Fundamental review to REJECT a stock (even it passes Muster and good p123'S Panel)

Mgerstein/Steve/Denny/Fundamental expert,

I would like to learn from expert how to reject a bad stock even the sim shows in top rank.
ie., CTP

CTP
Bought : 01/20/15
Sold : 02/02/15
Loss : -57.3%
ValueRank: Rank 99.2 on 02/02/15

  1. AvgRec=1 and number of analyst=4 on 01/20/15.
  2. The p123 panels looks good as no issue with this stock (screen shot is attached for reference).

Please, help to share your experience or muster to reject this CTP stock;
I have screened thru fundmentals; everything looks good except last 5 yrs earning is negative;

Thanks
Kumar


CTP
MktCap= $57-million
52-wk range= 3.01 - 23.75

Why would any investor buy such a stock?

George,

AMZN, AAPL, IBM all once followed CTP paths value multiplied with 5X and 10X and stays remain high.

Peter Lynch, suggest to buy small and unknown company to become rich. He refers 10 baggers.
CTP was 200+ million market cap few months ago.

ABTL, MFLX earns 50%+ since Jan 2015 on similar market cap.

There is any way to identify using fundamental CTP is high risk stock ?
I am reading Quantitative value - Wesley R. Gray- book .
But not able to find a way to identify risk with CTP using any fundamental metrics.

Any helps appreciated.

Thanks
Kumar

Kumar - welcome to the world of investing :slight_smile:

“On January 28, 2015, CTPartners Executive Search Inc. (the “Company”) announced a revision to its fourth quarter and full year 2014 preliminary earnings results previously announced on January 21, 2015. The revision is a result of a $1.7 million increase in the Company’s estimate of operating expenses for the fourth quarter primarily due to compensation expense associated with consultant performance bonuses.”

Kumar, please tell me what other smallcap stocks you are buying. I’d like to get the edge on consulting jobs. I can use the $1.7M bonus :slight_smile:

Steve

Throw away all of your graphics Kumar they mean nothing when it comes negative revisions. There is no way you could have known it was coming but the trading from lte November would have told an experienced trader something was wrong with the stock. This why every selection must be reviewed and not bought solely because your model says so. cTP’s trend was clearly down

There are numerous class actions suits against CTP. This company is history. One should check every stock that P123 models recommend to buy.

Hi Kumar,

I think you’re doing the right thing by looking at your previous trades to see what went wrong (or right).

I looked at CT Partners in June 2014 and again in January 2015, and luckily for me I decided not to invest. (I’ve been wrong plenty of other times, but I digress…) These were the things that put me off at the time:
(1) wild volatility in the share price, including a 75% drawdown in 2011
(2) I knew that they’re a firm of recruitment agents, and my personal experience of agents is that you can’t believe a word they say. That made me doubt the extremely bullish investor presentation from their website
(3)this article
http://www.marketwatch.com/story/phallic-shadows-naked-scrums-and-a-very-bad-day-for-ctpartners-2014-12-09?siteid=yhoof2
The previous history of lawsuits made me nervious, and I had the impression that management would take advantage of any run up in the share price to dilute existing stockholders, which I certainly want to avoid.

Best wishes,
Dodge

When there’s a significant legal controversy, fundamental analysis is pretty much out the window. Perhpas you can re-ask the question using a different stock.

One thing I will say is that if you really do want to do fundamental analysis (as I hope you and everybody would), download the A to Z Guide from the Help section and review pages 94-127, which show you how to customize the data panels. I’m not sure if you’re using the default presentation, but the defulat presentation is just that – something that’s there for use as a default, a starting point. In pages 124-127, I tell you what sets of panels I created for my own use, so if you’re not sure what to pick, you can always copy all or parts of that.

Once you get that, here’s the collection of things at which I look:

  1. Stock price chart (no less than 1Y and usually 5Y)
  2. Data panels – as per A to Z guide
  3. News links (Press releases on Yahoo)
  4. 10-K business description – easy to get from Yahoo! Finance or SEC web site; I copy it into word and highlight
  5. Latest earnings release
  6. Latest conference call transcript
  7. Any articles I can find (usually Seeking Alpha if anywhere)
  8. Major Holders from Yahoo! Finance (I want to see if any firms/funds I particularly respect are significant holders)
  9. Situation-specific possibilities – management commentary from 10-k/Q; liquidity discussion if basics leave unanswered questions
  10. Latest Company Presentation from Investor Relations section of company web site – if any (more and more companies have them by now)
  11. If stock price chart contains noteworthy breaks in trend I can’t readily understand, I get the historical 10-Ks or Qs to figure out what happened.

You never know what’s going to jump out from one company to the next, but usually, the price charts and data panels (unexpected jumps from plain-vanilla trends) will cue you where to dig. Often, the quarterly EPS/Sales boxes (at the top of my most-frequently=used panel layout) will give you an early cue; look too at the income statement (the trend in special items) and the annual trend in cash from operations. Annual changes in valuation metrics and current valuation comparisons also tell you a lot. (The way my panels are laid out, I can do a complete scan in less than a minute.)

Finally, have a sense of context. You’re not always looking for good numbers or good news. You can also do very well in a stock as a lousy company transitions to less lousy, or even rises to mediocrity. Absolute numbers are what they are. But its change that often drives the stocks. Change for the better is bullish. Change for the worse (i.e. even a spectacular company that falls to very, very good) tends to be bearish. (In quant language, I’d say don’t focus so much on the function as on the first and second derivatives.)

Great discussion,

So here is my question. If I did a detailed review of each stock I purchased, I would certainly avoid buying some bad stocks. However, would this benefit outweigh the losses I would incur from not buying the stocks that look bad but end up doubling?

I surely believe that some can do this well-Marc has a proven track record-but what would my learning curve look like?

Zacks stopped its “Zacks Recommendations” because “Zack’s Rank has a longer and more impressive track record” according to its web site. Greenblatt strongly discourages making any discretionary changes to his magic formula. I held a drug company that I did not think would get approval for its weight loss drug but it did. It quadrupled: my “expert” analysis was just plain wrong. To be fair, even though I did not think it would get approval, the potential upside seemed to outweigh the risk and I made some money. Maybe I could do this. But still I wonder.

I would love to hear any opinions or experiences from those more experienced than I am.

Greenblatt previously ran a test where he filtered his stock picks from his model vs followed the model. His model beat his filtered version. He ran this test with other subjects as well with the same result. This suggests that it is hard, even for an expert, to beat a good model. Consider holding more positions to lessen the financial damage when you pick up a stock like ctp.

Scott

Jim,

I’ve had similar thoughts myself. There are two possible approaches here

(1) just blindly follow your model, and assume that its not worth investing time in due diligence as the extra filtering process might actually end up degrading performance
(2) use your model to provide a shortlist for further investigation. The shortlist serves to improve your hit rate.

Up until now, I’ve been following (2), but I might later decide that my “expertise” isn’t helping and switch to (1). I think that one of the benefits of doing
due diligence is that is makes stop losses unnecessary. If my shares go down in value I can instead decide if the investment case is intact or not.

Dodge

There are different approaches.

  1. Many use models as idea generators. The goal is to have the model produce a list of tickers and then to do a full-out research effort (however one defines that) on each stock. Before backtesting, that was pretty much the only prudent way to use screening/ranking. And it’s largely what I did before p123, when my testing was confined by the little I could do with old data CDs and Excel, And even though we can now test, this is still a very powerful and widely-used approach. (The role of testing is to give us better models and better idea-lists to work from.)

  2. At the other extreme (and one that’s only reasonable today given all our testing capabilities) is to come up with fully-automated systems that involve zero company-specific research. This is also very much valid, assuming the model is well developed (i.e., no curve fitting, etc.). I invest money this way today. In these cases, when I look closely at companies, I do so as part of the model development process. I don’t think much of the standard “robustness” tests; in addition to running tests, I do sample checks on companies that pass the models to see if they were really what I had in mind when I created the strategy, and I do a lot of fine tuning to model around data oddities etc.) But once I finish and get these models running, I invest on a fully automated basis.

  3. There’s also a very big middle ground. The idea here is to aim at what is essentially an automated process but to glance at the socks just enough to spot if there’s something really odd, such as the litigation issues that plague CTP and over-ride the model if need be. (P123’s live portfolio interface accommodates manual over-ride). If my model focuses on a high risk area, I keep and continually add-to an elimination list and have the rule InList(“xxx”)=false as part of my screen. The tests aren’t 100% pure, but I’m fine with that since I emphasize real-world usefulness over statistical purity.

When using a fully or partially automated process, it’s important to put yourself in a position to be able to tolerate duds because the chances that you’ll get them are 100%. This is one of the reasons why I’m so troubled by 5-stock models. If one is going to put 20% of funds into a single name, I think it’s absolutely essential to go full-out with a heavy-duty research effort for every stock (and even with that,one could still trip). Another modeling consideration is how much time you’re willing to give for a stock to pull out of a mess. It’s something to think about when determining sell protocols and rebalancing intervals.

The cost/benefit tradeoff on company-specific research (on an ongoing basis, as opposed to as part of the model building process) has much to do with how sensitive your model is to disasters. Warren Buffett or some other big name is popularly quoted for having said: “Rule number one is don’t lose money. Rule number two is memorize rule number one.” That’s a cute sound bite, but in the real world, it ludicrous BS (even Buffett does lose money). It should be revised to: “Rule number one is recognize that you’re going to take huge losses. Rule number two is adapt your strategy such that these situations won’t significantly damage your overall portfolio.”

Mgerstein,Steve and all experts,

Thank you for the valuable details and various ways to REJECT a bad stock.

I am failing at executing the plan most of the time; one gray/black area is my mind set and past failures/behavior.

=================================
I have sold ABTL, MFLX very early instead of waited,

Almost, all the investment book/trading books instruct 10% winning investor/traders because of their beliefs and mind set over other 90% of the gambling crowd.

Please, suggest me any good book for positive mindset & belief system to get transition from 90% to 10%.

I am getting some success thru p123, but my mind set remain as gambling crowd.

Any guidance will be appreciated.

Thanks
Kumar

Kumar - what is done is done. You can’t change the past so don’t dwell on it. You (and I) are investors who should only trade mechanical systems without question. It is very important that you detach yourself emotionally from your trading. You have to follow your systems exactly. And you need diversification. Not just in terms of markets and systems. But also designers of systems. If you have the money then subscribe to a few R2G models.

Its called the “stupid tax”.

I paid the stupid tax when I started trading. Back in the mid '80s I scraped together all my savings and then borrowed some more. I doubled my money in three months. Instead of realizing that it was beginners luck I put all my money into one stock, my entire savings and all I had borrowed. Because of my success I got greedy. The company I invested in had been in existence for 30 years and seemed to have a good software product. It was trading below book value, the same strategy I used for my previous success. At that time there was no internet to trade online or check stock prices. I would read the paper every night.

One night I came home and found that the stock price had dropped from $4 to $1.70. The company announced that it was involved in a lawsuit. But not to worry as they were “in the right”. Ta da ta da… So I thought to myself, well maybe I’ll take a loss on this trade, but the stock will bounce and then I’ll get out and lick my wounds. So the next night I got home and checked the newspaper and there were no trades listed for that stock. I called my broker and found out that the stock was no longer trading. I lost it all, except of course for the loan I still had to repay.

The question is: Have you paid the stupid tax yet, or is that still in your future?

There is no substitute for diversification and for those investors that have trouble controlling their emotions, following trading systems to the letter.

Steve

Kumar,

Emotions are by far the number one reason that investors fail. However, you see that emotions are a problem for you. As they say, the first step in solving a problem is recognizing that you have one. Most self-directed investors simply give up because their emotions sabotage their decisions and they incur significant losses. It’s good that you are trying to improve and are seeking advice on how to avoid the emotional decisions that are hurting your returns.

Steve recommended that you stick with a quantitative system (P123) and avoid making personal decisions. I would add an additional layer of protection from yourself: As an inexperienced investor, you may want to avoid the small-cap stocks with which you seem to be enamored. While it is proven that small-cap stocks will provide better returns, they also have inherently higher volatility, and that volatility is detrimentally affecting your behavior.

You admit to “getting some success thru p123, but my mind-set remain as gambling crowd.” It’s good you recognize this tendency in yourself. You also say that you want to get to the “10% of winning investors” and away from the "90% of gambling crowd.” There can be no better goal if you want to be a successful investor.

However, in this same thread you also rebut George’s (geov) admonishment to avoid companies like CTP by saying, “Peter Lynch, suggest to buy small and unknown company to become rich. He prefers 10 baggers.”

Kumar, it’s obvious that you are ‘swinging for the fences,’ i.e., trying to ‘get rich’ from investing. That is a mind-set that will be sure to have the opposite result, i.e., make you poor. The number of people who ‘get rich’ is truly a microscopic portion of those who take up self-directed investing.

Investing is an activity in which you buy partial ownership in publicly traded companies with the objective of making a reasonable, small profit on your capital over long periods of time (decades). Consistently repeating years of reasonable profits, aided by the magic of compounding, can grow a portfolio into real wealth. You can’t ‘swing for the fences’ with micro-cap stocks and expect to make a reasonable, steady profit. Your approach is speculation; gambling.

I believe that for a new investor like yourself, trying to achieve a steady, reasonable return is the key to investing success – not trying to ‘get rich’ via volatile small-cap stocks. Even Warren Buffett, arguably the greatest investor who ever lived, only achieves an average annual return of about 20%. The way Buffett attained a net worth of $60 billion, starting out of college with $500, was to maintain that 20% annual return year-after-year over many decades. He systematically avoided losses – the kind of losses you get when your emotions can’t handle volatility and you pull the plug when things get scary.

Buffett’s 20% avg. annual return is about 17% more than what the typical individual (or even professional) investor attains. 98% of all investors aren’t really investors. They are traders, speculators, and gamblers.

Here’s a little tough-love, Kumar: Based on the things you’ve said and the type of stocks you are attracted to, you are not investing; you are speculating (gambling). The micro-cap companies (CTP, ABTL, MFLX) upon which you are taking chances will likely bring nothing but trouble for you. You invariably sell when you start to see a slightly negative result. I know this because you cancelled your subscription to my newsletter when I only had a 6% drawdown one quarter. That’s all it took for you to pull the plug on a proven system with an 11-year track record of profits.

Here’s some suggestions for a successful approach to investing that can help you avoid the shooting yourself in the foot from emotional decisions:

1) Reduce your expectations. Shoot for conservative 20% returns, not 80% or 100%. At least initially, those high returns aren’t available to you if you are not able to stick with your own program. Start slow and work your way into being a successful investor. Several years of good performance with conservative stocks will give you the confidence you need to get more aggressive.

2) Limit your investments to more stable mid- and large-cap companies. Typically, they are less volatile. Try adding a buy rule of MktCap>1000 and use a custom universe made from a combination of the S&P 400 and S&P 500 (not ‘All Fundamentals’).

3) Consider adding low Beta and high Sortino to your Ranking Systems and Buy rules to help reduce the volatility. It’ll probably reduce your returns over a sim/port without them, but at least you’ll be better able stick with the program for the long haul. A reasonable-return, low volatility portfolio will beat the pants off high-return portfolio with stocks with volatility you can’t handle emotionally.

4) Consider adding a personalized stop-loss rule. While our research shows that stop-loss strategies actually reduce returns, if you can’t emotionally handle a loss greater than, say 15%, then by all means, put in that rule. It’s better to have a rule that anticipates your personal pain threshold (even if it reduces overall returns in a sim) than not have one and give up because you got some big drawdowns on a few stocks and sold them at their lows.

5) Stick with a proven, quantitative system with the above characteristics. If you’ve designed a system with stocks you, personally, can live with day-in and day-out, it shouldn’t be hard to stick with them. You need to make sure that you are honest with yourself, anticipate your personal emotional weaknesses, and create a sim/port that takes those weaknesses into consideration.

You also asked for a book recommendation that will help you deal with emotions. Have a look at The Little Book of Behavioral Investing by James Montier. Books like this will help you understand how emotions sabotage your results, but it still won’t help you avoid them. It’s probably futile to even try.

Montier says, “Even once we are aware of our biases, we must recognize that knowledge does not equal behavior. The solution lies in designing and adopting an investment process that is at least partially robust to behavioral decision-making errors.”

Look in the mirror and be honest with yourself. Then design a system that takes your personal emotional nature into consideration. If you do that, you’ll still be investing – successfully – 30 years from now, and you may even be ‘rich.’

I’m not sure what books you’re seeing. But for you and others who are interested in book recommendations, we revised this portion of our Help content. Help >> Books, or just use this link: http://www.portfolio123.com/doc/books.jsp

It’s not necessary to read all of them. Hopefully, the classifications and mini-reviews I provide on that page will help you choose.

And if your ranking is heavily weighted towards value, there is probably a very legitimate reason why the stock is cheap. Most of us are knowingly trading inherently risky stocks in exchange for the better possibility of higher returns. Risk vs. Rewards has to be calculated according to investor temperament and goals. There’s no free lunch.

All:

FWIW:  One of my Ports recently recommended MX.  I did not buy this stock since I knew they were going materially restate their financials during the probable holding period. How did I know this?  The Co. said so, and the press release was on Yahoo.  MX was at $15, now it's $5.  There's a lot of things P123 does really well. One thing it doesn't do well is read press releases. 

Bill

Marco:

   How about adding a simple AI app that would scan Yahoo news and press releases for phrases like "fraud" and "material restatement", etc. ?

Bill

There is absolutely no reason why this should be so. But if it is, it would be troubling because it would mean that P123 is not being used effectively. It would mean that non-value factors are being inadequately weighted and/or that the user is not making reasonable use of screening/buy rules.

A well-constructed value strategy needs two elements (aside from the basics such as liquidity):

  1. Well-conceived valuation tests

  2. Additional tests aimed at company quality to flag stocks that don’t deserve to be as cheap as they are. considering how varied the potential definitions of this are, one should expect far more rules/factors aimed at this than at valuation. It would be perfectly reasonable, for example, to see a 1-3 factor value ranking system used together with a screen consisting of 1 or 2 liquidity/size rules and, say, five or more non-value rules that serve to per-qualify the list of stocks that get ranked.

If part 2 is missing or under-emphasized, then you have a tax-loss generator rather than a legitimate value strategy.