Month: February 2010

Richard Love on Superperforming stocks

First consideration in buying a stock is safety. Safety is derived more from the good timing of purchase and less from the financial strength of the company. (All stocks decline in bear markets. When there is no risk appetite, there are no buyers.)

Most stocks are price cyclical. Buying stocks as the market rebounds from bear market lows is the safest time and it offers the best opportunity for large capital gains. (Sellers cover their short positions, large size buyers are stepping in and indexes are rising above their rising 50 dma)

A winning combination in potential Super-performing stock is rapidly rising earnings, a small supply of stock, low P/E, and a product that promises strong future growth. (Investor’s job is to decide 1) when to buy; 2) what to buy) and 3) when to sell; the future best performing stocks have already doubled in value and are close to new 6 months high)

Some of the strongest price moves have been a result of severe imbalance between limited supply and huge demand of investors. Opportunities for a big gains in stock market are most likely to occur in relatively small companies than in companies with many millions of shares outstanding. Look for small company introducing a unique product that is likely to become widely used. This is the combination that has time after time resulted in dynamic growth.

Financial leverage in a stock is often responsible for high volatility in the stock’s price. Companies with high % of debt in their capitalization tend to have very volatile earnings. A relatively modest increase in income in such companies leads to disproportional increase in EPS.  Airlines and retailers are best examples of high leveraged companies. During periods of recession, when profits decline for most businesses, companies that have large amounts of debt sometimes have no profits at all. But as the national economy emerges from recession, corporate sales and profit margins improve. The % increase in profits can usually be larger than for stocks with small leverage. Highly leveraged companies, then, are even more business cycle sensitive and often are buying opportunities when the stock price is depressed.

Mark Minervini on discipline

Other than selling stocks short, I don’t know of any long-side method that works that great in a bear market. Very few stocks, even value stocks, can survive the wrath of a true bear decline.

The best leading stocks generally see their big performance a year or two into a bull market. I focus on those stocks in order to make a huge return in a relative short period of time. There is no need to be in the market all the time; in fact, I think there is grave danger in doing so. It’s like going out on a boat trip: you want to go out when the sky is blue and the seas are calm. Sure, you could stay out there and brave a hurricane and there would be a chance you’d make it through, but why would you want to do that, and how many times would you survive those conditions?

The mystery of Chinese savings

The world has been wondering for a while what stays behind the huge Chinese households’ savings rate, currently at 30% of the disposable income. Conventional wisdom points out that since there is no government safety net in China, the locals have to make sure that they have enough money for education, health care and retirement. This is certainly a valid reason, but as it turned out – not the main one.

Yes, part of the Chinese savings is to make up for the inadequacy of the social safety net. Yes, there may be some increase in the cost of healthcare. But, as the social safety has improved and the insurance coverage has expanded over the last decade or so, we should expect household savings to decline, or at least not increase. Yet, household savings as a share of disposable income almost doubled from 16% in 1990 to over 30% today.

There is a social phenomenon behind the high savings rate in China. For every 100 girls in China, there are 122 boys today. The gap is staggering and it is the biggest in the world. It means that at least 1/5 of all the boys won’t be able to get married. China’s stringent family-planning policy allows most couples to have only one or two children. Most families prefer a boy and often abort their first child if it is a girl. A major deal breaker for Chinese girls is the ability of their man (or his family) to provide a house for the future family. Therefore the ability to get married is often dependent on the thickness of the family wallet. You can see on the graph above that ever since the ratio of men/women in China started to rapidly rise in the late 1990s, the households’ savings rate skyrocketed. Families with a boy tend to save much more than families with a girl as a child. (a conclusion  made by Professor N.T. Wang.)

Sounds interesting. I’ve always thought that the huge households’ savings rate in China is due to a gradual increase in the living standard there. As the disposable income for all Chinese  has started to increase in the mid and late 1990s, they haven’t changed their spending habits and accumulated vast amounts for rainy days. It seems like during the last several years, the Chinese have started using their savings to invest (or I would say speculate) in real estate market. I am afraid that many of them are buying overpriced assets and in the following 5 years, they will see their savings disappear as the value of the real estate in China starts to decline.