backtesting - What We're Reading - StockBuz2024-03-29T08:50:40Zhttp://stockbuz.ning.com/articles/feed/tag/backtestingValue Stocks Hit (or miss) The Mark?http://stockbuz.ning.com/articles/value-stocks-hit-or-miss-the-mark2014-08-16T20:58:16.000Z2014-08-16T20:58:16.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://stock-chartist.com/wp-content/uploads/2014/07/image1.jpg"><img class="align-left" style="padding: 10px;" src="http://stock-chartist.com/wp-content/uploads/2014/07/image1.jpg?width=227" width="227" /></a>“<em>After 5 years of a bull market, the only place left to invest is in value names”</em><br />
<em>“The best protection in this volatile market are value stocks”</em></p>
<p>How reliable are these sorts of claims?  Those promoting the approach offer lists of stocks that are considered undervalued typically when they meet such financial criteria as low price/sales, low price/book value, or high, stable and growing dividends. However, they rarely attach timeframes or price targets.</p>
<p>So I decided to do some “back testing”.  By searching the term “value stock lists”, I gathered a small random sample of such lists published in 2012-13; stocks in these lists met one or more of criteria that qualifies them as “value stocks” at the time.  I then compared their stock price on the publication date with that of twelve months later; as a benchmark, those changes were compared with against the S&P 500 change over the same period.  These were selected at random and space limitations prevented including more, I suspect others would show similar results:</p>
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<li><a href="http://www.magicdiligence.com/top-10-dividend-2012-01">MagicDiligence.com: “Top 10 Dividend Yields, Lowest P/S, and Lowest P/B Stocks”</a> – 1/5/2012: “Every so often, MagicDiligence compiles a list of Magic Formula® Investing stocks sorted by their dividend yield, price-to-sales ratio, and price-to-book ratio for investors that like to use those metrics. The result produces a list of attractive value stocks for additional research.” The top 10 in each of the three metrics were:<br />
<a href="http://stock-chartist.com/wp-content/uploads/2014/07/Value-MagicDiligence.jpg"><img class="aligncenter size-full wp-image-10323" alt="Value MagicDiligence" src="http://stock-chartist.com/wp-content/uploads/2014/07/Value-MagicDiligence.jpg" height="264" width="390" /></a></li>
</ul>
<ul>
<li><a href="http://beta.fool.com/insidermonkey/2012/11/22/value-lines-6-safe-dividend-stocks/17018/" target="_blank">Valueline: “Value Line’s 6 Safe Dividend Stocks”</a> - 11/22/12 : “Value Line is an independent investment research and analysis company that has developed a safety ranking methodology which focuses on the long-term stability of company’s stock price and financial standing.  The fund invests in companies that carry Value Line’s ratings of 1 and 2, representing the most stable and financially-sound dividend-paying companies and higher-than-average dividend yield, as compared to the indicated dividend yield of the S&P 500 Composite Stock Price Index.”  The top picks were:<a href="http://stock-chartist.com/wp-content/uploads/2014/07/Value-Valueline.jpg"><img class="aligncenter size-full wp-image-10324" alt="Value - Valueline" src="http://stock-chartist.com/wp-content/uploads/2014/07/Value-Valueline.jpg" height="143" width="134" /></a></li>
<li><a href="http://www.forbes.com/sites/investor/2013/10/07/return-to-value-stocks-cisco-and-three-others-to-buy/">Forbes: “Return To Value Stocks: Cisco And Three Others To Buy”</a> – 10/7/13 : “At ValuEngine.com we show that 77% of all stocks are overvalued, 40.8% by 20% or more. 15 of 16 sectors are overvalued 13 by double-digit percentages, seven by more than 20%.  This week there are four Dow components on this week’s ValuTrader watch list.”  The list included:<a href="http://stock-chartist.com/wp-content/uploads/2014/07/Value-Fobes.jpg"><img class="aligncenter size-full wp-image-10325" alt="Value - Fobes" src="http://stock-chartist.com/wp-content/uploads/2014/07/Value-Fobes.jpg" height="127" width="134" /></a></li>
<li><a href="http://seekingalpha.com/article/538131-top-12-large-cap-stocks-selling-below-book-value">SeekingAlpha: “12 Large-Cap Stocks Selling Below Book Value”</a> : “Price-to-book ratio is used to compare a stock’s market value to its book value and it is calculated by dividing the stock price by the book value per share. The higher the price-to-book ratio, the higher the premium the market is willing to pay for the company above its assets. A low price-to-book ratio may signal a good investment opportunity, as book value is an accounting number and rarely represents the true value of the company.”<a href="http://stock-chartist.com/wp-content/uploads/2014/07/Value-SeekingAlpha.jpg"><img class="aligncenter size-full wp-image-10326" alt="Value - SeekingAlpha" src="http://stock-chartist.com/wp-content/uploads/2014/07/Value-SeekingAlpha.jpg" height="246" width="133" /></a></li>
</ul>
<ul>
<li><a href="http://247wallst.com/investing/2010/10/07/value-search-dirt-cheap-tech-stocks-stx-wdc-klic-hpq-dell-sndk-mu-csc-msft-intc/#ixzz377YgDiTI">24/7 Wall St.: “Value Search: Dirt Cheap Tech Stocks</a>” – 7/10/10:…” when you get companies that trade under 10-times believable forward earnings expectations and which have low multiples of sales and even a low implied book value, this is where value investors tend to focus.  Whether a turnaround comes or not might not even matter if stocks get “cheap enough” for the value investors.”<a href="http://stock-chartist.com/wp-content/uploads/2014/07/Value-24x7.jpg"><img class="aligncenter size-full wp-image-10327" alt="Value - 24x7" src="http://stock-chartist.com/wp-content/uploads/2014/07/Value-24x7.jpg" height="195" width="135" /></a></li>
</ul>
<p>The hit rate (performance exceeding that of the benchmark S&P 500 Index) of the 60 stocks for this random sample of five lists was 50%, not much better than randomly selecting 60 stocks from any or combination of the major Indexes.</p>
<p>We’re continually subjected to academic studies purporting to show the failure of technical analysis.  For example, Stockopedia had a piece entitled “<a href="http://www.stockopedia.com/content/technical-analysis-5-reasons-to-be-sceptical-about-charting-63806/#sthash.fkybNhXT.dpuf">Technical Analysis? 5 Reasons To be Sceptical about Charting</a> in which they quoted an academic study that back tested the effectiveness of “5000 technical trading rules” grouped into four categories:</p>
<ul>
<li>Filter Rules – prices move of various percentages.</li>
<li>Moving Average Rules – prices move above or below a long moving average</li>
<li>Channel Break-outs – prices move above or below a channel (trading range)</li>
<li>Support or Resistance Rules – prices move a certain percentage above or below a maximum or minimum price a number of periods back.</li>
</ul>
<p>;The study concluded that “no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation.”</p>
<p>I’ve now <b>turn the tables</b> and measured the effectiveness of some fundamental trading rules.  Although perhaps subject to criticism for being insufficiently rigorous, I convinces me that there is “<strong>no evidence that the profits to the fundamental trading rules are greater than those that might be expected due to random data variation</strong>“.</p>
<p>Great work courtesy of <a href="http://stock-chartist.com/2014/07/lists-of-value-stocks-often-miss-target/" target="_blank">Stockchartist</a></p>
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