PB Multiple

Text Box: Wiser Trader Stocks and Options Newsletter
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Issue No. 44 – September 19, 2005 Prescott, Arizona Systems@WiserTrader.com

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1.0 Trading

Last week it was shown that price to earnings ratio (PE) only slightly impacts the probability of 1 year stock price performance. This issue investigates the effect of the year ago price to book ratio (PB) on 52 week price performance.

1.1 PB Multiple

The analysis again involved NYSE, NASDAQ and AMEX stocks that had earnings and were priced above $4. The study eliminated Advanced Depository Receipts, Over the Counter Stocks and Exchange Traded Funds. The result was a group of 3230 stocks shown in Figure 1. The chart on the left appears to show an inverse relationship between PB and 52 week price gain.

FIGURE 1

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However, as before, zooming in closer, the chart on the right shows that even for low values of PB, one could have obtained a wide range of possible outcomes.

The 3,230 stocks were sorted into six PB ranges and used to plot 52 week price gain histograms. The data is summarized in Figure 2. Market data for the past year shows that the probability of a price decline indeed increases with PB ratios up to about 10. The lower the PB, the greater the probability of a price gains from 0 to 25%. Approximately 20% of stocks had a gain of 25 to 50% independent of PB. Nearly 15% of stocks had a price gain of 50 to 100% independent of PB.

A pattern that was seen with extreme PE ranges (less than 10 and greater than 50) is also seen with PB. The extreme ranges of PB (less than 1 and greater than 10) contained the predominant number of stocks with price gains of more than 100%.

FIGURE 2

The percentages of stocks in Figure 2 can be treated as probabilities of price gains for PB ranges over the past year only. With PB we see a stronger correlation with 52 week price gains compared to PE. Lower values of PB clearly provided a lower probability of 52 week price declines. The combined effects of PE and PB point to yet another level of analysis. Before getting into greater depth, next weeks newsletter will take a look at the effect of year ago price to sales on 52 week stock price gains.

2.0Market Analysis

On the brink of earnings warning season and the possibility of choppy markets ahead, the markets were mixed most of the week with some mid week selling to end the week on Friday with an up note with high volume. Oil prices declined moderately and inflation appears to be in check. The Fed meets on Tuesday and it is too close to call whether it will hold off on the next rate increase.

Stock price highs and lows are now like the peaks and valleys in a sand box that is being shaken back and forth by the sideways motion of the market. The peaks crumble and the valleys get filled in. It’s becoming flat everywhere. Good trades in either direction are harder to find.

Figure 1 compares index tracking stocks for the major averages with Sector SPDR’s.

FIGURE 1

Figure 2 compares index tracking stocks with five leading ETF’s for the week.

FIGURE 2

In Table 2A, the broader market edged upward for the week. Key industry ETF’s in Table 2A are Biotech and Semiconductors which confirm the NASDAQ. Transportation confirms the Dow Jones Industrial Average according to Dow Theory. Banking and Financials are confirming indicators for the S&P 500. Gold and Real Estate are respective indicators for the inverse health of the currency and consumer spending.

Table 2A

Index Tracking Stocks, Key Industry ETF’s and Sector SPDR’s

	1 month	1 wk ago	2 wks ago	3 wks ago	4 wks ago
SPY (S&P 500)	0.8%	-0.9%	1.9%	1.3%	-1.4%
DIA (DOW)	0.5%	-0.5%	2.1%	0.7%	-1.7%
QQQQ (NASDAQ 100)	1.5%	-0.6%	2.2%	0.8%	-0.9%
IWM (Russell 2000)	2.8%	-0.7%	1.8%	2.6%	-0.9%
GLD, GOLD	5.1%	2.2%	1.3%	1.5%	0.0%
RKH, Banking	-0.5%	0.1%	0.8%	1.0%	-2.4%
IYT, Transportation	-2.2%	0.5%	-0.9%	-0.7%	-1.1%
SMH, Semiconductors	1.8%	-1.2%	2.4%	0.5%	0.1%
BBH, Biotechnology	4.4%	-0.8%	1.7%	3.7%	-0.3%
IYR, Real Estate	3.0%	-1.0%	1.4%	2.2%	0.4%
OIH, Oil	5.8%	-1.5%	2.7%	4.7%	-0.1%
XLE, Energy	8.5%	-1.0%	3.6%	6.2%	-0.4%
XLU, Utilities	6.2%	0.5%	1.3%	2.6%	1.6%
XLB, Materials	-1.0%	-0.6%	1.8%	0.8%	-3.0%
XLI, Industrial	0.2%	-0.4%	1.6%	0.5%	-1.4%
XLK, Technology	1.1%	-0.3%	1.5%	0.7%	-0.8%
XLV, Healthcare	1.9%	-1.3%	2.5%	1.9%	-1.2%
XLF, Financials	0.7%	0.3%	1.3%	1.2%	-2.1%
XLP, Consumer Staples	-0.4%	-1.2%	1.2%	0.6%	-1.0%
XLY, Consumer Discretionary	-2.2%	-2.0%	2.3%	-1.2%	-1.2%

Market sentiment is shown in Table 2B.

Table 2B

VTO Market Sentiment Indicators

Sentiment Indicator	Current	Last Week	2 Weeks Ago	Complacent	Cautious
VIX **	11.22	11.98	13.57	< 20	> 50
VXN ***	14.58	14.27	15.67	< 30	> 70
Put/Call Ratio	0.522	0.510	0.612	< 0.6	> 0.7
%Bulls - %Bears	26.5%	24.0%	23.8%	> 29%	< 20%
Below 20 day SMA = Buy signal. * Below 20 day SMA = Buy signal.

3.0 Procedure

The following watch lists contain stock candidates for consideration. They are not necessarily trades. Categories include check lists for insider buying and cash rich companies, as well as, filters that employ stock picking methods used by six important master traders. Stocks are ranked by where their current price falls in the range defined by their 4 week highs and lows. Stocks at their 4 week highs are ranked 100% while those at their 4 week lows are ranked 0%.

The “Reference” is the date that a stock passed the indicated filter and was added to or returned to the list. The “% Change” is how the price has changed since the reference date. Stocks that are down 10% or more after being listed are removed. The “% from Max” is the percentage the price has declined from the maximum price reached since the reference date. Stocks that are down 8% from their highs after being listed are flagged in yellow. Stocks that are down 15% from their highs after being listed are removed. More information on filters is available on the web site.

A performance summary of filtering techniques for check lists and master trader selection methods is given in Table 3A.

Table 3A

Stock Filter Summary

Filter	Avg. % Change Since Listed	Avg. % Change Friday	1 Month	1 Week Ago	2 weeks Ago	3 Weeks Ago	4 Weeks Ago
Net Insider Buying	7.7%	-0.5%	8.3%	0.1%	2.3%	-0.4%	6.5%
Cash Rich Companies	-0.5%	-0.3%	0.2%	-1.4%	-0.4%	1.0%	0.9%
Growth Momentum Stocks	12.3%	0.6%	3.6%	-0.4%	2.1%	3.9%	-1.8%
Lynch Stocks	14.0%	0.7%	4.8%	0.9%	1.5%	2.8%	-0.5%
Buffett Stocks	22.7%	1.7%	4.8%	2.9%	2.0%	1.6%	-1.6%
Graham Stocks	11.6%	0.9%	6.2%	0.8%	1.2%	3.2%	0.9%
Templeton Stocks	6.9%	1.1%	0.9%	0.1%	1.4%	0.2%	-0.8%
Zweig Stocks	18.4%	0.6%	12.2%	-0.2%	3.6%	5.3%	3.3%
Average	11.6%	0.6%	5.1%	0.4%	1.7%	2.2%	0.9%

Key

Passed Recent Filter

Companies that have experienced net insider buying within the past 6 months of 5% or more of issued stock are listed in Table 3B. These stocks should also appear in one of the master trader screens or meet additional screening criteria before being given serious consideration. This list is a mixture of stocks that are optionable and those that are not.

Table 3B

Net Insider Buying Check List