A Tale of Two Toymakers: When You Can’t Afford to Play
Sheila Jamison and Rich Jamison
We recently heard, “I watch CNBC and Bloomberg. I read the Wall Street Journal, Barron’s and the Investor’s Business Daily. I check out websites like the Motley Fool, Morningstar and Zacks. Does technical analysis actually add anything to your investment process?”
We’re quick to add that this was not from a JFG client. Our client family already knows our process of choosing investments depends on the combination of fundamental and technical analysis.* Also, they know why.
However, media reports are generally based only on fundamental analysis.** Sometimes this creates confusion. The two analyses don’t always give us the same message about a given security. More significant, sometimes two fundamental analysts disagree with each other about the attractiveness or “investability” of a given security.
In turn, this can lead to heated discussions between/among friends and family as well as the “talking heads.” Perhaps you’d like a concrete example to point to when a friend or colleague asks you how – or even if – technical analysis is valuable.
Well, we have one that makes it crystal-clear. We saw it shortly before we heard the comment that opened this article. It was published on June 22, 2017 by Dorsey Wright Associates (Daily Equity and Market Report, dorseywright.com). They generously gave us permission to share it with you here. We’ve added a table below their piece to update the price and performance figures to include the 2½ weeks since theirs was written.
A Tale of Two Toymakers
One of the most effective uses of technical analysis is as an overlay on your fundamentally sound ideas. We often say that the fundamentals can point you toward "what" to buy, while the technicals address "when" to buy. Because there are shortcomings to both fundamental analysis and technical analysis on their own, using them together provides a wholesome approach. To demonstrate the importance for incorporating the technical piece, we'll walk through a real and timely example, reviewing the fundamental and technical side of two stocks in the same sector.
For the sake of the demonstration, we will leave the stock names anonymous to help prevent any emotional bias along the way. Let's start with the fundamentals.
There is no shortage of fundamental research. Whether it is coming from a broker/dealer’s research department, a reputable third party, or even mainstream media, you can find an opinion on any and every stock. The problem, however, is that you can often have conflicting fundamental opinions. One way to handle the different outlooks is to aggregate the opinions and see where the "average" falls. Below is a snapshot (source: marketwatch.com) of this type of summary for our two stocks: Stock A and Stock B. Notice both are recommended as current overweight ideas, and were either Overweight or Hold recommendations over the past 3 months. This highlights another common limitation from the fundamental side: it is rare to find an overwhelming "negative" recommendation based on fundamentals alone. In fact, a fundamental rating often increases as a stock's price falls, because it is argued to be a "better value". With no significant differences in the average opinion for these two stocks, we look to the "average target price." Notice that fundamental analysts see a potential for a 23% increases in Stock A's price before it reaches its average target price, while Stock B is trading above its average target price and a reversion to "fair value" would be a decline of about 4%.
Based on the information above, it is reasonable to assume that someone using only the fundamentals would choose Stock A over Stock B; but do the technicals offer additional perspective? Yes, in fact the charts of these two stocks could not look more different.
Stock A, the one that fundamental analysts expect a 23% rise in, has moved consistently lower for the last year. It has been in a negative trend since January and fell to a new 52-week low just earlier this week. With 0 positive attributes, it is not surprising to see the stock sitting at the bottom of the Leisure sector matrix, ranking 52 out of 53 stocks, where it has been for the entirety of 2017. Based on the daily price movement, there is no question that supply has been and remains in control of Stock A. The only "positive" based on the technicals for Stock A is that it currently sits at the bottom of its trading band (-84% oversold), so it may see a short term mean reversion bounce. Even still, it possesses far more characteristics of a potential short than it does of a buy, overweight, or hold idea.
In contrast, Stock B offers a positive trend with consecutive buy signals and an attribute rating of 4 out of 5. It achieved a new all-time high along with the broader market earlier this month. While Stock A sits in the caboose of the Leisure sector matrix, Stock B is within the top 3rd, ranking 18 out of 53 stocks.
Where the fundamental information leaves much to be desired, the technicals are clear. There are more investors wanting to sell than buyers willing to buy Stock A, and price has declined as a result. Meanwhile, demand continues to grow Stock B, and as long as that remains the case, price will continue to rise. So, now let's put a name to the face for these stocks.
Stock A is Mattel MAT - Although little boys still "choo choo" with Thomas the Tank Engine and Barbie remains the world's favorite doll, the stock is down over 27% this year!
Stock B is Hasbro HAS - Giving shareholders more than monopoly money with a gain of nearly 43% year-to-date.
We often say that selecting stocks by fundamentals alone is akin to playing the piano with one hand tied behind your back. You will be limited to playing just simply melodies. However, adding the technical piece into the mix provides you with a wider range for success. One of the most valuable things a Point & Figure Chart can give you is the ability to visualize the battle between supply and demand based on strictly objective data: price. Keep the above example in mind. Not only might it be useful in your discussions with the stalwart “fundamentalists,” it may help bring value to your portfolio.
That’s where MAT and HAS stood 2½ weeks ago.*** We’ve had several nice market rally days since then. How’ve these two done? As of close on July 12th,
Before we leave you to mull over the above, remember too that we are here to help you with any questions you may have about your specific portfolio. Give us a call whenever you wish.
* A Quick Refresher: Fundamental analysis tells you about the company itself (its markets, products, management, balance sheet, P/E ratio, cash flow, etc.). Fundamental analysis tells you about the company’s stock performance. Hence, the catch phrase - fundamentals tell you what to buy (or sell); technicals tell you when.
** The “big guys” in this industry tend to like and support fundamental analysis while somewhat looking down their noses at “the technicals.” At best, they admit that there may be some merit to them … but they hold that to be minor. The fundamentals are, they say, what really counts. To be fair, the majority of supporters of technical analysis tend to do the reverse. They feel technical analysis is the more valuable, some to the extent that they ignore fundamentals. Our thought is that taking the best of both and leaving the rest behind gives the greatest chance of achieving the results we’re looking for.
*** Note that this is not a recommendation to run out and buy Hasbro. It is to illustrate how fundamental and technical analysis played out for these two stocks over 2017. Past performance cannot guarantee future results.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.