The Kirk Report

ValuEngine

There are number of services available to investors that utilize valuation metrics as a basis for stock selection and screening. ValuEngine is one of the more popular services in this area.

ValuEngine's Stock Valuation Model is based on some interesting research and has been extensively backtested. Like many services of this kind, they provide a ranking system. The highest rating is a 5-Engine which is a considered a strong buy rating while the opposite is a 1-Engine or strong sell. According to ValuEngine, the 5-engine ratings have significantly outperformed the others:

As for the ValuEngine website, overall my impressions have been positive. For $200 per year or $20 a month, you receive access to a nice set of tools and portfolios. Although they need to improve some of the service's functions (for example, batch importing of portfolios and watchlists through a list of ticker symbols and offer better download functions like through Excel) the service is fairly easy to use. In fact, their advanced stock screener has been very well designed and even those who don't have a lot of experience with using stock screens will find that tool helpful.

The biggest weakness overall is that ValuEngine's coverage is limited. For example, quite a few of my stock screen machine stocks - like Potash (POT) and Research In Motion (RIMM) were not rated by their system even though they are fairly popular with investors. While I suspect their institutional software offers quite a bit more features and coverage, the price is simply out of reach for most of us ($5,000 per year or $500 per month). In some ways, the website is a bit of a teaser to get subscribers to shell out the big bucks, but that's par for the course for many of these kinds of offerings.

For some fun, I would like to share with you how my stock screen machine ranks according to the ValuEngine's proprietary formula. I have prepared this extensive spreadsheet which shows ValuEngine's recommendation, rating, fair value estimate, and 1 year expected return (at least for those stocks covered by the service) for every stock within my stock screen machine. Although I do not use ValuEngine's proprietary system in my stock screening, it was nice to see that my stock screen machine ranked fairly well (i.e. no sell ratings and a number of buys & 5-engine rated stocks). It was also interesting to see which stocks ranked the highest within specific sectors as provided within the spreadsheet.

As with many services of this nature, your mileage may vary depending on how you intend to use it. It certainly is not the holy grail (I've yet to see any system based on valuation in this manner to come even close), but if your approach lacks a valuation component and/or you think your strategies could benefit from that in some manner, you may find ValuEngine a worthwhile tool.

PowerRatings (Update)

Three months ago I did a review of PowerRatings, a quant rating method that ranks stocks on both safety and the potential for price appreciation. If you recall, I filtered all of the stocks showing up in my favorite stock screens through their ratings system and created six model portfolios in order to test the effectiveness of their ratings.

Using the closing pricing of the stocks on January 7, 2008 (the date of the review post) with an end date of last Friday, here's how these portfolios have performed in comparison to the S&P 500 which fell -3.23% during the same time frame.....[READ]

PowerRatings

I received a number of requests for me to offer a review of PowerRatings. Many of you are familiar with this product due to TradingMarkets website.

PowerRatings is a quantitative rating method which ranks stocks on both safety and the potential for price appreciation. According to the website, stocks with high PowerRatings (8-10) have historically outperformed the stock market over the next 12 months while stocks with low PowerRatings (1-3) have historically tended to underperform the market. From 1995-2007, 81% of stocks with PowerRatings of 10 increased in price one year later. On the other end, more than 65% of stocks with a PowerRating of 1 lost value over the following one year period.

The website recommends building a portfolio of stocks with PowerRatings of 9 and 10. Once the stock's rating declines, they urge replacing the stock with another stock rated 9 or 10. Another recommended strategy is to invest in stocks with PowerRatings of 10 and use a 100% profit target and a 20% protective stop. According to backtesting, the average gain per trade using this approach has been more than 41% per stock with an average holding period of about two years. Here are two nice looking graphs that illustrate the effectiveness of the system:

There's no doubt, these are very impressive performance numbers. So, should you run out and subscribe to their service? In my view, the jury is still out. The only way to evaluate these systems are to engage in some serious testing and tracking over a lengthy period of time which is more time consuming and painstaking than most will endure. Fortunately, I'm an exception to that rule. For the record, I was only able to locate one another independent performance review and it was over a short period of time.

As you may suspect, I always take published stats with a grain of salt as there are just too many ways to cook the data to make your system look better than it performs in reality. In addition, just because the system has performed well in the past offers absolutely no guarantee that it will do so in the future (if only the market were than easy!) In fact, as things tend to go, they often do the very opposite. We've seen that principle validated in other quant/ratings systems many times. For example, the well-known and highly regarded ValueLine in recent years experienced a situation where their worst ranked stocks significantly outperformed their top ranked stocks. Yikes!

With that said, over the weekend I did two things to test the PowerRatings. The first thing simply is to build a tracking portfolio from what their system thinks is the best of the best - the PowerRatings 10's portfolio. There are only 10 stocks in this portfolio and all of them are rated 10. Interesting enough, all of them are fairly defensive/pro-recession like stocks and include the following: BRKA, CL, CRL, CVD, KO, MGG, PAA, PRE, THI, and VMSI. I'll track these 10 and report back.

As you know, the way I really like to test these systems is to use my own stock screens as the foundation. Ideally, this is probably how most investors will use a system like this - i.e. they place their portfolio/watchlists and rank them accordingly. In addition, ideally utilizing a solid group of stocks to work with should enhance the future returns of the system or at least give it the best chance to show off its usefulness. Here is how stocks found within my stock screen machine are currently rated.

Performance is everything and I'll report back after some time has passed. But, without that data, here are what I think are some positives and negatives about their offering overall:

Positives:

• Easy import function to sort and rate stocks as an entire portfolio

• Email Guardian Alerts which easily allow you to keep on top of upgrades & downgrades daily

• PowerRatings charts which allow you to see how your stocks have rated in the past along with a simple pricing chart

• PowerRatings by market that enable to you see which stocks are rated best in the Dow, Nasdaq, & S&P 500

• Useful daily/weekly analysis and stock spotlights by David Penn

• Prominent Portfolios (like Warren Buffett to SAC Capital) are filtered through the system

• PowerRatings of the stocks in ETFs

• PowerRatings for industries allows for some interesting sector-based analysis/screening

Negatives:

• I would like to see more performance data and information about the system including rate of position turnover

• If the website gains in both popularity and use, I suspect past results will not be repeated

• PowerRatings portfolio - you should be able view more than 15 stocks at a time

• PowerRatings portfolio - excel export function should include ratings data

• Screener only allows to search powerratings - would be helpful to include both technical/fundamental scans as well

• Education section needs improvement

• Price is expensive ($49 per month/$449 per year) compared with other services

Conclusion: The website is designed well and more user friendly than some of its competitors. David Penn's commentary/analysis is also major plus. I also found it interesting to see what stocks are currently favored (i.e. recession/defensive names) not to mention how stocks within my own screens were rated. With any quant system like this, I'll ultimately let the performance data speak for itself and be extremely slow to incorporate it into my own approach unless it proves consistently helpful.

Where's The Mistletoe?

Bull or bear alike, there's little to keep one interested on this fine Friday afternoon. Perhaps they will rev up the buy programs once again again in the final hour, but I wouldn't bet the farm. They can put lipstick on this pig, but I'm sure not going to do any kissing.

Much like last year, I will be taking a couple of weeks off to spend with friends and family to enjoy the holiday season. During this time, I will be making some updates to the members' only website including a special Q&A session, year-end wrap up letter, and updates to my favorite stock screens.

I hope all of you have a wonderful couple of weeks and a Merry Christmas. I will be back on Wednesday, January 2, 2008.

Bernanke’s Christmas Gift

You may not have realized it, but the Fed just gave everyone their Christmas gift - a short-cover scare so that the smart money can reposition (i.e. go short) and get more defensive, before things really get bad. And, from what I saw on my screens today, reposition they did.

The only thing keeping the market intact is hope for a Santa Clause rally. I really hope that comes true - I have more stocks/etfs to sell.

Be defensive, hold lots of cash, don't be complacent with your longs, protect your assets, and if you're so inclined, look for strength to short. As for putting money to work on the long side, wake me up when we're back to extreme oversold conditions again. I don't plan one single buy until that point is reached. Such a tactic allowed me to survive and thrive in the past and I'm confident the same will hold true now.

We will see better days, but this is not the time for hope and faith that all is well. The market is sending us a message - are you listening?

Back To Resistance

It ended up being a pretty good day after three days of pain. As you can see from the 5-day view of the S&P 500, we've just only returned a little under Friday's failed test of resistance.

Although I read some commentary that today's strength was due to the strong ADP employment report, I'm quite skeptical. If the market went down today, they would be citing the same exact report as the catalyst. I continue to think that bad news about the economy (providing it isn't concerning retail sales) is good here ahead of the Fed.

In my opinion, we probably just saw some portfolio repositioning ahead of the big bad jobs report. If that is true, portfolio managers were reaching for the large growth tech stocks and beaten down financials. Emerging markets were also on fire and given the gains of stocks like ChinaNatural Resources (CHNR) and China Precision Steel (CPSL) it is clear that the fast money crowd is pressing for performance.

So far this week has held true to expectations - it is keeping all of us on our toes. But, so far, so good. We'll see what tomorrow brings our way.

Another Moody Monday

Including today, we haven't had a positive day for the market (as represented by the S&P 500) on a Monday since October 29th. Indeed, we've just seen five straight negative Monday sessions!

Historically, this isn't all that unusual of a pattern. Between 1952 and 1989, Monday was the worst trading day of the week and rose just 44% of the time while other trading days - Tuesday through Friday - closed higher 55% of the time. Very recently, one of the best days of the week has been Tuesday (especially following a negative Monday) and we'll see if the same pattern continues tomorrow.

Technically, 1470ish is the area that the bulls are trying to hold and it would be a major accomplishment if they're able to sustain this level throughout the week leading up to Friday's jobs report. In the short-term, I think we should be prepared for a pullback to 1425 to 1450 area at a minimum and then plan to be held hostage to the jobs data and then the Fed. It would also be helpful to get some positive headlines for a change which were few and far between today.

One Crazy Week

That was one crazy week! There simply no better way to put it.

On Monday, I made the following comment:

"While I’m certainly not sure this week’s economic data, window dressing, oversold conditions, and Fedspeak will be enough to put in at least a tradeable bottom, we’ve got to start somewhere. I’ve been sitting in cash for a reason, but it isn’t to stay in cash when everyone else now hates the market."

As you know from reading me recently, I have been concerned that I haven’t been doing a good job of putting cash to work. As we saw from the subsequent rally this week, those concerns were justified.

For the week just ended, the Dow gained +3.0%, the S&P 500 +2.8%, the Nasdaq +2.5% and the Russell 2000 +1.7%.

Next week will be all about "how much is the Fed going to cut rates?" and "will that make any substantial difference?" Friday's jobs report is going to be "THE" most important data point we'll see for the remainder of 2007. Also, any additional signs about how consumer spending is this holiday season will have a notable impact.

From my perspective, next week will be even more challenging than this one if you can believe that. With the gains we’ve seen, we are no longer working with extremely low expectations. So, make sure to get plenty of rest this weekend. The next two weeks will ultimately decide how we close out the 2007 and, if you’re like me, you want to close it out right!

Whack A Mole

Although it looked like at the start that we could finally put at least two days of gains together (something we haven't be able to do for a month), the bears enjoyed playing another fun round of whack a mole with anything that attempted to move higher.

The largest pressure points were found in all of the typical places - mortgage investment, residential construction, savings & loans, banks, and REITs of every flavor with a notable lack of leadership. And, when you see nothing but bear market ultrashort ETFs in today's winner circle, it doesn't take a genius to realize that people are not happy with this market.

For now, cash feels good, perhaps too good and that makes me increasingly very concerned that I'm not deploying capital into the weakness in the manner I've trained myself to do when things look and feel this bad. My goal this week is to put more than an chicken upside insurance trade on and I'm actively looking for a justification to upgrade my timing indicator from the neutral position. While I'm certainly not sure this week's economic data, window dressing, oversold conditions, and Fedspeak will be enough to put in at least a tradeable bottom, we've got to start somewhere. I've been sitting in cash for a reason, but it isn't to stay in cash when everyone else now hates the market.

See you tomorrow.

Bulls, Bears, & Turkeys

Holidays are stressful times for many and the market behavior this week hasn't helped. That's true no matter if you are a bull, bear, or just a turkey!

From my perspective, today's session was simply awful. While the buying of technology this afternoon is evidence that hope remains for at least a near-term oversold bounce, most everything else continues to struggle to find a bottom as that new 52-week low list keeps adding more and more names. Making matters worse, in my perspective, is options related activity that suggests not a lot of fear is now in our midst. As a result, I sat on my hands without make one single trade.

As long as people continue to think about what they can gain from a near-term rally instead of how much they can lose, this market is likely to test our nerves. No doubt, people have finally begun to lose faith in the Fed (the danger of having any faith in them to begin with) and think we're headed, if not already in a recession. In fact, even the most adamant bulls have started to suggest they're going to wait until the Fed blinks or something really bad happens that forces the Fed to act very aggressively. It's a tough game to play when traders start thinking along these lines.

My game plan is to continue do what I've been doing - maintain an open/opportunistic mindset, keep lots of firepower at the ready, pick at some ETFs that I think will offer some upside short-term potential, and keep monitoring my watchlists for low/risk - high/reward situations within my favorite screens. I haven't done much of stock focused trading recently primarily because the price alerts I've set still haven't been tagged, though they're getting closer by the day.

All in all, probably the best thing the market could have is a holiday to gain some much needed perspective and then prepare itself for the final days of what has been a truly remarkable November.

I'm taking both tomorrow and Friday off to spend time with friends and family. May you and your family have a wonderful holiday!