Saturday, April 5, 2008

On Recession, Cardiac Stents, Garbage Collection and Ballistic Missiles


Click on images for full-size and details.
By this time you must be pretty disillusioned with analysts' estimates and forecasts as well as what Companies tell us they are worth i.e. their book value.Using ValuEngine's Model and Viscovery's Self-Organizing Map, we take a look at what kind of stocks appear in our stock pick list if we ignore analysts' estimates, Price/Book ratios, Price/Earnings and Price/Sales ratios. We also ignore the forecasts of ValuEngine's Forecast Model that does simulation treating stock prices as mean-reverting stochastic processes, since at this stage we believe that certain Model variables such as Average Volume [Liquidity], Volatility, and Size should have greater weighting in the Model parameters. In the top image, the statistics of Cluster 3 [S3] are the most favorable when measured in terms of standard deviation from the screened population. The screen used is somewhat similar to the "stocks for a recession screen" of the March 11 post http://randomthoughtsofanagingbabyboomer.blogspot.com/2008/03/criteria-for-stock-picking-in-recession.html . In the middle image showing the Self-Organizing Map, Cluster 3 is the yellow colored cluster, with the Ticker Symbols in Red colored font. The last image shows the stocks in Cluster 3, with some of their characteristics such as Valuation, Average Volume, Market Cap, Volatility and Sharpe Ratio. ("Valuation" is defined as in the ValuEngine Valuation Model [see http://www.valuengine.com/] and not the valuation as calculated using conventional financial ratios.<-- Oops sorry, image 3 missing, but read on below:
Cluster 3, contains stocks of Companies in what we usually view as 'recession resilient' industries /sectors such as Public Utilities [Edison, Public Service Enterprice Group, Florida Power & Light], Defence [Raytheon, Northrop Grumman], Waste Management [Republic Services, Waste Management Inc], and Medical Supplies [Danaher, Baxter]. We are not sure why Auto Parts Mfg companies like Eaton , Ace and Johnson Controls appear here, unless its because the cheap US$ has contributed towards their export business. This also appears to be the case for United Technologies and Emerson Electrical who are in the Capital Goods sector.
And there you have it: If you are risk averse and feel that the current situation may have more downside, stick to garbage collectors, makers of cardiac stents and makers of weapons of mass destruction!

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