"WIND has well above average safety with well above average upside potential. It reflects a stock which is likely to give well above average, quite consistent returns over the long term. "
Those aren't my words, they are taken verbatim from VectorVest's summary view of WIND, which you neglected to include when you copied over VectorVest output. Besides the fact that VectorVest is not privy to the I2O impact on growth in EPS - which you should be if you follow the thread -- the hold recommendation reflects VectorVest's proprietary approach to Technical Analysis. You might note that WIND scores well on VectorVest's RV (Relative Value) and RS (Relative Safety) scales, but poor on RT (Relative Timing). If you need VectorVest to tell you that WIND and virtually all high tech stocks as a group are struggling with timing, then by all means you should base your portfolio on a simple mechanical device like VectorVest.
Actually, I confess to being intrigued by mechanical devices like VectorVest. They are to me like perpetual motion machines are to a physicist. They are NEVER worthwhile for serious investing, but they often provide an interesting digression working out their many mathematical weaknesses. Let's look more deeply at VectorVest to see how this game is played.
>VALUE: WIND has a Value of $24.40.
VectorVest claims Value is based upon earnings, earnings growth rate, dividend payments, dividend growth rate, and financial performance (as if to say earnings, earnings growth rate, etc. are not financial performance?). Do they mean what they say? Are they using earnings growth rate, for example, or are they using estimated growth in earnings? If the former, Value is superfluous; if the latter, then mac's criticism concerning ignorance of I2O applies. Further, what discount rate are they using to determine the present value of future earnings or cash flow? How far out are they projecting, or are they projecting?
Without knowing answers to these questions, why would anyone treat this number as credible and allow it to affect his/her feelings toward this or any other stock?
>RV (Relative Value): WIND has an RV of 1.36.
>On a scale of 0.00 to 2.00, an RV of 1.36 is excellent.
Nice that we agree about this, but how does RV differ from Value? They say, "RV reflects the long-term price appreciation potential of the stock compared to an alternative investment in AAA Corporate Bonds." Sounds like Warren Buffett's Intrinsic Value calculation to me. Isn't that what we are supposed to do? Why is it that WIND presumably returns more than AAA bonds but is priced above its Value? This is inconsistent with the meaning of value, and suggests that Value uses a more aggressive discount rate, or an alternative means of valuation. Wonder what they are?
>RS (Relative Safety): WIND has an RS rating of 1.19.
This is also a good rating for WIND, but totally worthless as an indicator of anything important. VectorVest looks at consistency of financial performance and stock price volatility to determine relative safety. While I agree that a whole industry has formed over interpreting past performance in ways like this, I believe it is very risky using data about the past as a means of judging risk. (The use of the word "risky" to label bad measures of risk is intentional.) Speaking strictly mathematically, this data is useful to estimate future volatility - as long as nothing changes about the stock or market in a meaningful, structural way. Since the only risk I am ever concerned with is of the meaningful, structural type, this measure of safety not only is useless, it is DANGEROUS, as it might lead to ill-deserved complacency.
Investing in high tech stocks is laden with risk, but the main risk is that the company's sector matures, or competition comes out of nowhere making your company's products obsolete. In neither of these cases will RS calculated as above provide an efficient warning of the coming apocalypse. Why use any RS calculation? Why not pay attention the company and the sector in which it operates, see the problem looming, and bail out early? It is rarely easy to see these things coming, but no one ever said investing was easy. There are no short cuts.
>RT (Relative Timing): WIND has an RT rating of 0.82. an RT of 0.82 is poor.
RT reflects VectorVest's proprietary measure of the short-term direction, or momentum, of stock price. Basically, it is their measure of the short-term trend.
I don't need RT to tell me that the market is struggling now with high tech companies in general, and software companies in particular. My job is to figure out which stocks may deserve a trouncing, and which are just being pulled down by a panicky herd.
>VST-Vector (VST): WIND has a VST-Vector rating of 1.13.
Overall, VectorVest indicates that WIND has a good rating of 1.13. But what is overall? According to VectorVest, the VST indicator "solves the dilemma of balancing Value, Safety and Timing." It does this magic trick by noting: "The classic vector formula (square root of the sum of the squares) solves this problem." What relation does the magnitude of the vector have with how these components ought to be combined? If they only had two component indicators instead of three, this formula would equivalent to the Pythagorean Theorem for determining the length of the hypotenuse of a right triangle. Is that what we mean by "classic". Its lineage is derived from Greek Classics, similar to the magical meaning the Greeks gave to the Golden Mean and other such non-experimental Greek fabrications -- all of which have been completely discredited by the advent of the Scientific Method, which helped lead mankind out of the dark ages.
The combining formula, if anyone wants to bother, should be based on the relative contribution of each component to a meaningful indicator, as well as their statistical correlations. It is a cop-out and wrong to elude to "the classic vector formula", when the formula has no inherent meaning in this context. It suggests an appropriateness that is unwarranted.
>Recommendation (REC): WIND has a Hold recommendation.
Why is the recommendation a Hold when VST is 1.13, which is good? The reason seems to be that more than VST is used in the recommendation. VectorVest also introduces a Stop-Price and intertwines its value with VST in yet another ad hoc fashion. Another explanation is that 1.2 or 1.5, or something else, is the cutoff for a Buy recommendation. We know that 1.13 is good, but how good is good?
Conclusion:
If there was a simple, mechanical way to consistently make money in the market, then lots of people with lots more computer power than you or I would be rich at everyone else's expense. In particular, I wouldn't be criticizing VectorVest, I would be piling in the dough using my own Genetic Algorithm, or Neural Network, or just plain time-series analysis.
If you disagree with me and insist that someone's half-baked, pseudo-indicator will make you money, then be my guest. However, before investing money mechanically. I would warn anyone to test the indicator scientifically for various stocks in various markets. If you validate the approach statistically and believe future market dynamics are consistent with the test period, then presumably you will make money mechanically. Further, if your assumptions prove out, the amount you would make should be determinable from the validation study (expressed as a known random variable).
Good luck.
Allen |
