's are becoming a part of every big fund manager's portfolio which by necessity must be a global portfolio. The big market cap and high liquidity ADRS are starting to take on the characteristics of the DJIA. [In image 1, you can see how closely positioned they are to the DJIA stocks ['d's']. So this type of ADR have become mature and do not have the volatility they had when they were 'young'. Among these ADRs are Vale, Banco Santander, Amer-Mobil and TEVA. [see image 3]. Then there are smaller cap, more volatile ADRs with higher growth potential, but also higher Beta and volatility. For these, see image 4.
For this week I constructed a SOM with the S&P500 as a backdrop. And on this backdrop, I placed components of the DJIA with the label 'd'. Then, about 500 ADRs were filtered for Average Daily Volume of last 3 months greater than 100,000. This reduced the number of ADRs to 285, and the SOM positioned them according to their combination of fundamental characteristics [model variables]. The ADRs retained their ticker symbol. In addition, ValuEngine's Long and Short screens for their Valuation, Growth and Quality models were also included for the SOM's calculation. Labeled with 'l' for Long and 's' for Short, they automatically formed Long and Short clusters on the SOM, and by looking at the ADRs location in a certain cluster, we can make inferences on it's characteristics. To summarize:
1. Image 1 shows the clusters of the SOM and the ADRs spread over the four clusters. S1 is where most of the S&P500 stocks are. There is a large group of ADRs there, but S1 is an ambivalent cluster with 'l' and 's' equally represented, and sparsely positioned. S2 is also generally a Short cluster with the additional comment that there are a lot of 'd' DJIA components there. S3 is a Short cluster. S4 is a strong Long cluster (see the 'l's'), and has a group of ADRs in it.
2. Image 4 shows that these smaller ADRs have high Beta [see scale at bottom of map] Contrast with the DJIA-like ADRs in the North-East corner, with their lower Beta. [These ADRs have darkened nodes]
3. Image 5 shows that even though they are more volatile, these smaller ADRs have a very high 12-month return %. For 12-month return % of big and small cap ADRs, you can see the difference in the 12-month return % column of image 2 and 3.
LESSON OF THE DAY: The world is indeed becoming a smaller place, and soon it doesn't really matter where a Company is physically located, or on which stock Exchange it is listed. The real difference is between having an international business or a domestic business. Big cap ADRs are maturing and assuming the characteristics of DJIA components. They are stable and will grow, but at a slower pace. To catch the next wave, move on to the smaller ADRs. Look in our Self-Organizing Map to discover where the gold fields are.
Afterthought: Fundamentals cannot forecast the short, short term, like tomorrow or the next 2 or 3 days. And often, we are more interested in the short, short term. For that, we are working on a Proof of Concept Analysis for a new paradigm in short-term forecasting. Stay tuned to this Blog
