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17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

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IMG_3386 (640x481)If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to include.

For the vast majority of investors, this begins with a screening process to reduce the direct share universe down to a manageable number. The problem is that most screening processes involve no validation despite the fact there is an abundance of academic literature on the topic.

In the Investing Times attempts to offer logic, academic rigour and validity to this screening process. The idea is to assess the stock universe using the 3 F’s of Investing – Fear, Fundamentals and Forces – which leads us to 17 factors that each have academic support in contributing to out-performance. They generally aim to achieve dividend strength, growth, value, stability, momentum, sector bias and pricing acknowledgement.

17 factors sharemarketThis allows us to illustrate a number of “optimal” portfolios across differing styles – including balanced, stability-focused, dividend-strength, deep-value, growth-bias and sector rotation (we highlight optimal because it is subject to varies weaknesses we are transparent about).

The underpinnings that make the research different to others is that it focuses heavily on relativity to the sector median. This is vital and a key advantage to creating out-performance on a risk-adjusted basis. For example, a utility company (typically with a high depreciation expense) should not be compared to a bank as their earnings and cash-flow are accounted for very differently. Therefore, our logic implies that the Price to Earnings ratio should be isolated and compared by sector rather than by market.

Our data has allowed us to stress-test the outcomes of a stock universe over 6 years, involving more than 850 data validation periods. We acknowledge this isn’t nearly enough to have outright conviction, however we believe a combination of 6 years of stress testing along with a body of academic literature supporting the underlining metrics is a form of validation.

Creating a portfolio using the 17 metrics

As the founder of the Investing Times and Australian Investors Association, Austin Donnelly always said, “There is a difference between a good company and a good investment”. BHP may be a good company but it is not a good investment if you buy it at the peak of a mining boom. Therefore, the idea is to create a portfolio of investments with strong fundamentals and attractive pricing. The logic is that if any of the 17 indicators hinted to a buy signal, these are recorded and scored. If all seventeen indicators are suggesting underlying appeal, there is a reasonable likelihood of strong future performance.

If you wish to see the net result and top 20 holdings using this fundamental rigour, we encourage you to request the latest report as a free one-off trial. We will send this via email as a value-add with no obligations or cost.

Trial today

RECOMMENDED BY THE INVESTING TIMES

Worried about a property crash? These nine facts answer it better than most…

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What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Headline Article, Most Viewed, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

MOST VIEWED

17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Could Donald Trump send the USA bankrupt? And why the first challenge is February next year.

| Most Viewed, Politics | No Comments
Donald Trump and economic stability rarely go hand-in-hand. While Trump insists he’ll "make this country rich again", his path to riches has been subjected to four bankruptcy negotiations and his...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...

Could Donald Trump send the USA bankrupt? And why the first challenge is February next year.

By | Most Viewed, Politics | No Comments

IMG_5997 (481x640)Donald Trump and economic stability rarely go hand-in-hand. While Trump insists he’ll “make this country rich again”, his path to riches has been subjected to four bankruptcy negotiations and his vagueness as a potential President can be summarised in “I want to be unpredictable.”

With the expectation for a close race to the White House in November this year (betting odds apparently have it as 1/3 vs 5/2 in favour of Clinton), it seems likely Donald Trump or Hilary Clinton will inherit a ticking bomb that is called the “debt ceiling”.

The debt ceiling is a piece of legislation that is intended to limit the amount the United States Government can borrow. However, well before Donald Trump rose to prominence politically, the USA Government has been amassing more and more debt, to the tune of $19.29 trillion at the latest recording and counting. This equates to a potentially dangerous ‘Debt to GDP ratio’ of 105.4% and a trajectory that means the last extension of the debt ceiling to March 2017 will need to be renegotiated again early next year.

The problem is this. If the vote is close, which it could easily be, and a majority is not created in Congress, either Trump or Clinton will have a very difficult time agreeing on terms to extend the debt ceiling further. If no agreement is made, the United States Government can’t pay its bills which leads to an abrupt default. The seriousness of this event for the USA should not be under-estimated:

“A default would be unprecedented and has the potential to be catastrophic: Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.” — U.S. Treasury report in 2011

It may not be Donald Trump or Hilary Clinton’s fault that the debt grew so substantially, and it is a complex story on why the United States has opted to take on so much debt along with the majority of the world, but whether it is Donald Trump or Hilary Clinton in office, they will hardly have had a chance to warm their seat before having to deal with this mess. Historically, debt ceiling negotiations have required an 11th hour agreement because the two political parties (Trump’s Republicans and Clinton’s Democrats) cannot agree on policy direction and block it in Congress as a re-negotiation tool.

The last occasion this “debt ceiling” was breached, it was Barack Obama’s “Obamacare” in the firing line. This would seem far less controversial than many of Donald Trump’s policies, meaning a greater risk of a stalemate and increased recessionary risks.

While Trump is known for his comments such as “Rich people are rich because they solve difficult problems”, it is another thing altogether managing a Congress that have conflicting views on policy to the extent as this 2016 Presidential Election.

It would seem Donald Trump himself has been an advocate of a stalemate and willingness to let the United States go into shutdown. His remarks prior to the 2013 debt ceiling negotiation went along the lines of “I don’t think [the United States is] going to go into default, but I do think if we allow laws like this to go through, we’re going to be in much bigger trouble long term” — Donald Trump in 2013

It begs the question on who is a more suitable candidate to lead the United States through a very tricky time politically. Forget the lacklustre growth forecast, the ageing population or the unemployment concerns, the real concern between now and the start of next year is how to handle a potential United States default.

Hilary Clinton does not have a perfect record, and it would appear likely the debt train would continue under her wing, but the alternative is Donald Trump who has been subjected to four Chapter 11 negotiations either directly or indirectly before attempting to take the White House (Trump Taj Mahal in 1991, Trump Plaza in 1992, Trump Hotel & Casino Resorts in 2004 and Trump Entertainment in 2009).

Regardless of the outcome, it is unlikely to be comical if the debt ceiling isn’t dealt with prudently and promptly. So with this in mind, which nominee do you think is better suited?

Quotes on the Debt Ceiling and its Risks:

“We’ve never gotten to the point where the United States government has operated without the ability to borrow. It’s very dangerous. It’s reckless, because the reality is, there are no good choices if we run out of borrowing capacity and we run out of cash.” Senator Jack Lew

“There is precedent for a government shutdown. There’s no precedent for default. We’re the most important economy in the world. We’re the reserve currency of the world. … If money doesn’t flow in, then money doesn’t flow out, so we really haven’t seen this before, and I’m not really anxious to be part of the process that witnesses it.” — Lloyd Blankfein, chief executive of Goldman Sachs

“The debt ceiling is such a calamitous possibility that you could go to a recession or even a depression worse than Lehman and AIG in 2008.” — Senator Chuck Schumer

“To tie [the debt ceiling] to something about whether you break the promises of the United States government to people all over the world as well as its own citizens, just makes no sense. So it ought to banned as a weapon, it should be like nuclear bombs, basically too horrible to use.” — Warren Buffett

RECOMMENDED BY THE INVESTING TIMES

Worried about a property crash? These nine facts answer it better than most…

| Investing Times News, Lifestyle, Recommended by the Investing Times | No Comments
What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Headline Article, Most Viewed, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

MOST VIEWED

17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Could Donald Trump send the USA bankrupt? And why the first challenge is February next year.

| Most Viewed, Politics | No Comments
Donald Trump and economic stability rarely go hand-in-hand. While Trump insists he’ll "make this country rich again", his path to riches has been subjected to four bankruptcy negotiations and his...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...

Recession risks: what are 10 of the top indicators to watch and why it works.

By | Economy, Headline Article, Most Viewed | No Comments

IMG_1116 (640x477)What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record of identifying recessions, and below we outline ten metrics to add to your watch-list:

  • Household spending – The amount of money households spend on everyday goods and services is the number one determinant of economic growth. It represents more than half of GDP at 55.7% and is thus a directly attributable indicator and of significant importance to any GDP insight. Household spending changes tend to change instantaneously with the rate of economic growth, however given that consumer confidence tends to go in cycles it is still a useful tool to foresee future recessionary risks.
  • Business investment – Technically called ‘private fixed capital formation’, business investment is a direct line in the GDP calculation and thus has a direct effect on recessionary conditions. Business investment accounts for 20% of GDP so it’s thus seen to be a very important component and indicator for future recessions. Apart from its direct impact, it is also a clear signal of business confidence which has flow on effects for future GDP results.
  • Dwelling formation – Dwelling formation refers to the activities involved in new and used private houses, including alterations and renovations. It now accounts for 5.3% of the entire economy and is thus seen to be strongly correlated with the overall economic growth rate. Similar to household spending, it is seen to be an indicator of consumer confidence and thus has the ability to act as a leading indicator for economic growth. An encouraging signal involves a positive and/or growing rate.
  • Corporate earnings – Corporate earnings refer to the aggregate profitability of businesses and is a data series produced to gauge the health of the corporate sub-set of the economy. If the average company is highly profitable, it makes sense that the overall economy will be expanding. With this logic, we can see a strong correlation between the current status of corporations and the future growth rate of the country. The risk of recession is seen to increase when corporate profitability is deteriorating on average.
  • Yield curve – The yield curve simply refers to the difference in ‘borrowing rates’ on 10 year bonds versus 5 year bonds. If the 10-year bond pays a higher rate than the 5-year bond, this is seen to be normal, however when the opposite occurs it is seen to be the markets way of pricing for a recession. Across the globe, there has been a very strong long-term connection between the shape of the yield curve and the risk of recession. The link in Australia has been relatively weak but remains an insightful measure of risk.
  • Historical GDP growth – It makes intuitive sense that the risk of recession is higher if the economic growth rate is off a lower base. For example, it would seem highly unlikely for a recession to occur from a base of 5% or more, but would be far more plausible to slide into recession from a growth rate of 2% or less. This momentum effect is a powerful force behind economic growth, and for this reason the historical GDP growth rate can be an insightful measure for future recessionary risks.
  • Worker productivity – The driving force behind an economy is the workforce. The more people work, or the more efficient they become, the stronger the economy tends to be. There are many useful measures to track workplace productivity, however the most useful measure tends to be the total number of hours worked as this factors in population growth and demographic changes. A low and/or falling work ethic increases the risk of recession, whilst a growing rate is a positive sign for the future economy.
  • Retail sales – Retail sales is a vital component of household spending and is a very useful measure of the future direction of the economy. If consumers aren’t shopping and money isn’t passing through people’s hands, the economy is unlikely to be growing with conviction.
    If retail sales are falling, there is a reasonably high likelihood that a recession could be impending as consumer confidence becomes dented. History has shown that this connection with GDP is strong.
  • Housing starts – The process to build a house begins with a housing approval or ‘housing start’. This commitment is a clear sign of confidence that the economy will hold up, and marks the commencement of a long list of transactions that eventually push the economy forward. The new housing starts data is subject to volatility, however, if more people are committing to build a new home, more people are signalling their confidence in the economy. This reduces the risk of a future recession.
  • Employment growth – Similar to the workforce productivity indicator, the employment rate is of vital importance for the future prospects of the economy. The total employment growth figure is a more useful measure than the unemployment rate because it accounts for new additions to the workforce. While the employment growth figure tends to have a strong instantaneous correlation with GDP, the indicator has also proven to be an effective measure for future recessionary risks.

Of course, this list is not conclusive and there are an array of other important economic fundamentals that will impact the likelihood of a recession. In reality, there is no such thing as a perfect model, simply because the economy is so dynamic.

Creating a view from the data

Despite the limitations, an individual that wants any form of success should be trying to formulate a view based on the “known-known’s” while acknowledging the inability to predict the future with any precision. On this basis, the Investing Times opens up this research to help its readers, and produces a global recession risk report that is freely available to the public via the link below. This is a value-add service at no cost that covers at least five of the major global economies.

To give readers an idea of what to expect, the chart below is a historical view of the “recession trackers” ability in Australia, with a strong connection between the leading indicators and the future GDP growth rate.

Recession tracker performance

RECOMMENDED BY THE INVESTING TIMES

Worried about a property crash? These nine facts answer it better than most…

| Investing Times News, Lifestyle, Recommended by the Investing Times | No Comments
What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Headline Article, Most Viewed, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

MOST VIEWED

17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Could Donald Trump send the USA bankrupt? And why the first challenge is February next year.

| Most Viewed, Politics | No Comments
Donald Trump and economic stability rarely go hand-in-hand. While Trump insists he’ll "make this country rich again", his path to riches has been subjected to four bankruptcy negotiations and his...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

By | Investing Times News, Most Viewed, Share-Market | No Comments

IMG_9055 (480x640)Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when it comes to money matters, and each have varied yet complimentary views on what drives the overall share-market.

Therefore, the title of this article has an underlying power behind it. “Can Warren Buffett and Robert Shiller both be wrong at the same time” is really the same way of saying “These two people are legends of their field and worth watching closely”.

The reason these two men are exceptional

Robert Shiller’s CV includes being the Professor of Economics at Yale University and a Nobel Prize winner in Economics. More importantly, he is the man behind the Shiller P/E ratio – a complex and compelling share-market indicator.

The Shiller P/E ratio is known as the more stable and reliable cousin of the Price to Earnings ratio, and is a market valuation tool that has accurately predicted the bubbles of recent decades (including famously for the 1987 Crash and the GFC in 2007/08).

Shiller PE Ratio in Australia

Shiller PE

Warren Buffett is the world’s 3rd richest man and better known for his ability to source businesses that have an understandable business model and long-term abilities to grow. He is quick to tell people he cannot predict the short-term direction of the market, however, underlying his strategy is an optimistic outlook for the overall economy and a strong consideration on its relationship with the share-market. In fact, it is the relationship between the share-market and the economy that has made him a fortune along with his “buy low, sell never” company philosophy. More specifically, Buffett has been documented on multiple occasions for his consideration of the Market Capitalisation of the overall share-market and its position relative to the nominal value of the overall economy. This is called the Market Cap to GNP ratio or the Market Cap to GDP ratio.

Market Cap to GDP Ratio in Australia

Buffett Market Cap to GDP

Utilising the favourite metrics of the smartest minds in a field would be seen by many to be a no-brainer. Going against it could be like ignoring the opinion of the world’s best heart surgeon when needing a heart transplant.

Yet fund flows continue to diminish and the average allocation to equities continues to remain well below historical norms in Australia. This is despite the Shiller PE being below historical norms and the Market Cap to GDP around historical norms.

Summary

It will take time before we know who will make the correct long-term judgement – the Shiller/Buffett duo or the average Australian – but it would seem unlikely to be the latter.

Note: This articles comes from the most popular and commented data from the Investing Times Asset Allocation Research document. This comprises nine of the most influential factors that determine share-market value (including the Shiller PE and Buffett Market Cap to GDP ratio), with a compelling track-record over a 25-year period in Australia.

If you wish to see the 9 metrics, please request a free trial below and we will forward it by email. This is a value-add with no obligation.

Trial today

RECOMMENDED BY THE INVESTING TIMES

Worried about a property crash? These nine facts answer it better than most…

| Investing Times News, Lifestyle, Recommended by the Investing Times | No Comments
What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Headline Article, Most Viewed, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

MOST VIEWED

17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Could Donald Trump send the USA bankrupt? And why the first challenge is February next year.

| Most Viewed, Politics | No Comments
Donald Trump and economic stability rarely go hand-in-hand. While Trump insists he’ll "make this country rich again", his path to riches has been subjected to four bankruptcy negotiations and his...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...