by Maj Soueidan
Market timing is not a core strategy of the GeoInvesting philosophy. However, attempting to identify individual stocks in the prime of their financial performance period is central to our investing approach.
When is the right time to own a particular stock? We often define this as a time when a company is about to enter the meat of an EPS growth cycle.
GeoInvesting Power Rankings
Through the use of analyst EPS estimates, we can create GeoPowerRankings (NYSEMKT:GPR) to help us identify opportunities like these. The GPR is the amount of consecutive quarters that a company is expected to experience EPS growth of around 30%*. The higher a stock’s GPR, the more timely and lucrative returns can be. From our experience, stocks with a minimum GPR of 3 or 4 can begin to offer lucrative and timely returns.
Going a step a further, companies that have failed to exhibit robust EPS growth in recent quarters but are about to attain a favorable GPR can offer some of the most rewarding scenarios. These are the diamonds in the rough and are often the stocks that will come to the forefront with strong EPS growth seemingly just around the corner.
We prefer to buy stocks with forward P/Es of less than 15 that are one quarter away from a favorable GPR. In essence, we have a value+growth+momentum strategy. Looking at past growth rates is also important, but we believe investors place too much weight on this statistic. Actually, a lackluster past can lead to a bigger P/E discount and greater expected returns. In these cases, finding companies with a lousy or mediocre past that have restructured operations can increase investment gains. (1)
When EPS estimates are not available, other good ways to gather information are to conduct interviews, scrutinize press releases and listen to conference calls. As a matter of fact, these tasks should also be performed when estimates are available. A successful interview with high GPR is a recipe for success.
Of course, the future can not produce guaranteed results, especially during uncertain times. We tracked several stocks with strong GPRs going into the 2010 third quarter, such as Tri-Tech (NASDAQ:TRIT) and Technitrol (TNL), but unforeseen circumstances curtailed near-term investor appetite.
In 2011, U.S stocks face the challenge of finally going up against EPS figures that benefitted from recent restructuring efforts. Much of these efforts produced stellar 2010 results, many times without the aid of robust revenue growth that investors will soon crave. The silver lining we have observed is that weak EPS growth assumptions have already been baked into analyst estimates which we believe leaves upside surprises if the economic recovery unexpectedly gains steam. We are highly confident that applying GPR analysis to your U.S. portfolio holdings will substantially enhance investment returns.
The China story is a little more complicated. Investor psychology will likely be affected by debates surrounding the slim possibility that increasingly stringent policies in China may moderate growth rates in some industries. The impact of increased labor tensions and faltering growth plans from seasoned firms may also be a topic of discussion. Equity raise activities have not slowed down in low P/E stocks.
To complicate matters, we have to contend with fraud allegations across the reverse merger space, which has made Reverse Take Overs a market segment driven by sentiment in lieu of fundamentals. GeoInvesting Power Rankings will only work if investors believe the numbers.
At some point in the future, we anticipate that as some companies improve financial transparency, the cesspool of dishonest companies will be cleared out, making for a more confident GPR analysis. If this is the case, risky investors could see healthy returns in select ChinaHybrid names, especially after 2010 audits and SEC investigations are complete. Until then it is prudent to take GPR analysis for RTO ChinaHybrids with a grain of salt. We remain overweight in U.S. stocks.
Please reference this link to view U.S. stocks and Chinese stocks with high GPR such as Cpi Aerostructures (NYSEMKT:CVU), Brown Shoe Co (BWS), Versar (NYSEMKT:VSR) Deer Consumer Products (OTC:DEER), Yuhe Intl (OTC:YUII) and Lj Intl (NASDAQ:JADE).
(1) Some objectivity has to be allowed when choosing growth rates for GPR analysis. We are willing to look at quarterly growth rates of less than 30% if the majority of EPS growth in the targeted period is over 30% and especially if the PEG ratio is favorable. We also attempt to verify that forward EPS growth rate will be close to 30%.
Disclosure: I am long BWS, CVU, VSR, JADE.