Wednesday
Feb062008

Are Value Stocks A Good Value?

After growth stocks, and more specifically, the four horsemen of technology outperformed the market during 2007, some well regarded advisors think that 2008 may be the year for value stocks.  In fact, one popular value investor thinks that at current levels, value stocks are trading at one of their steepest discounts to the overall market since 1970.

Richard Pzena runs Pzena Investment Management (PZN), and in his fourth quarter newsletter, he highlights that the only other times where value stocks were cheaper than they currently are was in November 1999 (Internet Bubble), June 1973 (Bear Market/Nifty Fifty), and October 1990 (S&L and Real Estate Crisis).  In his example, Pzena classified value by looking at 100 stocks in the S&P 500 with the lowest price to book ratios.  On a side note, it's somewhat ironic that according to Bloomberg, Pzena's publicly traded company trades at a price to book ratio of 101.91, which is 38 times the level of the S&P 500!

Whatworks_on_wall_street_3While many investors often measure a stock's value based on its P/E ratio, Pzena's use of book value is hardly out of the norm.  In his book What Works on Wall Street, James O' Shaughnessy devotes an entire chapter to measuring the performance of stocks based on their book values.  He points out that many investors believe it is "a more important ratio than price-to-earnings...since earnings can be easily manipulated by a clever chief financial officer."  O'Shaughnessy's conclusion is that, "Over the long-term, the market rewards stocks with low price-to-book ratios and punishes those with high ones."

With Pzena's and O'Shaughnessy's findings in mind, we screened the S&P 500 for the 100 stocks with the lowest price-to-book ratios.  However, given the recent writedowns in the financial sector, we wanted to avoid names that looked cheap but may face further writedowns in the coming quarters.  For example, Ambac (ABK) and MBIA (MBI) both have some of the lowest price-to-book ratios in the S&P 500 (0.59 and 0.55, respectively), but over the last year ABK's book value has declined by 62% while MBI's has declined by 45%.  In order to avoid these companies whose book values have been falling by almost as fast as their earnings, we further screened the list for companies whose book values have increased by at least 10% over the last year.

Low_pb_2

While the names in the above list may not be the sexiest stocks in the S&P 500, we would note that while the S&P 500 has had a total return of negative 9.5% year to date, the twenty names on the above list have outperformed, declining by 6.2%.

The above analysis is an example of a recent B.I.G. Tips report available to Bespoke Premium members.

Wednesday
Feb062008

S&P 500: The Gravity Effect

"What goes up must come down" hasn't always applied to equity markets, but it sure has lately.  At the end of last week, all we heard was that stocks had their best one-week performance in five years -- up 4.87%.  Well, in the first three days of this week, all of last week's gains have been washed away (see chart below).

Spxgravity

And the stocks that were up the most last week are down the most this week.  We broke the S&P 1500 into deciles (150 stocks in each decile) based on their performance last week.  As shown in the chart below, the decile of stocks with the biggest gains last week are averaging declines of 8.2% this week.  The decile of stocks that were up the least last week are down just 3.71% this week.

Decilelosers_2

Below we provide a list of the biggest losers in the S&P 1500 so far this week.  A couple of years ago, this list could have represented the biggest losers for an entire year.  Now it represents losses over just three days.  As shown, NSR is down the most at -29%, followed by CWTR (-26%), RSYS (-26%) and WOOF (-23%). 

Biggestlosers_2

Bottom line = The downtrend continues.

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Wednesday
Feb062008

Correlation Ticking Higher in Current Market Environment

We recently calculated the correlations between the S&P 500, its ten sectors, gold, oil and the 10-year Treasury note over two different time periods.  The first matrix below (click to enlarge) highlights the correlations (between daily % changes) from July 2007 to now.  The second matrix highlights the correlations over the last 10 years, and the third matrix compares the difference between the two sets of correlations.  In the third matrix, numbers highlighted in green indicate an increase in correlation, while numbers highlighted in red indicate a decrease in correlation (or more negative correlation). 

Since July, the market has had a change in personality from cool, calm and collected, to volatile, crabby and downright bipolar.  Based on our correlation matrix, it's easy to see that sectors and asset classes (with the exception of Treasuries) have become much more correlated.  All sectors have become more correlated with each other and the S&P 500 as a whole.  Most have become more correlated with gold and oil as well.  This new environment has put an even greater emphasis on macro-level investment strategies, because diversification is not really providing much diversification right now.

Matrix1_2

Matrix2

Matrix3

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Wednesday
Feb062008

A New Line of Business For The Homebuilders: Stock Trading

While some may argue that that homebuilders don't do a very good job building houses, one thing they know how to do well is trade their own stocks.  Some may remember back in 2005, when insiders at TOL sold over $164 million in stock just days before the stock hit its all-time peak.  By not holding that stock, these insiders saved themselves nearly $100 million.

Tol_insiders2005_2

Not only are insiders at the homebuilders good sellers, but it appears that they are good buyers too.  During the month of January, insiders at Hovnanian (HOV), purchased 389,000 shares of stock at an average price of $5.3.  Now only six days into February, HOV's stock is trading at $9.8 for an 85% gain.  Not bad for less than a month's work.

Hov_insiders_last_year

Wednesday
Feb062008

Bespoke on Bloomberg TV

Jwaltersimage_2 Bespoke's Justin Walters appeared on Bloomberg TV at 9:10 AM ET this morning.  Justin spoke about a Bespoke Premium report sent out yesterday that highlighted the market's typical reaction on the day following a large down day. Bloomberg_4

Wednesday
Feb062008

Hang Seng Down 5% Overnight

Losses in the US market followed through to Asia overnight as Hong Kong's Hang Seng index fell 5.4%.  To find a bigger one day decline in the index, one needs to look no further than January 22nd when the index fell 8.2%.  In fact, even though the year is less than six weeks old, last night's decline ranks as only the third worst year to date.  So much for the whole global decoupling thesis.

Hang_seng_5_declines_4

Tuesday
Feb052008

Today's Russell 1,000 Winners and Losers

From our daily Stock Odds report available to Bespoke Premium subscribers, below we highlight the Russell 1,000 stocks that were up or down the most today.  We also highlight all prior days (over the last 5 years) that the stocks had similar moves and how they reacted the next day. 

For example, WHR has been up more than 10% just one other day over the last 5 years (today it was up 10.31%).  On the day following its prior +10% move, it was up another 4.42%.  On the other hand, WMG was up 9.39% today, but it has averaged a decline of 2.35% on the day following moves of 9% or more.

As shown, WOOF was the worst performing stock in the index today, declining 18.66%.  WOOF was followed by IMB (-17.87%), NYX (-14.14%) and SPWR (-12.32%).

Largeupdown_2 

Tuesday
Feb052008

Updated S&P/Case-Shiller Median Home Price Charts

As we typically do each month, below we highlight some updated housing charts based on the most recent S&P/Case-Shiller Median Home Price indices.  The first table below shows the percent change from each city's peak median home price (most occurred in 2006) to its current level (November 2007).  As shown, the composite 10-city index is down 9.4% from its highs.  San Diego has fallen the most at -16.3%, followed by Miami (-15.3%) and Las Vegas (-14%).  Chicago has fallen the least from its peak at -4.1%.  Denver, New York and Boston are the other 3 cities that have fallen less than the composite index.

Caseshiller

The charts below are historical monthly year-over-year percent changes in home prices for all 20 cities that S&P/Case-Shiller track.  We also include the composite 10-city and 20-city indices.

Case

Case2

Case3

Case4    

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Tuesday
Feb052008

One Percent Moves Are More Common Than Uncommon

Typically, a daily move of one percent in the S&P 500 is considered a big up or down day.  This year, however, moves of one percent or more have become the norm.  Over the last twenty trading days, the S&P 500 has risen by at least one percent seven times and declined by more than one percent on eight occasions.  This makes a total of fifteen one percent days over a twenty day period.  In the chart below, we highlight prior occasions since 1990 where the S&P 500 had fifteen one percent days over a twenty trading day period.  As shown, the volatility we have seen in the market is extremely uncommon.

One_percent_moves

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Tuesday
Feb052008

A Short Covering Rally

From the 1/22 bottom through yesterday, the average stock in the S&P 500 was up 8.96%.  We broke the index into deciles (50 stocks in each decile) based on each stock's short interest as a percentage of float and then calculated the average percent change of each decile from 1/22 to 2/4.  As shown below, the decile of stocks with the highest short interest was up a whopping 17.1% from the bottom, while the decile of stocks with the lowest short interest was only up 5.3%.  This analysis clearly highlights that the most recent gains have come from large amounts of short covering.

Sidecile

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Tuesday
Feb052008

Sector Earnings Growth in the Fourth Quarter

With earnings season more than halfway completed, below we highlight the actual year over year EPS growth numbers by sector.  As shown, earnings in the Financial sector are down 120% from Q4 '06.  The Consumer Discretionary sector is down 27%, and the Materials sector is down 5%.  As a whole, earnings for the S&P 500 are down 24%.  However, there are plenty of sectors that have showed strength, and when you strip out Financials, year-over-year earnings growth for the S&P 500 is actually 18%.  Telecom earnings are up 57% and Technology earnings are up 31%.

Q408

We went back to the start of the fourth quarter to see what analysts were predicting for earnings back then.  As shown, on October 4th, analysts were expecting Q4 earnings in the Financial sector to actually grow 2%.  They were expecting Consumer Discretionary to grow 17% and the entire S&P 500 to grow 11%.  While they got Financials, Consumer Discretionary and Materials wrong on the downside, they got plenty of sectors wrong on the upside as well.  Energy earnings were only expected to grow 11%, and they are currently at 21%.  Utilities were expected to grow 15%, and they are currently at 26%.  Technology earnings are currently at 31% versus expectations of just 20% last October.   

Q4081 

Looking at these numbers would probably lead an investor to believe that Tech, Energy, Utilities and Telecom would be performing great, while Financials and Consumer Discretionary would be doing terrible.  However, it highlights the predictive mechanism of the market, because Financials and Consumer Discretionary tanked leading up to earnings season.  Over the past few weeks, these beaten down sectors have performed great, indicating that investors are expecting earnings to turn around for them over the next few quarters.  And even though Technology is doing great as far as Q4 earnings are concerned, the sector's recent poor price performance indicates future earnings will probably slow significantly. 

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Monday
Feb042008

What's Up With GOOG?

Google (GOOG) is now down 33% from its closing high of $741.79 reached on November 6th, 2007.  Many investors are saying the stock simply ran too far too fast since IPOing back in August 2004, and that the company is overvalued.  At its peak, GOOG was up 772% from its IPO price of $85.  After 871 trading days, the stock is now up 483%.  We decided to compare Google's performance since its IPO to other technology stocks at this point in their lives as public companies.  Market cap aside, after 871 trading days, MSFT was up 458%, AMZN was up 1,783%, EBAY was up 1,789% and YHOO was up 7,918%. 

Compared to AMZN, EBAY and YHOO at this stage in their lives, GOOG looks like a bargain.  We all know that AMZN, EBAY and YHOO went public during Tech's heyday, but AMZN and EBAY are currently up 3,500% since their IPOs -- nearly double the price that they were at 871 trading days after going public.  YHOO is the only stock in the list that is currently lower than where it was 871 trading days in, but it was also up by far the most at 7,918%.  And even though GOOG likes to think of itself as the anti-MSFT, it is trading most similarly to MSFT at this stage in its career (483% vs 458%).  Twenty years from now, GOOG can only hope that it is up 43,000% from its IPO price like MSFT currently is.

Googipo

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Monday
Feb042008

S&P 500 Growth vs Value

After underperforming value stocks for most of the last five years, it appeared as though the pendulum was finally shifting in favor of growth stocks during the second half of 2007.  However, as the chart below illustrates, the party for growth stocks didn't last long.  Almost in unison with the change of the calendar, the rally in growth stocks has come to a grinding halt this year as value stocks have taken back the reigns of outperformance.

Growth_vs_value

Monday
Feb042008

Shanghai Composite Up 8.13%

China's Shanghai Composite was up 8.13% today, its biggest gain since it went up 8.21% on July 8th, 2005.  We went back 10 years and found all days where the Shanghai Composite went up 5% or more to see how the index reacted on the following day and over the following week.  As shown below, the index has averaged a gain of 0.94% versus an average 1-day gain of 0.07% on all days over the last 10 years.  The Shanghai Composite's average change in the week following a +5% day is a little less muted at 0.44%, but it is still better than the average 1-week change of 0.33%.

Lgupdays1 

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Monday
Feb042008

Russell 1,000 Stocks Furthest Above and Below Their 50-Day Moving Averages

After a sharp rally in Homebuilders and Financial stocks, many of them are now trading well above their 50-day moving averages.  As shown below, IMB, PHM, BPOP, ETFC, WM, DHI, RYL and KBH are all trading more than 25% above their 50-day moving averages.  These stocks have had bounces off of their bottoms of more than 30% in a very short time period.  While they are currently trading well above their 50-days, they still have a long, long way to go to get back to their normal trading ranges over the past 2 years.

50dayabove1

Technology stocks litter the list of Russell 1,000 stocks furthest below their 50-day moving averages.  Key names like AAPL, GOOG, GRMN and FSLR that used to be on the most overbought list are now more than 15% below their 50-days.  Since the start of the year, there has been a clear shift in the direction of the momentum stocks from the past couple of years.

50dayabove

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