Investment strategies investigated - Part i - Relative Strength Index

As some of you will be aware, Quantr.co provide investors and traders with all the tools needed to download stock market data directly into Excel spreadsheets. As we cover over 7000 US listed stocks it's a fantastic place to investigate investment strategies.

The first of our strategies is the use of the relative strength index (RSI) in buying undervalued stocks. As Investopedia explain "The RSI is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:

RSI = 100 - 100/(1 + RS*)

*Where RS = Average of x days' up closes / Average of x days' down closes.

Most people deem an RSI approaching 30 (or below) to be oversold, meaning that the stock may now start an uptrend, and an RSI approaching 70 (or above) to be overbought, causing the asset to start a downtrend.

Our approach

So, for this investigation we are going to look at the what if scenario for the portfolio performance if buying all stocks approaching an RSI of 30, as well as a specially selected group of stocks approaching an RSI of 30 that satisfy a few fundamental factors.

As of October 25 2014 we have 703 stocks that are approaching an RSI of 30. For the purpose of this experiment we are going to class 'approaching an RSI of 30' as any stock below an RSI of 40 on 14 day basis.

We have placed all 703 stocks in an equally-weighted portfolio together and will track them for one month, removing individual stocks from the study as they approach an RSI of 70 and thus are categorised as being overbought.  At the end of the month we will judge the portfolio against the market performance and other portfolios within the study.

The special selection

Sometimes there are fundamental reasons why a stock is trading with a low RSI. A company that is heading to bankruptcy, for example, would see very little buying when heading to $0. 

So for this reason we have screened through our data for stocks with fundamentally strong features that may greater encourage a change in momentum.

The follow criterion had to be satisfied to be included in this particular portfolio.

• Return on Equity > 20%
• Debt to Equity  < 80%
• PEGY Ratio < 2
• Relative Strength Index < 40

Out of over 7000 stocks we were left with just 15 stocks that satisfied our criterion. These stocks were:

Once again these stocks will be held for one month, or until they approach an RSI of 70 and thus are categorised as being overbought.

Finally - for the purists.

Some people prefer to class oversold as strictly below an RSI of 30. For this reason, a third portfolio has been constructed containing 148 stocks that currently trade with an RSI below 30. The same rules apply for this portfolio.

We will report back with regular updates as we investigate this trading strategy. 

- J

A Short Case For Under Armour, Inc. Ahead Of Q3 Earnings

A Short Case For Under Armour, Inc. Ahead Of Q3 Earnings

Previously posted on Seeking Alpha on Oct 22, 2015 

Is Under Armour overvalued relative to its growth prospects?

We love Under Armour. We think it is a fantastic company with some highly marketable athletes promoting high quality products at a time where there is evidence of an accelerated global adoption of the athleisure trend.

But, is the Company overvalued? We believe, that trading at a PE ttm of 107.78, the growth UA would need to produce over the next five years to produce good to great shareholder returns is not quite achievable.

Time To Fall In Line With Its Peers

Our thesis is built on the premise that we believe the time has come for UA to start to fall in line with its peers, most notably NKE, and in five years believe the market will expect the company to be trading at a Price to Earnings ratio of approximately 33.

The current consensus is for UA to grow EPS at a rate of 23.4% per year for the next five years. Should this be the case, and that the PE Ratio drops to 33 as we predict, the outlook would be as follows:

For us, under the terms of our thesis, in order for UA to be fairly priced, and achieve an average shareholder return of 5% per year over the next five years, we posit that the Company needs to be growing their EPS by approximately 29% per year. Only then would we look at going long with UA. Were they to achieve this then the outlook could look like this:

Unfortunately, we think this growth is out of reach for the Company. Sure, we see great opportunity in the Asia market, but we don't believe there is enough there to achieve 29% annual EPS growth. Additionally, with a sustainable growth rate (ROE x (1 - dividend-payout ratio)) of 15%, there would potentially be substantial financial strain on the company to grow at any rate higher than this, let alone almost twice the SGR.

The worst case scenario, the Company only being able to achieve 15% annual EPS growth over the next five years (in line with the SGR), we would envisage the outlook to look a lot like this:

Thursday's Earnings

Before the market opens on Thursday UA will announce their third quarter earnings. The Wall Street consensus is for EPS of $0.44 and revenue of $1.173 BN. These earnings may just give us an indication as to whether 29% EPS growth is an achievable feat or merely a pipe dream.