Within the markets, statistics can play a powerful role in giving investors insight into how the future may behave. 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, 5 companies with strong statistical properties are shown.
The above 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 65% 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 5 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 about the company which provides us with a compelling reason to invest. I suggest using weighted-average cost of capital. 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 their weighted-average cost of capital, they 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 their WACC, we can look at return on assets or return on equity.
In the above table, each firm's WACC can be seen as well as the assumptions that underlie this key metric. Additionally, I have included return on assets and return on equity to help an investor make the optimal investment decision.
- General Electric Company (GE) - GE is one of our strong firms to invest in for the next five months. It statistically has a 72% chance of ending the year higher, and if it does increase in price, it is estimated to increase by around 13% between August and December of this year. Additionally, the firm has a remarkably low WACC which shows that investors are satisfied with low rates of return from this company. By glancing at the return on assets and return on equity, an investor can quickly see that GE is not only meeting the standard, it is exceeding it.
- The Coca-Cola Company (KO) - KO is another firm that I expect to perform strongly in the back half of the year. It has increased in price between August and December for 34 out of the past 50 years, and it normally increases around 12% during this time period. It also has a very small WACC which shows that it can easily satisfy investors in the company with its strong return on assets and return on equity.
- Hewlett-Packard Company (HPQ) - HPQ has not performed very strongly this year, however statistically it is estimated to increase between August and December in 66% of all years. This increase is normally in the range of 14% or more. As any HPQ participant already knows, HPQ has been struggling under a higher cost of doing business as reflected in its WACC. It is currently not meeting its WACC through return on assets, but its return on equity is robust, signaling a potential climb in this stock as well.
- Du Pont (DD) - DD has an acceptable year-to-date performance of around 4%, however statistically it is due for a sharp rally between now and the end of the year. Of the past 50 years, DD has rallied in the last 5 months of the year in 64% of years, and on average these rallies represent an 8% increase in share price. DD is also a strongly positioned company on our list in that their cost of doing business is very low compared to the return they are generating on assets and equity.
- International Business Machines (IBM) - IBM has done very well for the past few years and this strength will possibly continue. According to the last 50 years of data, IBM has increased between August and December in 64% of all years and this increase has been on average around 14% in these months. IBM has an exceptionally low cost of doing business and they have simply been knocking the ball out of the park with their strong return on equity and return on assets. This strongly positions IBM for a rally in these last five months.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.