Value and Rankings

Numerically ranking the late economic sectors in UAE is bound to throw up surprising stock and asset picks and contrary to popular belief which looks more at growth than value.
It is tough to explain why a majority of investors are momentum driven. Why most of us look at growth than value? Why investors and traders want price and volume action as the first filter? Many market gurus over the ages and now behavioral finance has explained this phenomenon. Charles Dow explained in 1884 in his Dow Theory that a multi-year trend is made of three upsides. The first upside is rarely seen and is for the value pickers, the second one is for the large speculators who capture the second profit opportunity. And it is only the third and the final terminal growth is what catches the mass fascination and attention.
Behavioral finance says that humans error both the side of pessimism and optimism. This means when is extremely low value and attractive prices, the majority is negative and fearful to buy in. On the other hand when growth is at its exponential best, the majority is fully invested, including fund managers. This is why timing tools are more important for judging value than growth, because, unlike value, growth is conspicuous.
As a technician, we are forced to see patterns, millions of them over decades. Over time when one studies market history, one gets a rare opportunity to see and isolate value patterns from growth patterns. Value patterns, unlike anything, are found at historical bottoms. How can one classify a historical bottom? Any price low after more than 9 months of fall, which continues to hold, could be labeled as a bottom. There are other ways one can classify bottoms. Bottoms can also be characterized by low volume and lackluster activity. Real bottoms rarely see v shape recovery. They are more like W’s, double based. Now of course these are guidelines to understand how value bottoms look like.
To quantify this subjectivity, Orpheus performance cycles can help. Performance cycles are a bounded oscillator that moves in a predefined range say from 1 to 10. 1 is top relative performance and 10 is worst performance. The idea is that performance is cyclical. A top performer will underperform in future and vice versa. A top relative performer is a top growth stock (the worst value picks) and the top relative underperformer is the best value pick.
Last few features we took you through the ranking of broad market indices and banking stocks. Today we have ranked the late economic sector for UAE. The late economic sector includes Energy, utilities, food, metals and materials and pharmaceuticals. As the economic cycle ages, energy becomes expensive, utilities and staples are among the few income generating companies, and pharmaceuticals defensiveness turns out to low risk allocation.
So there are some clear observations we have made here over the last few weeks. First, the V-shaped recovery from Mar 09 may not be enough to turn the economic cycle around. Second. A final drop down in yields and fall in markets into 2010 is a possibility. And third, ADI (Abu Dhabi Index) is still value compared to Gold and late economic sector outperformance could be the first sign that markets are heading into the final stages of the economic cycle and we are heading into a multiyear reversal, a contrary opinion to popular belief.
So assuming the author is right, it is time to look at the ranking of the best food, utility, energy and pharmaceutical stocks. We took the following stocks AABAR (Energy Sources), DANA GAS (Utilities-Electrical & Gas), AD NATL ENERGY (Energy Sources), TABREED (Business & Public Services), GULF MEDICAL (Health & Personal Care), GULF PHARM IND (Health & Personal Care), FOODCO HOLDING (Food & Household Products), INT FISH FARMING (Food & Household Products), EM FOODSTUFF (Food & Household Products). We added the ADI and DFMGI indices and we benchmarked it to crude oil prices.
AABAR, FOOD, ASMK were the worst ranked stocks and consequently value for the next weeks ahead. While GPHI, TAQUA, AGTH were the top ranked stocks and hence top growth one could reduce out off. We will not be surprised if this is different to what the popular belief is, because popular belief as we explained is about growth, not value. Another interesting aspect was that ADI was the worst ranked asset in this sample of assets and hence a best potential outperformer. There are no rules in markets, even if we offer a quantitative solution, but it’s obvious that getting an outperformer before the noise is tougher than accumulating it after the noise.