Technical Analysis vs. Fundamental Analysis

[tech/a]

Did that once on a delightful stock called AED (still going), only once, never again.

It was probably the best $9000 + that I have ever spent (lost) because it has saved me far more than that since then.

I have to laugh when I see people write about how they average down or when they say that they are funnymentalists and then put up a chart of what price they usually enter at because the chart shows what range it usually bottoms at

My favourite is.
It was a bargain when I bought its and now its 50% less its an absolute gift.

If anyone remembers or saw Ducati's 2 yr attempt to buy value and prove the very same point argued here (I've looked but cant find it in the archives) they will understand the folly first hand---unless of course your like Boggo and excelled yourself.

 

[professor_frink]

here you go:

fundamental positions II

 

[Julia]

Thanks, Prof Frink. Ah, what memories that thread revives.
Wonder what Duc is doing these days. Does anyone hear from him?


I shudder when I think of all those folk who faithfully averaged down while their chosen stock sank into oblivion.

 

[Julia]

Further to above post, two of the market darlings, ABC Learning and Babcock and Brown were great examples of where investors averaging down came to a very sticky end.

They are both deleted from E-trade now so I can't find a decent chart demonstrating their woeful descent. Below is best I can find now.

Babcock & Brown was a global investment and advisory firm based in Sydney, Australia. It was best known in financial markets for structured finance deals that is currently in liquidation. The company had at its peak 28 offices and in excess of 1,500 employees worldwide. Although headquartered in Sydney, it had a significant presence in Europe and the United States. The creditors of Babcock & Brown voted to place the company into liquidation on August 24, 2009.

At the end of 2006, Babcock had a market capitalisation of just over $8.5 billion, and in 2007 its market capitalization peaked above $9.1 billion (AU$33.90 per share). However by October 2008 the share price had collapsed by 96% to AU$1.40[1] and by December 2008 by 99.6% to AU$0.14, representing a market capitalisation of less than $50 million. On March 13, 2009 the company was placed into voluntary administration. [2] Approximately 45% of its shares were owned by the executives of the firm.

 

[skc]

Further to above post, two of the market darlings, ABC Learning and Babcock and Brown were great examples of where investors averaging down came to a very sticky end.

They are both deleted from E-trade now so I can't find a decent chart demonstrating their woeful descent. Below is best I can find now.

While I don't necessarily agree with averaging down, I have to say that the rule to average down is to average down only on fundamentally sound companies...

Given that both companies went belly up, whoever thought they were fundamentally sound were dead wrong. And whoever averaged down on them were either ignorant of the rule of averaging down, or got their analysis wrong.

Noting incorrect fundamental analysis doesn't equate to fundamental analysis does or doesn't work.

There is no doubt however that the inclusion of stop loss is good risk management for those who have inadequate fundamental analysis skills. It will generate a lot of false negatives, but save you from some disasters at the same time.

 

[moreld]

Wonder what Duc is doing these days.

Duc regularly blogs at http://leduc998.wordpress.com/ I confess to finding it hard to follow his thoughts and reasoning.

 

[Tysonboss1]

Further to above post, two of the market darlings, ABC Learning and Babcock and Brown were great examples of where investors averaging down came to a very sticky end.
.

Neither of those to stocks would have passed a true value investors tests.

Value investing is not about buying stock just because it's price has fallen. Their is some common misconceptions here about value investors, These misconceptions are made worse by people who call them selves value investors or fundamnetal investors who are not investors at all. a better description of them would be recovery speculaters or sector gamblers.

a person who says either of the following things is not a value investor or fundamental investor.

1, "Stock in XYZ company has had a big fall so now it is cheap compared to it's highs, so I am going to load up because I am a value investor."

or,

2, "I have a hunch the coal price will go up in coming years, so I will buy coal stocks because I am a fundamental investor"

 

[ducati916]

et al,

I'm still about, mostly, as indicated on my blog, unless a topic catches my eye.

With regards to the fundamentals, what became quite apparant was that the macro-picture has an enormous influence on the micro [individual stock value] and purchasing value, however defined, against the macro-picture, will make for a very difficult holding period.

jog on
duc

 

[ducati916]

Duc regularly blogs at http://leduc998.wordpress.com/ I confess to finding it hard to follow his thoughts and reasoning.

Surely I'm not that obtuse?

jog on
duc

 

[Boggo]

Neither of those to stocks would have passed a true value investors tests.

Value investing is not about buying stock just because it's price has fallen. Their is some common misconceptions here about value investors, These misconceptions are made worse by people who call them selves value investors or fundamnetal investors who are not investors at all. a better description of them would be recovery speculaters or sector gamblers.

a person who says either of the following things is not a value investor or fundamental investor.

1, "Stock in XYZ company has had a big fall so now it is cheap compared to it's highs, so I am going to load up because I am a value investor."

or,

2, "I have a hunch the coal price will go up in coming years, so I will buy coal stocks because I am a fundamental investor"

Precisely, some of the stocks mentioned by so called fundamental or value investors are just stocks that have been good or are popular and everyone knows them.
I haven't seen any mention of any of the top fundamentally sound stocks at the moment such as SUL and MND.
Technical analysts would be more familiar with them and are probably making good money from them while others debate the pros and cons of TLS or CSL

The charts will tell you very quickly whether they are fundamentally sound or not.

Rant over

 

[Tysonboss1]

The charts will tell you very quickly whether they are fundamentally sound or not.

Rant over

I don't aggree, the two stocks mentioned earlier "ABC and BABCOCK", at some point (atleast by the charts) seemed like wonderful investments, but they were not.

T/A will only show you what the shorterm mood of a stock is, not whether it is a good longterm investment. which depending on your stratergy might be what you are after.

I think one of the virtues of true fundamental analysis is that it shows you what "not" to buy even through the hype of such things as the tech boom. And alot of the time it's the things you turn down that are more important than the things you say yes to.

 

[moreld]

Surely I'm not that obtuse?
duc

I fear the failing is mine.

 

[Boggo]

I don't aggree, the two stocks mentioned earlier "ABC and BABCOCK", at some point (atleast by the charts) seemed like wonderful investments, but they were not.

T/A will only show you what the shorterm mood of a stock is, not whether it is a good longterm investment. which depending on your stratergy might be what you are after.

BNB, the chart told the real story 12 months before the demise...
https://www.aussiestockforums.com/forums/showpost.php?p=326300&postcount=640

 

[Tysonboss1]

BNB, the chart told the real story 12 months before the demise...
https://www.aussiestockforums.com/forums/showpost.php?p=326300&postcount=640

I don't know about babcock but abc was clearly a loser for years fundamentaly

 

[ducati916]

I fear the failing is mine.

Ahhhh, I feel so much better now.

jog on
duc

 

[Julia]

BNB, the chart told the real story 12 months before the demise...
https://www.aussiestockforums.com/forums/showpost.php?p=326300&postcount=640

Thanks, Boggo. I should have thought to look on the BNB thread for a chart.

I don't know about babcock but abc was clearly a loser for years fundamentaly

Yes, you're right. They expanded too rapidly and too far on too much debt.
However, some people did make some decent money out of it on the way up.

 

[ducati916]

A current example: CST

Now I don't really follow the ASX that closely at all, except for this one stock that I have had an ongoing beef with for about 4yrs now, previously it was VCR which essentially went bankrupt.

Looking at the 2009 Financials, which may be a little behind the curve now the following problems present: It looks very possible that CST are reclassifying Receivables [ii] Inventory may be obsolete, or CST may have failed to charge full costs under COG line entry, this latter is the more likely as it is again raised [confirmed] elsewhere.

Again, accounting issues abound with this company, which was my original objection to it prior to it actually having any sales. Now that it has sales, the accounting shenanigans continue in a different form.

I haven't read the reports from Lincoln that you mention, so my analysis may address points they have covered, or it may not. Also I have not undertaken an in depth analysis at this point, but may well do so if it seems to be required.

Essentially I have looked at 6 initial line entires:
*Revenues
*Cost of Goods
*Receivables
*Inventories
*Ratio of Net Income/Cash from Operations

Year..........................2008/2009......................2009/2010
Revenues.....................+83%..............................+17%
Cost of Goods...............+67%..............................+19%
Receivables..................+67%.............................+24%
Inventories...................+115%...........................[-13%]
Ratio.............................................................1.50

Bearing in mind my previous comments on the 2008/2009 Financial Statements, I'll now add some comment to the 2009/2010 Financial Statements.

When Receivables grow faster than Sales, then immediately I suspect aggressive Revenue recognition. This assertion is further underlined by the ratio analysis which shows an overstatement of Income. This analysis is further supported by the growth in Accts. Pay. which has exceeded Revenues, which indicates a failure to pay fully for Inventory and will reduce earnings in future periods [while concurrently overstating Net Income, which has already been flagged]

We also have a margin compression with COG exceeding Revenues. This indicates pricing pressure, and for a new company [new as in newly profitable] this is a major issue.

Inventories have compressed dramatically, with a concurrent fall in Revenue growth, which is suggestive of Inventory writedowns, which would have been flagged in the 2008/2009 financials, although I haven't looked for the notes in the current financials that may disclose this.

Anyway, that's simply a very cursory analysis and I suspect if I really dug deeply I could uncover all manner of egregious behaviour by management, these indiscretions would however give me significant pause.

I have continued to focus upon the Inventory, Receivables, Accounts Payable line entries.

Collections: the data here analyses the success/failure of the collection of Receivables. Slowing collections are an early indicator of credit problems which lead to cashflow problems.

2008/2009.................0.92
2009/2010.................0.97

So far so good. As an example Dell Computer used to run Collection ratios 1.22 etc, as it collected payment before shipping product, before even building product. Anyhow, on the surface, good. The ratio is improving.

An analysis of Receivables.

2008...........................172
2009...........................192
2010...........................200

Houston, we have a problem. The Accts. Rec. are deteriorating. While the collection ratio is improving, viz. less debt default, the time taken is increasing. The Company would seem to be offering more generous credit terms to its better customers.

An analysis of Accts. Pay.

2008........................78.2
2009........................52.7
2010........................54.9

CST's creditors however are not as patient. They, in the tightening business conditions, demand payment significantly faster, which always has cashflow implications.

Inventory analysis

2008.......................16.5
2009.......................19.4
2010.......................14.4

Here we see a deterioration. The inventory turnover has slowed. This is the source of much of CST's problems, they simply are not moving product at the same pace. Despite the spin of the company spokesperson, this is not good. Combined with the previous analysis, this would for me definitely constitute an early warning sign.

Now when you look at the price chart, you see already a decline in the shareprice. This strikes me as somewhat odd. Odd because the new financial data came out approximately 20 days ago, and the data is not immediately obvious to be bad, there are still incredibly optimistic people on this forum.

Of course the stock might simply be tightening its correlation to the ASX index, and the ASX to the US indices, and may be no more than that. However, for those interested, an analysis of Insider trading might be illuminating. I haven't as yet looked at the intangible elements, I'm still plodding through the numbers.

Further analysis reveals that from the $763 allocated to CapEx. $15.26 went elsewhere. This represents a hidden cashflow. Now, whether this hidden cashflow redounds to shareholders or to management isn't at this point entirely clear. Regardless, I do not like to see hidden cashflows, it always makes me suspicious as to what else is being obsfucated.

No same figures, simply a different way of approaching the analysis. You are simply looking at a vertical analysis, as such your numbers are correct. I am however looking at a horizontal analysis and querying why there is a dichotomy.

Line Entry..............................2008/2010 Change
Revenues...................................48.6%
COG.........................................33%
Inventories.................................36%
Receivables................................44%

What is evident is that COG is not tracking Revenues, and they should, there is a major discrepency. On this analysis it is obvious that the COG lags Revenues, thus the company likely hasn't transferred the entire cost of product from Inventory. Notice how Inventory change tends to track COG and Receivables track Revenue more closely than COG tracks Revenues. This again flags that further questions need to be asked as it raises questions of manipulation. COG should track Revenues closely.

Year..........................2008/2009......................2009/2010
Revenues.....................+83%..............................+17%
Cost of Goods...............+67%..............................+19%
Receivables..................+67%.............................+24%
Inventories...................+115%...........................[-13%]

When we return to the broken down data we see that in 2008/2009 when sales were booming, as CST became profitable, we still had this failure to transfer costs of Inventory correctly. In 2009/2010 where sales have slowed, we see that the fall in Revenues in % terms is greater than the fall in COG. This represents pricing pressure. Pricing pressure has compressed margins even though on a vertical analysis they both show Gross Margins of 66%

The pricing pressure that is resulting in margin compression can be partly explained in the following manner.

An analysis of Receivables.

2008...........................172
2009...........................192
2010...........................200

Receivables Period........+5.2%

Inventory analysis

2008.......................16.5
2009.......................19.4
2010.......................14.4

Inventory Turn............[-4.4%]

An analysis of Accts. Pay.

2008........................78.2
2009........................52.7
2010........................54.9

Accts Pay Turn...........[-11.1%]

Inventory is turning over more slowly, thus inventory is held longer, necessitating financing. Accts Pay are being demanded faster, again a financing issue, and Receivables are being collected more slowly, another financing issue. Thus the costs of financing are impacting the figures in the initial data and indicate a margin compression that is not immediately obvious to an analysis that considers only a vertical analysis.

jog on
duc

 

[So_Cynical]

The charts will tell you very quickly whether they are fundamentally sound or not.

Ok so when the BNB share price was was going up in 2005/6 it was fundamentally sound?....and at what point in the price collapse did it become unsound?

Rising share price = fundamentally sound / good

Falling share price = fundamentally unsound / bad

Its just way too simplistic and just totally ignores the variables.

 

[Boggo]

Ok so when the BNB share price was was going up in 2005/6 it was fundamentally sound?....and at what point in the price collapse did it become unsound?

No idea, don't care, if its going up I buy, if it turns down I sell and move on.

Rising share price = fundamentally sound / good

In most cases yes, or maybe or the board spends more time on PR than on running the business, or, as in the case of TLS they tell the current holders how good the dividend yield is and that it will stay the same, they assume (correctly in most cases) that no one understands the formula for calculating yield.
They also just forgot to mention the bit about borrowing to maintain the dividend !
Either way it makes no difference, going up = I may be interested, going down = let me know when it starts going back up.

Falling share price = fundamentally unsound / bad

No idea, if I am holding it my stop takes care of if it starts to turn down.
Why would I want to know about the director's pay increase if I too can't make some money from it otherwise I am just holding it for them to profit while I lose.

Its just way too simplistic and just totally ignores the variables.

That's just it, its simple once you develop an entry exit procedure.
I am up over 140% on my best performing stock and I couldn't really tell you where they are based, who the people behind it are or what is in their annual report. All I know is that they are in the S&P ASX300 and they are going up.

What are the variables you mention ?


I am not trying to be a smart **** So_Cynical, just trying to point out that if you want to make money out of the market there is another (and simpler and better I believe) way of doing it without getting attached to half a dozen stocks.

That's just my

 

[robusta]

While I don't necessarily agree with averaging down, I have to say that the rule to average down is to average down only on fundamentally sound companies...

Given that both companies went belly up, whoever thought they were fundamentally sound were dead wrong. And whoever averaged down on them were either ignorant of the rule of averaging down, or got their analysis wrong.

Noting incorrect fundamental analysis doesn't equate to fundamental analysis does or doesn't work.

There is no doubt however that the inclusion of stop loss is good risk management for those who have inadequate fundamental analysis skills. It will generate a lot of false negatives, but save you from some disasters at the same time.

Could not agree more, if a company does not tick all the boxes (little or no debt, strong cash flow, high ROE, competitive advantage...) It should not even be in my portfolio let alone trying to average downon it.

Neither of those to stocks would have passed a true value investors tests.

Value investing is not about buying stock just because it's price has fallen. Their is some common misconceptions here about value investors, These misconceptions are made worse by people who call them selves value investors or fundamnetal investors who are not investors at all. a better description of them would be recovery speculaters or sector gamblers.

a person who says either of the following things is not a value investor or fundamental investor.

1, "Stock in XYZ company has had a big fall so now it is cheap compared to it's highs, so I am going to load up because I am a value investor."

or,

2, "I have a hunch the coal price will go up in coming years, so I will buy coal stocks because I am a fundamental investor"

Once again Tysonboss you have hit the nail on the head.
You need to seperate value and price.
If a stock for example is worth $1.00 it does not make it good value when the price falls from $3.00 to $2.00. It is so simple! The majority of the time when the sp is falling there is a very good reason for it. I just want to be able to take advantage on the rare occasion it is a opportunity to pick up a great company at a bargain price.

Precisely, some of the stocks mentioned by so called fundamental or value investors are just stocks that have been good or are popular and everyone knows them.
I haven't seen any mention of any of the top fundamentally sound stocks at the moment such as SUL and MND.
Technical analysts would be more familiar with them and are probably making good money from them while others debate the pros and cons of TLS or CSL

The charts will tell you very quickly whether they are fundamentally sound or not.

Rant over

Not sure how you worked out the fundamentals from a chart but I agree with you regarding MND. I have eight companies in my portfolio and MND is my third largest holding. Looks like we have reached the same conclusion from two different viewpoints.
SUL is basically fundamentally sound but a bit too much debt and declining ROE rules this one out for me.

Now back to averaging down.

My basic thought is if I allready own the best companies I can find and for some reason (usually macro-economic) the sp declines.

Why would I go and buy the eighth or ninth best company I can find?

Why not load up on the best company I own and pick up even more shares at a bargain price?