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The Hypothetical No Due-Diligence Portfolio

  • There is not enough time in the world to research all the companies out there. Thousands of ticker symbols. Funds/ETFs, Stocks, Bonds - a sea of CUSIPs to drown in.
  • The hypothesis is simple: Could the experience and opinion of thousands of savvy investors and investment managers show up in the charts of individual companies?
  • Could picking "nice charts" (after a 30 second glance) be a more effective manner to select quality companies than any other, given your limited resource: Time?


Welcome to the hypothetical no-due-diligence portfolio, an idea that materialized after a lively discussion with an online acquaintance. We agreed that there is not enough time in the world to research all of the companies out there. Could there be a quicker way to spot the best of the best, high quality companies that are out there? Skip below to The Hypothesis if you prefer a quicker read.

We readers come to SeekingAlpha to find skilled authors and analysts, focused on and watching their own specific sectors every day. They write updates or an analysis, which we then take in. We gain insights and the benefit of their hours or days of research in just minutes. This really is a great place.

SA helps to preserve our most precious resource - time. Given enough time, we could in theory make perfect investment decisions, leading to immense wealth generation. (Which actually frees you up to do more of what you want with your time.) But since we have finite time, decisions are often based on partial or incomplete research. Sometimes it's better to seek the opinions of others rather than taking a shot in the dark. Many times I have seen thorough research come from authors and SA commenters that far exceeds my own. I am still learning to properly read balance sheets and 10-K reports. I'm like a toddler, slowly wobbling through them looking for signs of danger. I am not proficient at it by a long shot, which is why many articles here are so helpful to me.

...but then a fun thought popped into my head... what if there were another way to distill such knowledge? A way several magnitudes more time efficient, and involving no due diligence whatsoever? Something easy to look at, that you could flip through a hundred at a time? Something easy, like say... charts?

The Hypothesis

Readers may find it a strange concept, unless they have read some of Chris Ciovacco's articles. The hypothesis is that there are millions of intelligent investors and investment managers out there - could their opinions of stocks/companies be revealed in aggregate by the charts themselves?

I am not advocating technical analysis here - I'm actually proposing that fundamentals show up in multi-year charts, at least when the charts contain enough elements.

Consider the following behaviour:

  • When an investor decides that they trust management to pull through a tough time, they are more likely to hang on or buy more when a stock dips. This may manifest as a stock price that is more stable, or a stock that never gets "cheap".

Some of the bigger oil companies sure have held up well through this price collapse, while many of the smaller ones have had their stock prices collapse by 90-95%. Walmart (NYSE:WMT) with its recent disappointing earnings guidance also never dipped that far. There's something to be said for management trust.

  • When management screws up, or investors decide that they do not trust them, the opposite happens - charts may get much more volatile. Traders aside, these companies are probably worth avoiding.

Sun Edison (SUNE), Northstar Realty (NRF), SeaDrill (NYSE:SDRL), Vereit (NYSE:VER) - got any more? Charts get noticeably more spiky when management makes promises and breaks them.

  • When best in class management knows what they are doing, but a sector is in trouble, analysts will lower earnings estimates, yet the company may still deliver excellent earnings and beat the lower estimates

If you had a chart that revealed this trait, it could be invaluable to spotting the cream of the crop in any sector.

  • When a company and its management execute well, earnings rise right along with the stock price, but this doesn't always happen in lockstep. Sometimes price gets ahead of itself, and other times price declines despite earnings continuing to rise at a good clip.

If you had a chart that revealed this, it could be invaluable to spotting good buying or selling points.

  • Consistently growing earnings year after year is an excellent trait. Even if you pick the wrong entry point, earnings growth can eventually bail you out and take your portfolio higher.

A chart that reveals consistent earnings growth could be invaluable. It's the sort of company that I'd like to have in my portfolio.

If you could find a chart that revealed all of these traits, and was easy to compare to other companies, it might be very useful for spotting quality companies. Pass over the ones that don't have enough good traits, consider the ones that do.

In reality, I'd then start my due diligence at that point, but for this fun exercise and hypothesis, no further research will take place.

The Problem - The Snag

Where do we find such charts? Yahoo charts contain only the stock price on a given date. Google Finance is similar, but also shows dividends. Neither will cut it, as they provide no insight into how well the company is executing - only how market/company/sector sentiment is at the moment. (With higher price equaling better sentiment.) Perhaps that's all that you need for a story stock, or for trading, but it tells me nothing about the health of the underlying company, or whether its dividends are safe or at risk.

To spot the above factors, which have the potential to combine to reveal the best of the best companies (as the hypothesis goes), we need a new kind of chart that has earnings information contained within it.

Possible Solutions to the Problem

Two possible charting solutions that I have come across are FastGraphs and ZACKS earnings charts. FastGraphs require a subscription, and ZACKS charts are free. If anyone has any other chart services that I should be aware of, please post links in the comments below, as I'm actively looking for the perfect service for my own needs.

Both types of charts actually have a fair bit of backwards looking information packed into them, which is the most useful sort for spotting consistency, and determining how the market views or has viewed a company. They could be just what we need.

I had a section explaining FastGraphs, but it ended up being rather long and kicked the article over the typical length that editors like to see. (No matter - they rejected this article. If I still had it, I'd paste it in.) Since the service already does a good job explaining how to use its charts, and authors here like Brad Thomas often utilize and explain them, I will skip them at this time. That said, I like them, their configurability, and the different elements that they can display over long time spans.

Reading Charts - It's not Voodoo

Reading charts isn't voodoo, despite what some people think. But it also won't tell you every single thing about a stock either. Still, perhaps it tells you enough, even with a 30 second glance? That is the hypothesis that I aim to test. Rather than throwing around baseless opinions, I'll explain step by step what I look at within such a chart, and then produce some ticker symbols using the same quick chart analysis.

SA readers will then get to forward-test this hypothesis over the next few years, to see whether it had any merit. Bookmark this article and add it to your calendar - some day in the future we'll find out!

I'm a bigger believer in forward-testing than back-testing, since you can craft any set of data into remarkable back-tested results. With the benefit of 20/20 hindsight, you can do it even more wrong! Fall victim to survivorship bias at your own peril. Back-testing often only includes companies that did survive - excluding companies that went bankrupt, since they no longer exist. They may have qualified at the time, potentially skewing the results massively.

Before we get started, if anyone thinks that I missed anything, please point out below what you yourself look at in charts.

First, a ZACKS Price & Consensus Chart, plus the scribbled on version and points worthy of note:

ZACKS Price + Consensus - OHI

  1. ZACKS charts cover the last 5 years. (2011 - 2016)
  2. 40% volatility, peak to trough.
  3. Earnings have grown ~60% over 5 years.
  4. OHI's price recently diverged from its earnings growth. Careful: The scales on the chart are not quite the same! $16 to $45 is nearly 200% price appreciation, while $1.80 to $3.20 in earnings is not. Share price cannot follow this line forever without multiple expansion, but earnings and dividends can. Breaking it strongly may signal a buying opportunity.
  5. I happen to know the HCP Manorcare event caused price volatility. Analysts wrongly lowered estimates, which OHI easily beat with significant Y/Y growth. No, I didn't divine that from the chart - it was actually from SA and Brad Thomas - but allow me this leniency, since OHI and S&P ~1820 were the recent trigger for me deploying funds in my TFSA, which is the Canadian equivalent to a Roth IRA.
  6. OHI was considered a safe bond proxy, but now isn't.

Generally my procedure goes something like this:

First I compare highs to lows, to get an idea of the volatility. 20%? 30% 50%? 70%? 90%? It doesn't have to be exact, but being able to do ratios quickly in your head means that you'll be able to spot less volatile companies easier. Keep in mind that not all charts use the same scale, so a 5%, 15% and 50% decline can sometimes appear the same on different charts.

Also consider - even "blue chip" companies like JNJ and PG have years where they decline 35%+ from peak to trough. It might seem like a large number, but I'd consider companies even if they had a 50 or 60% stock price decline, so long as other elements justify it. (For example, if their stock price clearly got ahead of their growing earnings, or if their earnings growth is proceeding at an excellent pace regardless of what the stock price is doing. The disconnect between price and earnings sometimes spells opportunity, sometimes danger.)

I also take note of whether the company is considered a bond proxy by the market. Does it spike upward right along with known dates when US treasuries spiked and yields hit record lows? (May 2013, Jan 2015, Jan 2016) Realty Income (NYSE:O), National Retail Properties (NYSE:NNN), and STORE Capital (NYSE:STOR) are good examples of that - they sell off when treasuries sell off and yields rise. These sorts of companies may require different entry points. Knowing this, I am more likely to sell them when the market is breaking down, and buy them when everything is good, since I am a trader at heart. Not many companies are considered safe enough to act this way. They are certainly good stocks to have to smooth out a volatile portfolio.

Realty Income (<a href='' title='Realty Income Corporation'>O</a>) - The True Bond Proxy... that grows 6-8% per year.

Google Finance: Realty Income plotted against TLT - 20yr Treasuries Fund.

Next I examine the earnings portion of the chart to verify that earnings are rising. Are the coloured lines heading upward to the right? I also check the scale of earnings on the left. I have more trouble paying 20-25x earnings for a company growing 45% over 5 years, than one growing 200% over the same time period. That said, I wouldn't mind owning both in this case.

Since the exercise is finding truly great companies by looking at charts, as long as the company really is a great company that continues to execute, the PE multiple will likely be the same at some point in the future. That means I will probably get to sell to someone else at the same inflated multiple, making it a point of consideration (but not determination) about whether I buy. The rate of growth is far more important over the long term.

Realty Income vs Extra Space Storage

Generally the first half of a year's earnings line is projections and estimates by analysts. The second half will be a mixture of what analysts expect, and what the company actually delivers. Sloping upward to the right is a very good thing, as it means the company is beating the rising expectations of everyone.

Here's a lodging / hotel REIT. Judging by this chart (and nearly 50% decline), you might think there's something wrong with the company:

CLDT - Yahoo

But by combining earnings data, we can see it is one the best players in a weak sector. Earnings estimates have come down, but are still near 10% Y/Y growth.


Do you really want to own hotels going into a recession? Probably not. Some other lodging companies are reporting poor results, which will pull them all down if it hasn't already. Even so, the trader in me wants to play this rebound, and the investor in me wants to own them for the next growth cycle.

They hit nearly $16/share, against guidance for ~$2.50+ in FFO. In 2013 they were that price against $1.50 in FFO. Admittedly that was at a different point in the lodging cycle, but if I thought these recession fears were going to blow over, I would certainly consider CLDT in the high teens to play the rebound.

Whoops - If I'm not careful I'm going to slip into knowing something about these companies... slip into fundamental analysis.

Enough of That - Lets Get to Work on this Hypothetical Portfolio

Once again, the point is to see whether the charts will provide enough clues (and "Look Nice Enough") in order to steer me towards excellent companies, as determined by the aggregate opinion of other investors taking part in the market. I am to make my decision, knowing very little about these companies. Perhaps their name and sector, or whether Brad Thomas likes them (I read too many of his articles to rule out this being a subconscious factor in my decision making), but aside from that it will be based on what I see in the charts. I'm only to spend ~30 seconds evaluating each one.

Detailed Methodology

Last December I combed over articles and scanned for ticker symbols that people were asking about in the comments. After checking a dozen or so articles, I spotted about 200-300 symbols, and quickly checked their charts. My list ended up containing about 51 of them before I got tired of the exercise:

Since I recently deployed money into my TFSA (like a Roth IRA) and bought OHI shares, I am going to use that day (Feb 9th 2016) as the starting date of the portfolio. Aside from trades or company specific opportunities, I tend to only deploy funds when the market is testing major support points. In this case, the S&P 500 was near 1820. If the market continues to rebound from here, the comparison with the SPY ETF will be very close to its absolute low this year.

Even though I would've bought the "bond equivalent" portion of the portfolio at much better prices, we will purchase everything in one go on the same day.

I have allocated an imaginary $50,000 USD to this portfolio. Since I know nothing of the companies other than their charts, I will simply equal weight it. Nearly 100% is deployed into shares ($49,934.52 according to my spreadsheet), but there are enough dollars left over to pay commissions at a discount broker. (My favourite would probably be RobinHood if they ever make it to Canada. I do hope that we get fee free stock trading here sometime soon. A few brokerages offer unlimited trades during the first month, so $0 to fake-acquire these shares is not unreasonable.)

For dividends, I think the best use might be to collect them and then deploy them when there's a clump available, into whatever ticker symbol looks good after a 30 second evaluation. Commenters (if I get any, since this is now on my 160 subscriber insta-blog... lol), feel free to toss out symbols that I haven't heard about.

Now on to the Portfolio...

Pretty Spreadsheet Courtesy of Google Docs

The NoDD Portfolio - No Due Diligence Performed!

Right off the bat we have a lead, but whether that holds up, only time will tell. I have taken a tip from Regarded Solutions and broken out the portfolio value, expected dividends, and other metrics for those that are interested, and included the SPY ETF for comparison. I'll probably add a cash onhand amount once a few dividends have gone by.

Right now AVGO is failing to fetch historical pricing from Google Finance, so I used today's price rather than pick something arbitrary. That may correct itself in the future, or I'll go in and manually enter a price.

Aside from that, there's nothing to report about this experiment until some time passes. I'll likely keep it quite close to a Buy&Hold strategy. I could check the charts over again from time to time to see if they are changing/degrading, but I think that might defeat the purpose of the whole experiment.

The hypothesis was testing whether we can locate the best of the best investments for the long haul through ~30 seconds of looking at a chart. Although prudent for managing a portfolio, rebalancing and factoring in future information is not part of that hypothesis. That's further fundamental research. As such, it should likely be excluded?

To The Readers

Do any SA readers have thoughts on this experiment, or predictions on how it will turn out? I'm rather curious of your opinions! I have learned much from SA's authors and commenters, and would like to hear what you think about this experiment. I haven't bothered to crunch the sector concentration, although I see quite a lot of REITs in this list. If you've got any input or an opinion, post it below! I read every comment. (Which would be more impressive if I had any.)


Additional disclosure: Portfolio has no due diligence performed. Based solely on the
above companies having 'nice looking' charts after a 30 second glance each. Entry trigger was S&P near 1820 + OHI selloff. $50k deployed to hypothetical portfolio. I do own some of the stocks mentioned for my own portfolio.