Magic Formula Stocks Near 52 Week Lows, Far From 52 Week Highs
What the strategy does not identify is this: is it a good time to buy the stock now? This is always a good question, and one that can possibly be answered with a little of the black art known as technical analysis.
MagicDiligence is mostly interested in fundamental analysis: sustainability of cash flows, competitive position, growth potential, strength of management, financial health, and so forth. Assuming these check out, we should have the fundamentally focused investors on the "buy" side. However, if the chart is not favorable, the sizable number of technically focused investors will not want to buy the stock. To get the greatest gains in a market based system, we want to have the majority of investors (technical and fundamental) on the "buy" side.
The very simplest concept in technical analysis is that of a support and a resistance level. Support simply means a price at which the stock price has not fallen below, meaning that buyers tend to come in and "support" the stock price once it reaches that level. Conversely, resistance is a price at which the stock has not broken through, meaning that investors have "resisted" buying the stock once it reaches this level. In general, technical investors prefer to buy a stock when it trades near the support level, and prefer to sell it once it trades near the resistance level.
There is no hard and fast rule of what constitutes a support and resistance level. It depends really on the time frame and how a chart is interpreted. The target holding period in Magic Formula Investing is one year. So for this article, we will simply look at the 52-week high (resistance) and 52-week low (support) for Magic Formula stocks in the screens covered by MagicDiligence (those are the top 50 over 50 million, top 50 over 1 billion, and top 30 over 3 billion).
For the "downside protection" list, we see the top 10 stocks currently in MFI that trade the closest to their 52-week lows. These stocks, at least in theory, are trading at or below levels that investors have been willing to buy them in the past year, meaning there may be limited downside left in the stock price (all prices at close 7/28/2010):
|WDC||Western Digital Corp||27.12||27.80||2.50%|
|MYGN||Myriad Genetics Inc||14.26||14.63||2.60%|
|PETS||PetMed Express Inc||15.00||15.94||6.30%|
|CEU||China Education Alliance Inc||3.65||3.90||6.80%|
|DNB||Dun & Bradstreet Corp (The)||65.50||70.38||7.50%|
|LPS||Lender Processing Services Inc||29.70||32.26||8.60%|
On the other hand, we can also look at MFI stocks that are trading the greatest distance under their 52-week highs. Again, at least in theory, these stocks could provide the "greatest upside", given the fact that investors have been willing to pay much more for the shares within the past year. These stocks are:
|UTA||Universal Travel Group||17.20||6.12||181.0%|
|SMED||Sharps Compliance Corp||13.00||4.67||178.4%|
|TNDM||Neutral Tandem Inc||34.56||13.15||162.8%|
|CSKI||China Sky One Medical Inc||25.45||10.46||143.3%|
|VALU||Value Line Inc||33.99||14.52||134.1%|
As always, investors should always verify the fundamental factors of a company before even considering buying. Maybe there is a good reason that these stocks are trading close to, or even setting, new 52-week lows. In a best case scenario, we have a stock trading well below its intrinsic fundamental value and also near a level where technically oriented investors have been willing to buy it in the past year.
Disclosure: Steve owns TNDM
Joel Greenblatt and MagicFormulaInvesting.com are not associated in any way with this website. Neither Mr. Greenblatt or MagicFormulaInvesting.com endorse this website's investment opinions, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr. Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website. The information on this website is for informational purposes only and solely represents the views and opinions of the author. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind, nor can it be relied upon as the basis for stock trades. The proprietor of this website is not responsible in any way for losses or damages resulting from the use of this information. Alexander Online Properties is not a registered investment advisor. All logos are trademarked properties of their respective companies.
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