By using statistics, investors can best position themselves to exploit the repetitive nature of history in the stock market. Statistics allow us to determine what is normal within a market and research if relationships hold true over time. In order to select stocks, I try to locate stocks which exhibit statistically-sound characteristics to see if an investing opportunity exists.
In the following research, I have seen how each of the following stocks performed from the months of August through December of every year that public data is available. This analysis gives us insight in that it shows us how specific stocks tend to behave between now and the end of the year. In the table below, five companies with strong statistical properties are shown.
The table shows 50 years of data for each stock. The second row of data shows how many of the years studied ended higher during the period of August through December. As can be seen, each stock went up in over 62% of the years studied. Below this information, the average return for the months of August through December is shown. Beneath this row, the average return in a year which went up and the average return in a year which went down during the months of August through December are shown.
This data by itself shows that these five stocks are set to potentially experience a large gain in the following months, but this data in isolation is not enough to make an informed investment decision. In order to make a better decision, we need to factor in information which provides us with a compelling reason to invest. I suggest using weighted-average cost of capital (GM:WACC). At the highest level, WACC represents the cost of capital of the firm to do business. Specifically, this figure is a percentage amount that the firm must generate on projects to satisfy creditors and equity investors. If a firm is unable to meet its WACC, it will eventually be faced with defaults to creditors or decrease in share demand from equity investors. In order to gauge a firm's success at meeting or beating its WACC, we can look at return on assets or return on equity.
In the above table, each firm's WACC and the assumptions that underlie this key metric can be seen. Additionally, I have included return on assets and return on equity to help an investor make the optimal investment decision.
- Caterpillar Inc. (CAT) - Caterpillar has not been performing very well this year; however, statistically it increases in price during the next five months in 62% of all years. When prices do increase, they normally increase 12% from August to December. Fundamentally, Caterpillar is a strong investment option with its return on assets and return on equity strongly outperforming its WACC. This means that Caterpillar is not only satisfying its investors, but it is generating a return sufficient to justify an expansion of its business.
- The Walt Disney Company (DIS) - Disney has had a very strong year-to-date performance of nearly 34% and statistically this performance will more than likely continue. In 64% of all years studied, Disney increased between August and December. If an investor decides to own this company and the price increases, the average return could potentially be around a staggering 19%. Fundamentally, Disney is positioned for success with a return on assets and return on equity more than sufficient to recuperate its cost of capital.
- 3M Company (MMM) - 3M has had a decent year by earning an 8.5% year-to-date performance. According to history, 3M typically increases between August and December in 67% of all years with an average gain of 10%. This potential gain is supported by the fundamental characteristics of the company. 3M is currently earning a return over twice its required return on capital. This positions the company to continue satisfying investors with market return and debt repayments for years to come.
- CenterPoint Energy, Inc. (CNP) - The stock performance of CenterPoint has been acceptable this year by earning investors a 5% return with very little volatility. Current investors will be happy to know that between the months of August through December, CenterPoint has a 73% chance of increasing in share price. If we are correct in believing that CenterPoint will increase, the average share price change is a growth of 14%. CenterPoint is currently generating slim return on assets; however, the company more than makes up for this deficiency with its robust return on equity.
- American Electric Power Company, Inc. (AEP) - AEP has experienced a relatively flat year-to-date performance of only 3% with fairly large volatility. Despite these price swings, AEP statistically increases in the following five months of the year 74% of the time and the average return of positive years is around 10%. These statistics are supported by a decent return on equity. Investors should note that AEP is not earning the strongest return on assets; however, it is more than recuperating its required return through equity.
By using statistics and leveraging an understanding of a company's cost of doing business, we as investors can position ourselves to best capitalize on the future. It is my hope that this list provides you with opportunities to utilize your existing investment philosophy and achieve alpha in the near future.