Zeev's Turnips Patch-No Politics (ZEEV)

[Train Guy]

Have you considered switching over to doing FA screens as opposed to TA screens for picking swing trades? What use to be Multex got bought by Reuters, and they have 19 ReutersSelect Screens, http://dai.investor.reuters.com/ReadHTML.aspx?target=%2fopinion%2ffind%2fabout. It's on the left under Ideas & Screening. Since January 2000 collectively the screens have doubled. Their best screen is up by 7.5 times. I've mentioned them before, but I've yet to see anybody doing anything with them. They're right up your alley. They have free screening tools, excel spreadsheets, a 4 year track record and Mark Gerstein who came up with them does a few columns a week on them.

Being a daytrader, I aware of them, but not really interested. For swing traders it appears to be a gold mine of information. Doubling your money every 4 yrs. will turn $31,250 into $1 million after 20 yrs. And that's without adding any more money. If somebody was to start a board, say ReutersSelect Swing Trades, I'm sure a bunch of you swing traders could cherry pick through the screens and do better than the 20% a year average all 19 screens have been gotten. They're best screen below has been doing better than 60% and that's picking "value" stocks.

On the contrary
08 May 2004
Marc Gerstein - Director of investment research

Following recent market turmoil, our strongest, but most risky, screen is looking a lot more benign.

Those who regularly follow the Reuters Select stock lists might wonder why I've devoted so little commentary to the Contrarian Opportunities screen, our runaway number-one performer. The answer is that for a long time, few stocks (usually five or less and sometimes, none) have made the list. But after the stock market's horrible performance in April, the screen's population has suddenly surged. And its new denizens aren't entirely made up of tiny outfits; there are some big, easily tradable names on the list.

Might this be seen as a market timing signal? Perhaps. My unscientific impression is that this screen tends to produce larger numbers of more respectable names when the market is at low points, or as some might say, oversold levels. Conversely, when the market is really heating up, the lists tend to be skimpier in size and quality.

Perhaps there is a timing message here. But I'd prefer to consider what the size and quality of the lists are saying about market psychology. Consider the tests used in the screen, which are as follows:

Share price, over the past four weeks, suffered a decline of more than 15% and was worse than four-week industry average share price change over that period
EPS growth must be above the industry average over the past three and five year periods
5-year average operating margin must be above the industry average
5-year average ROI must be above the industry average
5-year average return on equity must be above the industry average

Notice the dissonance between the first test, which actively seeks poor recent market performance, and the others, which paint a picture of substantial fundamental strength. The naive contrarian view maintains that the Wall Street herd is dumb and that the contrarian individual is smarter. That definitely soothes the ego, but contributes little to an understanding of the real world. No matter how unromantic is to acknowledge this, the plain fact is that there are a lot of smart people out there who have reasons for acting as they do. Some may have different goals and therefore disagree with the reasons. But it doesn't make the reasons any less valid (after all, everybody is entitled to pursue their own goals).

This suggests a different slant on the screen. Let's assume that the poor market performance it takes to pass the first test occurs because of some clearly identifiable here-and-now problem. Now, the prototypical situation would be one in which a company with strong fundamentals has hit a snag. To what extent is the market willing to look beyond current difficulties.

On one level, we might suggest that the market is always impatient and focused on the here-and-now. But that's an oversimplification. There are degrees of patience and at some times, the market is more or less willing to look ahead than at other times. A lot of this hinges on the market's confidence in the future and willingness to assume that today's problems are a short-term thing, rather than the start of a long and ugly trend.

Now we can see the relevance of a broad market view. When stocks are hot, investors are much more willing to look forward. Hence quality companies don't tend to find their shares pounded heavily. Hence the reason for the skimpy lists during bullish periods. When the market is struggling, investors are much more willing to ignore good companies. That results in a larger number of names in this screen.

These psychological dynamics are similar to those that produce oversold and overbought readings in other market indicators. So I wouldn't completely ignore the screen's market-oriented message. The screen might tell us that the mood is atypically bearish, but it does not tell us about when the aberration might be corrected (this being similar to the sorts of messages delivered by indicators like the percent of advisors who are bullish or bearish).

Performance Record

Tables 1 and 2 show how this screen has performed in the past.

Table 1
Reuters Select Screen single-month Performance Closeup

------------------------------------------------------ Contrarian screen --- S&P 500
Total % change: 1/28/00 thru 4/30/4 ____________ +625.25 __ -18.59
Average monthly % change: 1/28/00 thru 4/30/04 ____ +4.85 __ -0.27
Monthly standard deviation: 1/28/00 thru 4/30/04 _____ 13.21__ 5.06
Total % change: 1/27/04 thru 4/30/04 _____________ +2.71__ +2.11
Best monthly % change for screen: 12/03 __________ +56.13 __ +4.75
Worst monthly % change for screen: 7/02 __________ -16.83 __ -12.69
Average monthly screen % change when S&P 500 up ___+11.66 __+3.55
Average monthly screen % change when S&P 500 down __ -3.01 __ -4.57
# months screen above S&P 500 -- 33
# months screen equal to or below S&P 500 -- 18
All stocks appearing in a screen are deemed "held" in equally-weighted portfolios for one month. On a Friday near the end of each month, the screens are re-run and "portfolios" reconstituted.

Table 2
Reuters Select Screen three-month Performance Closeup

--------------------------------------------------------------- Contrarian screen -- S&P 500
Average 3 mo. % change: 1/28/00 thru 4/30/04 _________ +2.51 __ -1.21
3 mo. standard deviation: 1/28/00 thru 4/30/04 __________ 17.78 __ 8.09
Total % change: 1/27/04 thru 4/30/04 ________________ +2.76 __ +1.22
Best 3 mo. % change for screen: Nov, Dec '03, Jan '04 __ +56.13 __ +4.75
Worst 3 mo. % change for screen: Nov, Dec, Jan '01 ___ -32.64 __ +3.22
Average 3 mo. screen % change when S&P 500 up ___ +11.28 __ +5.42
Average 3 mo. screen % change when S&P 500 down __ -6.01 __ -7.57
# 3 mo. periods when screen above S&P 500 -- 27
# 3 mo. periods when screen equal to or below S&P 500 -- 22-
All stocks appearing in a screen are deemed "held" in equally-weighted portfolios for three months.

This is a measurement of 3-month performance, not a portfolio simulation. Hence there are overlapping periods. For example, one 3-month period can comprise Jan-Feb-Mar, another can comprise Feb-Mar-Apr, another can comprise Mar-Apr-May, and so forth.

To say it's been a powerhouse would be an understatement. It would also be an oversimplification. As noted, the screen experiences prolonged periods with few stocks on the list. That exposes it to a huge element of hit or miss, which can be seen in the especially wide standard deviation. (a measure of volatility). So it's especially important here to do your stock-by-stock homework before you invest.

Scanning the list

Table 3 identifies stocks recently appearing in the screen that are favorably rated by analysts. This is an interesting list in that analysts aren't usually known for being positive about companies experiencing difficulties. Here, however, it appears that future and presumably better prospects are more visible than usual.

Table 3
Contrarian stocks with bullish ratings
Company - Industry
Chelsea Property Group (CPG.N) Real Estate Operations
Craftmade International, Inc. (CRFT.O) Appliance & Tool
International Game Tech. (IGT.N) Casinos & Gaming
The Mills Corporation (MLS.N) Real Estate Operations
New York Community Bancorp, Inc. (NYB.N) S&Ls/Savings Banks
O2Micro International Ltd (Wrong symbol (OIM)) Electronic Instr. & Controls
Overland Storage, Inc. (OVRL.O) Computer Storage Devices
Schnitzer Steel Industries, Inc. (SCHN.O) Iron & Steel
SanDisk Corporation (SNDK.O) Computer Storage Devices
Trinity Biotech plc (ADR) (TRIB.O) Biotechnology & Drugs
Ixia (XXIA.O) Electronic Instr. & Controls

Table 4 identifies stocks recently appearing in the screen with declining short interest.

Table 4
Contrarian stocks with short covering
Company - Industry
Catellus Development Corp (REIT) (CDX.N) Real Estate Operations
Chelsea Property Group (CPG.N) Real Estate Operations
Craftmade International, Inc. (CRFT.O) Appliance & Tool
Hospitality Properties Trust (HPT.N) Real Estate Operations
Mobile TeleSystems OJSC (ADR) (MBT.N) Communications Services
The Mills Corporation (MLS.N) Real Estate Operations
NVIDIA Corporation (NVDA.O) Semiconductors
O2Micro International Ltd (OIIM.O) Electronic Instr. & Controls
Catalina Marketing Corp. (POS.N) Advertising
Power Integrations, Inc. (POWI.O) Semiconductors
QLogic Corporation (QLGC.O) Semiconductors
Dr. Reddy's Laboratories (ADR) (RDY.N) Biotechnology & Drugs
Novamerican Steel Inc. (TONS.O) Iron & Steel
Trinity Biotech plc (ADR) (TRIB.O) Biotechnology & Drugs
Universal Health Realty (XXIA.O) Real Estate Operations

Table 5 identifies stocks recently appearing in the screen with recent (past six months) insider buying.

Table 5
Contrarian stocks with insider buying
Company - Industry
Anworth Mortgage Asset (ANH.N) Real Estate Operations
CBL & Associates Properties, Inc. (CBL.N) Real Estate Operations
Catellus Development Corp (REIT) (CDX.N) Real Estate Operations
Craftmade International, Inc. (CRFT.O) Appliance & Tool
First Health Group Corp. (FHCC.O) Insurance (Miscellaneous)
K-Swiss Inc. (KSWS.O) Footwear
RAIT Investment Trust (RAS.N) Real Estate Operations
SanDisk Corporation (SNDK.O) Computer Storage Devices
Virginia Commerce Bancorp (VCBI.O) Regional Banks
Weingarten Realty Investors (WRI.N) Real Estate Operations

Table 6 identifies stocks recently appearing in the screen with low risk-alert scores. This seems to present an odd juxtaposition in that you'd think all or most of the stocks on this screen would fare poorly under this sentiment-oriented measure. But sentiment cuts a broad swath and the screen measures only aspect of one element of it. Sentiment gauges on the stocks listed here are not as poor as they might be, suggesting a lesser level of overall perceived risk.

Table 6
Contrarian stocks with low risk alerts
Company - Industry
American Mortgage Acceptance Company (AMC.A) Real Estate Operations
Anworth Mortgage Asset (ANH.N) Real Estate Operations
Catalyst Semiconductor (CATS.O) Semiconductors
Catellus Development Corp (REIT) (CDX.N) Real Estate Operations
China Telecom Corporation Limited (ADR) (CHA.N) Communications Services
ClearOne Communications (CLRO.PK) Communications Equipment
Chelsea Property Group (CPG.N) Real Estate Operations
Entertainment Properties Trust (EPR.N) Real Estate Operations
Hospitality Properties Trust (HPT.N) Real Estate Operations
The Mills Corporation (MLS.N) Real Estate Operations
O2Micro International Ltd (OIIM.O) Electronic Instr. & Controls
Pan Pacific Retail Properties, Inc. (PNP.N) Real Estate Operations
Catalina Marketing Corp. (POS.N) Advertising
RAIT Investment Trust (RAS.N) Real Estate Operations
SigmaTron International (SGMA.O) Electronic Instr. & Controls
SpectraLink Corp. (SLNK.O) Communications Equipment
Trinity Biotech plc (ADR) (TRIB.O) Biotechnology & Drugs
Universal Health Realty X (UHT.N) Biotechnology & Drugs
Virginia Commerce Bancorp (VCBI.O) Regional Banks
Weingarten Realty Investors (WRI.N) Real Estate Operations
Yanzhou Coal Mining Co. (ADR) (YZC.N) Coal

Noteworthy stocks

Here are some stocks I picked from the tables above. Based on the nature of this screen, expect to see obstacles, things to worry about.

In these cases, the challenges deal with stock valuation. All four are pretty good companies that play leading roles in their respective industries. But each, in their own way, got over hyped and the stocks surged too far. Recently, all have corrected sharply thereby earning them spot in this screen. In assessing the companies, the issue is whether the current, reduced, stock prices are reasonably aligned with achievable future prospects. These, in my opinion, are less risky than situations where the future prospects of the companies (i.e. calling for assessment of whether current problems are temporary) are being called into questions.

SanDisk (SNDK.O): This company is the leading manufacturer of flash memory products. This is the kind of memory that retains data even after power is turned off; i.e. the thing that lets your cell phone retain stored phone numbers even without power. Demand is strong because of an increase in the different kinds of uses. Cell phones is one example. Film, so to speak, for digital cameras is another. Storage for digital music players is another. The next immediate wave of growth is likely to come from removable memory cards for storing pictures taken with cell phones. This patent-rich firm has licensed technologies in exchange for assured supplies of sometimes-hard-to-get chips. The big negative was valuation. Concerns along this line caused the stock to get pummeled, along with many other tech issues. I wouldn't yet say it's cheap. But it is now at a level that at least can be rationally defended based on credible EPS growth expectations.

International Game Tech. (IGT.N): Here's another market leader, this time in computerized gaming products, such as video slots and poker machines. Following a sharp upward slope that characterized much of 2003 and early 2004, this stock corrected from its highs, albeit not to the degree experienced by SNDK. IGT's trailing 12 month P/E is very high, but near-term growth prospects seem solid enough to make the forward P/E ratios tolerable. The growth, here, is based on expansion of gaming to new jurisdictions and a strong equipment replacement cycle, paced by the emergence of cashless machines (operated by magnetic cards that track customer balances). Eventually, this replacement cycle will wane and growth will slow. But the Street is already thinking about that, which is a good thing since expectations can more rationally align with the stock price (a process that already got started). And there is room for more upside surprise if new jurisdictions, especially overseas, adopt gaming.

K-Swiss (KSWS.O): Continuing with the theme of market leading success stories with stocks that have been hit by valuation concerns, we find this maker of classic sneakers, the basic design being one that was conceived in 1966. The good part of this story is that the classic, almost timeless, nature of KSWS' core product line leaves it less vulnerable to the fashion-oriented whims its rivals wrestle with all the time. On the other hand, retro has, lately, been a fashion unto itself, enough so that we should assume KSWS' recent results are at a level that is likely to prove unsustainable. But again, the market seems to already be, or at least going, there. The stock is well off its highs and now seems to be at levels that are consistent with realistic growth prospects from the current level.

Schnitzer Steel Industries (SCHN.O): This company recycles metals and winds up extracting, among other things, steel scrap which is sold as raw material for electric arc furnace (mini-mill) steel producers. The company became a China play because of soaring steel production there and the fact that Chinese steelmakers are a major customer group for SCHN. When China was chic on Wall Street, SCHN stock was hot. More recently, it turned ice cold, especially in light of the Chinese government's expressed intent to reign in that country's recent probably-unsustainably strong rates of economic growth. However, at current levels, it seems like the stock reached realistic levels of valuation. That's not to say it's going to immediately stop falling; the market tends to over-react, not just on the upside but on the downside as well. But if we can look beyond the near-term noise, the economy is strengthening, so too is China (even after a cool down, progress there is likely to remain pretty good by most other standards), and, hence, steel is probably at the early stage of a cyclical upturn.

http://dai.investor.reuters.com/Article.aspx?target=%2fopinion%2ffind%2fscreeningmarket