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    Is stock-picking an investment dying art?

    With the JSE up some 62% in spectacular fashion since the March 2009 low’s, you would be correct in assuming stock-pickers from the mid to large-cap universe would need to pull out all the stops to beat the indices.

    In fact, to make the stock-pickers’ challenge even harder, the private investor can go one better than following the ALSH index with a SATRIX40 (or equivalent) Exchange Traded Fund (ETF) and opt for a thematic (“fundamental stock-picking”) ETF such as the SATRIX DIVI+ that picks its constituents based on their “dividend paying credentials”. These high dividend-yield (Dogs of the Dow) type strategies work exceptionally well following brutal bear markets and the SATRIX DIVI+ is without a doubt the darling of the index/ETF follower’s fan-clubs right now. Onother popular ETF using "fundamental stock picking criteria" is the RAFI family designed by Research Affiliates (also available through SATRIX and others.)

    Does this mean individual stock picking for non-speculative purposes is dead? Just buy the ETF’s and follow the indices and you can’t go wrong! They are cheap, easy to buy and sell, available for a variety of styles and JSE sectors and are simple to understand without having to do copious amounts of research. Even Warren Buffet suggests ETF’s are the place for self-directed investors to start.

    It is true that self-directed investors dabbling part-time in the markets are better off with ETF’s, but we counter that for the more tenacious private investor, stock picking can reap rich rewards both financially and intellectually.

    There is one timeless stock-picking strategy that most private investors are unaware of. It’s called “Follow the earnings”. We all know stock prices depend on company earnings, so this should be no surprise. But what many people do not realise is how powerful CONSISTANCY of earnings growth, say over the last 10 reporting periods, is as a predictor for future share gains.

    Let us assume in March 2009 you had received our “all clear” signals telling us it was time to get into equities again (or you figured it out through some other means). Assume you screened the JSE for liquid companies of ANY size that had shown consistent (always positive) earnings-per-share (EPS) growth for at least the last 5 years for BOTH their last 5 sets of interims and 5 sets of finals.

    You would have been amazed to find only 10 main-board shares meeting those strict criteria! In fact the 10 shares hail from various sectors and market-caps (none were small caps) and would have formed a nicely diversified, liquid portfolio. Assume you then bought those 10 shares in equal parts to create your own thematic “Fundamental ETF” we will dubb “EPS-5”. How do you think you would have stacked up versus say a SATRIX-40 (tracking the TOP-40 index) and the venerable SATRIX-DIVI? The results are shown below:

    The stock-pickers’ 10-shares would have delivered a stunning 144% capital growth, superior dividends and less drawdowns. For the first 10 months of the post-crash recovery, it maintained pace with the SATRIX-40 and SATRIX-DIVI index since everything usually rebounds sharply and is very closely correlated during the first 10-11 months of a new post-crash bull market. But after December 2009, when the market took its first "breather", is when the stock-picker's portfolio credentials started to shine, as market participants started being more selective in their buying and the shares were delivering superior earnings.

    The surprising thing (and this is not just isolated to this test case), is that consistent earnings growth, being the best-known predictor for capital growth of a share, is sometimes also a better predictor for superior future dividends than historical dividend yields/track records, with the stock-pickers’ portfolio yielding 9.97% dividend yield (not re-invested) versus the SATRIX-40’s 3.56% and the SATRIX DIVI’s impressive 8.28%

    Make no mistake, ETF’s such as SATRIX-DIVI, PTXSPY (listed property), GLD (New Gold) and the like are important parts of any investor’s diversified portfolio, but so are some individual share-picks using proven techniques such as this one. Finally, the satisfaction of seeing your own well thought-out stock picks beat an index or ETF is priceless! You can see the names of many of these consistent earnings growers in our latest training video for our JSE Share Watchlist (JSW) offering, which is purpose-built for stock picking and timing of purchases, for both investors and traders.

    Dwaine van Vuuren

    Permalink2010-10-22, 17:35:10, by dwaine Email , Leave a comment
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