December buys, part I

My goal with this round of picks was to try two things: 1) to take a little more into account when buying stocks than just insider buying and 2) to try to analyze the stocks that I buy. #1 was solved by using the Piotroski F-Score to help me pick stocks. This is also a sort of short cut to #2, but only partly. So, in keeping with my previous analysis of MFI stocks, here's an analysis of the top 100 stocks with a market cap of at least $1M. (Actually, because of errors acquiring the F-Scores of a nuber of stocks, the actual sample size was 77.) It's a skewed distribution, weighted towards stocks with 'good' company characteristics, as defined by the F-Score. If you compare this distribution to that of my last analysis, there is a remarkable similarity (comparing to the distribution of companies with a market cap of at least $1M). Also, companies with higher F-Scores had larger market caps.

Of those 77, 22 had insider purchases. Only one of those had a Piotroski F-Score of 9, PACR, so I decided on that as a definite purchase. Three companies had a F-Score of 8, but of those, two had very low insider ownership. The last of these was WMCO, so that went on the list. FCX just announced the acquisition of PD, and there is a rumor of a takeover bid for FCX itself. Also, considering the size of FCX, it's insider ownership of ~5% seems pretty high. So with a F-Score of 7, FCX joined the list. The number of insider shares purchased by GVHR (620K!) got it added to the list, despite a F-Score of only 6. Finally, the excel add-in returned an error for F-Score of OFLX , but this article and the insider purchases (6 since June, by 5 separate officers of the company) got it on the list.

This is at best a partial success - let's face it, I'm still mechanically using F-Score as a proxy for fundamental analysis and I'm considering insider buying as a substitute for my own valuation. But it's a place to start. If you look at the logic above, insider buying still trumps fundamentals, too (GVHR got in with a 6, OFLX didn't have a clean analysis). So here's some fundamental analysis, using the questions outlined by Browne:

GVHR: Current assets : current liabilities are about even, but he'd prefer to see at least 2:1. LT assets are up ~ 30% compared to last year and up 10% compared to last quarter. LT liabilities are flat yoy, but appear to have been paid down somewhat since last quarter. PB is 4.3. Cost of revenue is not going up as quickly as revenue is, so there is more falling to the bottom line. Indeed, gross profit and EBIT are up yoy. Return on capital is 60%, a nice MFI number. Profit margins are flat, though.

FCX: Current assets are 2:1 with current liabilities, so that's good. LT assets are flat, while LT liabilities declined since last quarter. PB is ~12. ROC was huge last year, ~100%, but a more modest 28% the year before.

WMCO: Current assets to current liabilites are 1:1. LT assets are flat yoy, while LT liabilities declined nearly 40%. This is the first year of the last three that WMCO is profitable. EBIT was up 27% last year, and 17% the year before. ROC was huge.

(I didn't get to PACR or OFLX before this posting.)

The question is, do these analyses indicate that these companies are good or not? None of these seem to be as good as UEPS... does that mean that I have a skewed perspective of what is good, or is that a true, objective evaluation? I still have a lot to learn. Luckily, I am learning it in an up market, so mistakes are perhaps less costly than they could be.

OK, OK, if I'm making mistakes, they have, so far, been of the luckily good kind. But until I can do more fundamental analysis, it's just luck. Actually, it's statistics - since MFI stocks historically do well, and stocks with high insider buying historically do well, I am perhaps skewing my probabilities in the right direction.