The article (below) on the poor performance of low PE stocks in no
way refutes the potential for using fundamental stock data
to obtain superior investment returns.
If this value approach WERE to perform well for a quarter or three,
would that validate the methodology? Certainly not. In short,
it proves little other than that one or two variables (Ta of Funny)
are not likely to work for any long period of time.
PE and low price to book are only 2 of a very large number of
variables available in QP2. To limit fundamental analysis to
these 2 variables is akin to limiting TA to buying when a
stock drops back to its 200 day moving average.
Fundamental stock data are correlated to price. The early
possession of this information by insiders may make it
difficult or impossible for the rest of us to profit from
this approach. And certainly, such systems would be complex
and difficult to devise.
But I have not seen many TA oriented investors finding they
have been exceeding a simple SP500 Index fund for the last
few years. Particularly when the relatively high beta stock
selections I see coming out of many TA filters are compared
with the beta of the SP500.
I think returns exceeding a measure such as the SP500
may be had using technical analysis as well as a fundamental
data approach. More likely is an approach involving both.
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No bargains for the value investors
High PE stocks fueled S&P's second-quarter gains
By Don Scott, CBS MarketWatch
Last Update: 10:01 AM June 26, 1998
NEW YORK (CBS.MW) -- Value investors who look for low price-earnings
ratios to guide their stock-picking may be on the wrong track.
In the second quarter, 22 large cap stocks with the highest PE ratios were
primarily responsible for the second-quarter gains by the S&P 500.
The remaining 478 stocks in the index have, as a group, been non-starters.
That's according to a new study just completed by David E. Nelson, a
portfolio manager at the Legg Mason Funds (www.leggmason.com), which
takes a value-oriented approach to investing.
Nelson was named portfolio manager for Legg's
$205 million American Leading Companies
Trust in March and his mission is to improve
the fund's performance, which has lagged the
market lately.
He studies the markets to find growth stocks he
can buy at a reasonable value. And he says the
market hasn't been rewarding investors who
look for traditional value measures like low PE
ratios, low price-to-book, and the like. "The
strength of the market has been concentrated in
the very largest and most expensive stocks in
the market," he said.
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