mechincl (51.69)

Company Rankings, MechPrime & China

December 06, 2010 – Comments (0) | RELATED TICKERS: CEAI

So I've completed the code that gives my system the ability to rank stocks according to a wide variety of criteria. While coding it, I realized that in addition to treating stocks like CAPS players as regards their scores on specific criteria, I could also give stocks "charms" according to how well they performed in the rankings. So at present my system has a number of charms that it bestows on stocks.

E for earnings growth
F for financial condition
G for sales and income growth rates
I for investment return ratios
M for management efficiency
R for price ratios (similar to a value calculation)
P for profit margins
V for value (based on my existing valuation calculations)
D for a combination of dividend and growth conditions

So stocks rated by my software can receive the above charms when they are in the top 20%, 2% & 1%. So for example, a 1% G(top 1% of all companies as ranked by growth) means more than a 20% G. They can also receive those charms as "risks" when they appear in the bottom 20% of the market as ranked by those criteria. This has given me a significant amount of additional tools to use in cutting lists of stocks.

Regarding China. The recent debacle with CEU(which cost me 33 points in a day!) and the report questioning whether or not they even have anyone working at a specific headquarters highlighted something to me. There are a number of Chinese stocks highlighted by my software as being attractively valued. Yet, a number of them have performed very poorly. I realize that in dealing with "value" stocks, that risk is the name of the game. Most of these stocks have a higher degree of risk associated with them. Many times, they are cheap for a reason. And investing in them is in essence a bet that the company will sort out the issues that have made the stock cheep and the stock will return to better valuations, while I ride that wave and make money. Taking the risk on whether or not a company is even really doing what they say they do (which seems to be the MO of some of the Chinese companies highlighted by my software as a value play) seems less like an investment in a company making good business decisions and returning to normal valuations, and more like a straight gamble. Might as well go play poker with my retirement funds. This has also raised a number of questions. If they are Chinese companies, why are they listing themselves on US stock exchanges? For them, the answer is obvious. Larger pool of investment capital to use in financing their business(or lining their pockets). But it could also just be a scam. So all things considered, I think the China component is just not worth the risk. So I've also implemented a straight forward blacklist component in my software. I probably didn't get all China companies, but I think I got most of them. Not that the US is without risk at the moment, I just think I'd rather stay more in my own backyard.

This means the most recent execution of my software has culled another 30 stocks. Some of them for the typical reasons, stock achieved its valuation target, or, fundamentals no longer justify the target prices previously set by my software, the rest because they were Chinese companies.

In addition, I've resurrected my mechprime profile. It previously had been my first hack at a straight value portfolio. Since I'm mostly using mechincl and mechstrt for that, I'm doing something different with mechprime. I'm using the top 50 stocks as ranked by my ranking system from 4 composite categories, giving me roughly 200 stocks. The categories are, 1. Value & Earnings, 2. Pure Growth, 3. a category I don't much want to talk about ;-), and 4. Dividend and financial conditions. That is the super cool thing about this method of ranking stocks. I can slam a few criteria together into a custom view, and viola, rank the entire market based on those criteria, and do it very quickly too. For mechprime, I'll open the thing back up after a couple months has gone by and look at how each category did to learn something about how those categories individually performed. Mechprime had a significant up day today. Up 150 points and accuracy jumped by 6-7 percent. We'll see how that plays out over time, but it looks promising.

Fool on!