Maybe a Pine Tree

Master-ahknaten-Card and Momentum

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I'm sad when I see that folks seem to pick stocks based primarily on momentum. Along with size and value, momentum is certainly a factor in the market, but it seems to me that in stock picking competitions, the best way to win at times is by picking these momentum plays. As Mastercard was held since the start of the competition, then it would appear that it was such a holding.

For fun, I made a paper portfolio of stocks that had nice momentum as of the end of July. That portfolio had TBSI, LPHI, CROX, SIF, EXM, DRYS, RCCC, ZNH, SNCR, CFSG, CEA, INNO, TNH, CF and MA. The two month return of that portfolio was 24%! Much higher than my virtual competition portfolio. Out of those stocks, CEA went up 96%, SIF fell -30% and the standard deviation was 36%! Now, many of those stocks were small, but guess which one had the highest marketcap? Mastercard. So, Mastercard makes for a great blog. Find a stock that many would hold, and those folks probably hold it for some momentum reason. Now, ask those folks to comment on their pick and why they love the stock. Some will talk about how great the company is, and perhaps it is great, but I'd be willing to guess that many picked it just because of the chart.

So, let's assume what I said above is true, and I'll make a paper portfolio with 20 stocks based purely on momentum -- ACH ZNH CEA CROX DRYS TBSI EXM BCSI SNCR CALM FTK CRNT JRJC NWK BPHX CFSG APPY HEM ASTI CORT. Now, I'm not saying these are bad (or good), I'm just saying that they look like momentum plays, and I bet there is a high probability that someone holds a few of these in the competition, and perhaps... in a few weeks we'll get a question that asks: Why do you hold ACH, ZNH, CEA, CROX or DRYS? Someone will come up with some sort of smart response, when in reality they held it for the momentum.

Here's my non-momentum based take on Mastercard. I see a high short interest, high price/book and high accruals. That concerns me. When I value the stock and make a DCF model on eVal, I get a value that is less than $100. (DCF is picky on the tax rate you choose for this one). Then, I look at the earnings history and I notice that it usually beats by 0.10-0.40 cents and I have to stop and ask myself... if it doesn't beat by 0.10 cents next time, what happens? This is a stock that I would sell/short at this point. Some may give the argument that as rates fall, folks will use their cards more. Some will give the argument that as Christmas approaches then everyone will go out shopping. I think it's overvalued, it was a momentum pick and it's due for a correction soon.

By the way, in the Apple blog (part two), I had sarcastically listed some other momentum stocks -- RIMM RIO JNPR AMZN FCX CROX VIP NOV and GMST. On average those stocks went up 6% last week. It's not master stock picking, it's just momentum.