______________________________________________________________________________
Issue No. 52 – November 14, 2005 Prescott, Arizona Systems@WiserTrader.com
______________________________________________________________________________
1.0 Trading
Continuing with background work on a value stock filter, this week we seek a correlation between an absolute price to book (PB) value of 1 needed to minimize the probability of loss and a ratio of PB to industry PB that produced a similar result.
1.1 Ratio of PB to Industry PB
As mentioned last week, absolute measures of a stock’s value indicator do not take industry averages into account. The PB ratio is no exception. Yahoo-Finance at http://biz.yahoo.com/p/sum_prid.html shows that industry PB values range from a negative 107 for House-wares and Accessories to a positive 159 for the Soft-drink industry. The lowest positive industry value is 1.38 for Major Auto Manufacturers.
We found earlier that, based on 1 year data ending in September 2005 (Figure 1), a price to book ratio of less than 1 had the lowest probability of loss. For data ending in October 2005 (Figure 2), that correlates with a ratio of PB to industry PB of 0.5 to 0.75. The October data involved a greater overall percentage market decline compared to the September data. PB results are similar to those for price to earnings, as shown in the third column of Table 1.
Table 1
Valuation Metrics to Minimize the Probability of Loss
|
Valuation Metric |
Stock Value That Reduced Risk of Loss |
Corresponding Ratio of Stock Value to Industry Value |
|
Price to Earnings (PE) |
10 to 15 |
0.5 to 0.75 |
|
Price to Book (PB) |
< 1 |
0.5 to 0.75 |
|
Price to Sales (PS) |
< 0.5 |
? |
|
Return on Equity (ROE) |
10 to 20 |
? |
|
Price to Free Cash Flow (P-FCF) |
< 5 |
? |
© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser. Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.
FIGURE 1
FIGURE 2
We will continue to correlate absolute valuation metrics with ratios to their industry values to complete Table 1. Then we can use the filter of Table 1 to begin tracking some value stocks.
2.0 Market Analysis
Slightly bullish sentiment led to the third straight weekly gain for the S&P500 index. It was mostly a quite week with lower unemployment claims, a lower trade deficit and lower energy prices. Next week things will pick up with inflation data, retail sales data and housing start data.
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 the capacity for consumer spending.
Table 2A
Indices, Key Industry ETF’s and Sector SPDR’s
|
|
1 month |
1 wk ago |
2 wks ago |
3 wks ago |
4 wks ago |
|
Dow Jones Industrials |
3.9% |
1.5% |
1.2% |
1.8% |
-0.7% |
|
NASDAQ |
6.7% |
1.5% |
3.8% |
0.4% |
0.8% |
|
S & P 500 |
4.1% |
1.2% |
1.8% |
1.6% |
-0.6% |
|
Russell 2000 |
5.3% |
1.3% |
3.6% |
0.4% |
-0.1% |
|
GLD, Gold |
0.0% |
2.8% |
-3.6% |
1.5% |
-0.6% |
|
RKH, Banking |
9.1% |
3.7% |
0.4% |
2.6% |
2.0% |
|
IYT, Transportation |
12.4% |
3.8% |
5.4% |
3.0% |
-0.3% |
|
SMH, Semiconductors |
4.4% |
2.0% |
5.9% |
-4.1% |
0.8% |
|
BBH, Biotechnology |
10.3% |
2.3% |
6.0% |
2.6% |
-0.8% |
|
IYR, Real Estate |
5.7% |
4.4% |
-1.2% |
2.5% |
-0.1% |
|
OIH, Oil |
2.1% |
-4.7% |
3.2% |
6.5% |
-2.5% |
|
XLE, Energy |
-1.8% |
-4.1% |
2.5% |
4.9% |
-4.8% |
|
XLU, Utilities |
-0.7% |
-0.8% |
-0.5% |
2.3% |
-1.7% |
|
XLB, Materials |
8.7% |
2.7% |
1.3% |
3.6% |
0.8% |
|
XLI, Industrial |
3.0% |
1.5% |
1.5% |
1.2% |
-1.1% |
|
XLK, Technology |
5.7% |
1.2% |
3.4% |
0.2% |
0.8% |
|
XLV, Healthcare |
0.9% |
1.4% |
1.3% |
0.1% |
-1.9% |
|
XLF, Financials |
8.7% |
3.2% |
1.1% |
3.2% |
1.0% |
|
XLP, Consumer Staples |
3.3% |
1.4% |
0.4% |
0.9% |
0.5% |
|
XLY, Consumer Discretionary |
5.2% |
1.4% |
3.9% |
0.1% |
-0.4% |
