Moneymaking Research Tidbits
“As goes January, so goes the rest of the year.” It turns out that more
often than not, that market axiom is true. According to a recent report,
over the past 150 years, the stock market averaged an 11% gain from
February through December when January recorded positive returns and
averaged a 3% drop during negative January
years. Over the past five years, the market gained 9%,
on average, from February-December, during positive January years and
dropped 14% in down January years.
That was one of many intriguing tidbits I picked up by browsing through
the Investing Notes section of the free CXO Advisory Group site. (www.cxoadvisory.com).
Here are a few more.
Employment vs. Stock Prices
Another recent study found that the stock market generally
moves opposite to employment figures. That is, an increase in unemployment
signals future stock market gains, while a decrease in unemployment
predicts a down market.
Jim Cramer Tips
A study found that stocks that CNBC TV personality Jim Cramer
recommends buying average a 2% gain on the day
after the show, but then drop back 2% over the
next 30 days. However, stocks that Cramer advises selling drop
1% on the day after the show and then drop
another 3% over the next 30-days.
Morningstar Fund Ratings
rates mutual funds from one to five stars, where five is best. A study
found that, on average, the higher the rating, the higher a fund’s likely
future return. However, although five-star funds record higher absolute
returns than three- and four-star funds, five-star funds are usually more
Consequently, the study concluded that, taking risk into account, the star
ratings are best used to rule out low rated (one- and two-star) funds, but
are not particularly useful for discriminating between three-, four- and
Don’t Confuse Me With Facts
A study found that individual investors are almost two times more likely
to believe information confirming rather than disproving their prior
Sell in May?
The oft-repeated adage “sell in May and go away” seems to be good advice,
and not just in the U.S. A study found that, over the 34-year period from
1970 through 2003, the return for a world stock index during the November
to April period beat May-October by almost 8%,
on average, annually. Alas, the effect doesn’t happen every year. In one
out of three years, May-October beats November-April.
Cash Still King
Total assets are the value of cash and everything else owned by a company.
A recent study found that stocks of firms with the highest percentage of
cash to total assets outperform low cash to asset ratio stocks. You can
find the information you need on Yahoo’s Balance Sheet report (finance.yahoo.com).
Calculate the ratio by comparing the Cash and Cash Equivalents balance
sheet line to total assets.
Shrinking Assets Best
Speaking of assets, intuitively, you’d think that growing assets
signal a healthy company, and hence, a good stock. But in fact, a recent
study found that stocks of firms with the lowest percentage asset growth
over the past 12-months substantially outperform high asset growth stocks.
Indeed, asset growth rate (lower is best) to be one of the best predictors
of future stock returns. Why?
Events that increase asset values such as acquisitions and new stock sales
tend to be followed by periods of abnormally low stock returns, while
events that reduce asset values such as share repurchases tend to be
followed by periods of unusually high returns. The affect is most
pronounced for smaller stocks (small capitalization), but still
substantial for large-cap stocks.
Better Value Gauge
Many studies have found that, on average, value-priced (out-of -favor)
stocks outperform growth stocks. Most investors use the price/book ratio
(share price vs. book value) to define undervalued stocks (the lower the
ratio, the more undervalued the stock).
However, research has found that the enterprise value/EBITDA ratio
displayed in the Valuation Measures section of
Statistics report works better for selecting undervalued stocks. If
you’re a numbers person, enterprise value is book value plus debt and
EBITDA is earnings before deducting interest, taxes and various accounting
Score Predicts Stock Drop
Researchers Craig Nichols and M. D. Beneish devised the “O Score,”
which measures a stock’s overvaluation. The score ranges from zero (least)
to five (most overvalued). The study found that stocks with O Scores of
five dramatically underperformed the market over the next 12-months. They
calculate the score by assigning one point to each of these indicators: 1)
likely earnings overstatement (net income rises, but operating cash flow
drops), 2) high sales growth, 3) low operating cash flow to total assets,
4) recent large acquisition, and 5) unusually high levels of new stock
Rather than trying to come up with absolute pass/fail values, use these
factors to compare stocks that you own, or are considering buying. For
more details, use Google or your favorite search program and search for
“Identifying Overvalued Equity.” Here's a
link to the report.
The research summary is only one of many free features offered by CXO
Advisory that will help you make better investing decisions. Check it out.