Updated Today: The Investment Grade Value Stock Expectation Analyzer 

The Investment Grade Value Stock Index (IGVSI)

The IGVSI is a barometer of a small but elite sector of the Stock Market that is generally ignored by the financial community... Investment Grade Value Stocks.  Some IGV stocks are included in all averages and indices, but even the well dressed Dow Jones Industrial Average includes several issues that are below Investment Grade and very few boast an A+ rating. The IGVSI tracks the value of a portfolio of  approximately 450 IGV stocks... nearly all of them. Perhaps this totally ignored by the media snippet will pique your attention: on December 18, 2007, 50% of the IGVS were down an average of over 30% from their 52-week highs... the Dow and the S & P 500 had fallen just 7%! The Featured Article below discusses the distinctions between Value Stocks, Growth Stocks, and Investment Grade Value Stocks.

The index was created and tested in November and December of 2007, but it's effectiveness has been observed informally for years by investor's who employ the Working Capital Model in the construction and management of their investment portfolios. In mid-1998, at the inception of the dot-com hysteria, IGV stocks began to falter and remained out of favor until the bubble burst around the turn of the century. (They were only growing at about 10% per year, compared with the bubblicious 30%.). Since then, or at least until the middle of 2007, IGVSs have been the heroes.  Neither the DJIA nor the S & P 500 have been moving in the same direction as the IGVSI for nearly ten years... as evidenced by aggregate NYSE Issue Breadth and New High vs. New Low Statistics compiled, studied, and reported upon religiously since January 1999.

In the past two years, the popularity of the latest of Wall Street's endless supply of new financial products altered the statistical playing field, making these illuminating Market Stats nearly worthless in monitoring the direction and performance of individual IGV stocks. Exchange Traded Index Funds of all varieties have diluted the figures and made them meaningless. There are approximately 450 IGV stocks... the NYSE Breadth numbers report on more than 3,000 issues changing hands every day. Similarly the Most Advanced and Most Declined Lists contain an ever increasing number of derivative products making it more and more difficult  for IGVS investors to zoom in on what is really going on. The IGVSI will help, but only in combination with further analysis of Breadth, High-Low, and Watchlist Statistics. All of these important statistics are presented for your use right here, but what you do with them is totally up to you.

Both the NYSE Index and the DJIA numbers have been divided by ten for ease of comparison with the (proprietary) IGVSI numbers. Clearly, Investment Grade Value issues have suffered more than the General Market since early in 2007. Early 2008 numbers hint at a changing trend that favors less speculative issues. The IGVSI is a new (and only important to true Value Investors) Index; we'll see if it becomes an accepted benchmark for assessing the performance of Investment Grade equity portfolios. The income portion of a portfolio demands separate attention. Click here for a helpful article on that subject, or study Chapter Five of The Brainwashing of the American Investor:  "What Your Mother Never Told You about Income Investing".

What does all this mean? See the Investment Grade Value Stock Expectation Analyzer.

 Investment Grade Value Stocks (IGVS) Bargain Level Monitor (04/30/08)

The Bargain Stock Monitor is derived from the Month End Value Stock Watchlist Spreadsheet. The Watchlist Program identifies specific IGVSI Companies whose stock is trading at least 15% below the 52-week high water mark, and that also meet the price selection criteria outlined in The Brainwashing of the American Investor: The Book that Wall Street does not want YOU to read. The monitor gives value investors a feel for what's going on in this limited sector of the overall market. The fewer IGV stocks at bargain prices, the stronger the market and the more Smart Cash that should be found in portfolios. As the list of bargain IGV stocks grows, portfolio Smart Cash should be finding its way back into undervalued securities. 

• The 2007 Monitor showed a decreasing number of IGVS bargains through May, followed by rapidly increasing numbers toward year-end, when nearly half the IGVS population was down 15% or more from individual 52-week high levels.

• The trend continued through the 1st Quarter of 2008 with more than 50% of the IGVS universe down 15% or more, most of the time... IGVS down at least 15% were down an average of 33%. 

• Nearly half of the IGVS universe were down more than 20% throughout the Quarter. Based on these measurements alone, it is possible that significant bargains may exist in this area.

It is not uncommon for the Monitor to identify a speculative bubble outside of the IGVS sector. A high DJIA or S & P 500 average in the face of a growing number of bargain IGV stocks is a clear indicator of a flight from these quality companies and into more speculative, but more popular, alternatives. As we start the 2nd Quarter of 2008, it appears that more attention is being given to Investment Grade Value Stocks.

What does all this mean? See the Investment Grade Value Stock Expectation Analyzer.

IGVS Issue Breadth Statistics (05/12/08)

Issue Breadth Statistics are (or used to be) the single most reliable indicator of what is going on in the stock market... daily, monthly, annually, whatever. Clearly, if more issues are going up in price every day for a meaningful period of time, so should the Equity Bucket of the Investment Portfolio. But NYSE Issue Breadth Statistics have never been Individual-Equity-Only Statistics, and that is a condition that is no longer acceptable. The newly created (right here folks) IGVS Issue Breadth Statistics will signal changes in direction within the IGVS sector, something that none of the popular market averages seem to care about. These Issue Breadth Stats do not include: CEFs, ETFs, or Preferreds... and no Individual Issues that are NOT considered Investment Grade. Issue Breadth Statistics should allow investors to look inside an Index to obtain a better feel for what has been going on... this one does.

Monthly IGVS Issue Breadth numbers had been negative for 10 consecutive months; April was clearly positive!, and May has followed suit through the 12th. Hallelujah! 

What does all this mean? See the Investment Grade Value Stock Expectation Analyzer.

New 52 Week High and New 52 Week Low Statistics (05/12/08)

A second useful tool for analyzing an index (particularly when an investor knows for sure that every equity owned is in the Index being analyzed) is a comparison between the number of issues establishing new 52-week high ground and the number sinking to new 52-week lows. Superficial analysis is very straight forward... there should be more new highs in an upward trending market and more new lows during a correction. Since December of 2007, there have been approximately 5 times more new lows than hew highs... Through March 2008, there were only three days all year, just THREE, where new IGVS highs exceeded new lows! That was unprecedented.

The New High and New Low issues themselves can identify weaker and/or stronger sectors within the Investment Grade Value Stock selection universe... very important in helping investors determine where the bargains are and where profit taking opportunities should be. Clearly, April was the best month we've had in this area in a long time... May is looking even better.

What does all this mean? See the Investment Grade Value Stock Expectation Analyzer.

Featured Article

Wall Street Wisdom... Value Stocks vs. Growth Stocks (Dec, 2007)

One would think that there would be a pretty clear distinction between Value Stocks and Growth Stocks. But an hour or less research, and some non Wall Street analysis, will muddy the waters significantly. In the back of our minds, most investors think of Value Stocks as more conservative investments than Growth Stocks, mostly larger, proven, and profitable companies that are quite a bit safer than their Growth Stock brethren. Value stocks, you will determine, are those that: 

•       Tend to trade at a lower price relative to their fundamentals. 

•       Are undervalued and have a good expectation of price appreciation. 

•       The marketplace perceives to be undervalued based on criteria such P/E,
        price-to-book ratio, dividend yield, etc.  

•       Have been out of favor and are relatively cheap compared to the value of their assets.  

•       Trade at a P/E ratio lower than the market average P/E ratio as a result of falling prices
        rather than improving fundamentals.  

      Surprisingly, the distinguishing feature of Value Stocks is price. How does the price of the stock relate to its fundamentals, and if it is truly under-valued, how good are the chances for the price to go up? The definitions mention dividends, various financial statement ratios, and market sentiment. The problem is that there are no real benchmarks or specifics to cuddle up to for selection decision-making purposes. What Wall Street labels as a Value Stock is, in reality, a stock that, at a certain point in time, is selling at a bargain price... a very temporary thing. Once the stock goes up in price, the Value Stock label disappears.  

      Growth Stocks, on the other hand, are most often thought of as flashy startups, high tech innovators, and generally more speculative entities that should be dealt with carefully. These are the bread and butter of both Growth and Index Funds and are the kind that the media covers most extensively. The most popular definitions describe Growth Stocks as those of companies that:  

•       Are growing earnings and/or revenue faster than their industry or the overall market.  

•       Pay little or no dividend, preferring to use their income to finance expansion.  

•       Are young, with little or no earnings history, and which are valued on the  basis of anticipated 
       future earnings.  

•       Have high price-earnings ratios.  

•       Are currently growing earnings with potential to continue growing earnings 15% to 30%
        annually for the next one to three years.  

      Equally surprising, to me anyway, is that price is only mentioned as a part of the high P/E ratio expectation that seems consistent with the Growth Stock identity. This is because price is a tertiary consideration in this inherently speculative area, and not nearly as relevant as those quarterly analyst projections that fuel the hysteria... in both directions.  

      I don't disagree with the need for distinctions such as this, but I have a problem with the lack of consistency in who does the labeling, how unbiased it can possibly be, and then this one big problem: almost any stock out there can be seen as one or the other, even at the same time, by almost anyone who owns a calculator and who thinks they have the ability to predict the future. Are the real estate, home building, and financial Growth Stocks of the past three years now Value Stocks, and which of the current Value Stocks will achieve Growth Stock prominence in 2008 or 2009?  Similarly problematic is the perception that a Value Stock must be safe and full of quality and the assumption that a Mutual Fund full of Growth Stocks just has to grow in... value!  

      Its time to refine these definitions a scooch, if for no other reason than to recognize that both are purposely flexible concepts that attempt to compare current equity prices either with past accomplishments or with future potential. Two things about publicly traded companies that most investors and speculators would probably agree upon are these: (1) High P/E, unprofitable, non-dividend paying, young companies are less likely to be around in their present form 10 years from now than profitable, dividend paying, low P/E, established companies; and (2) That the current Market Price of a security is as much or more a function of supply and demand, current events and their media spin, and world politics than it is a function of the company's financial statements. BUT, spending more time inside a company's financial statements certainly helps in identifying: stability, consistency, general quality, and long-term economic viability.  

      In other words, what I am looking for is a selection universe of fundamentally valuable companies that can be expected to remain that way for a significant period of time, not just a bunch of random symbols that someone believes are at garage sale prices. With a stable, fundamental-value or quality universe to select from, we can use Market Price to determine both: when a stock is available for purchase at a bargain price, and when each of our individual holdings has grown enough for us to realize a reasonable profit.  

      S & P Corporation publishes a standardized earnings and dividends ranking system which separates stocks with average and better fundamental qualities from those with lesser economic strength and viability.  It is particularly useful because it excludes market analysis and projections of the future, thus eliminating any form of hype whatever. It sticks with pure fundamentals, financial report numbers, and ratios... market price is not an issue. As with all marketable securities, every member of this select group of approximately 450 higher fundamental quality companies will vary in Market Price in either direction dependent on all of the usual market factors... but their basic quality remains constant, regardless. I think of this group of especially successful companies as Investment Grade Value Stocks, and I look to them to produce above average growth in Working Capital annually and in Market Value cyclically. Experienced investors know better than to relate Market Price with the soundness of a company's financial statements... particularly during stock market corrections.  

      Four new sets of statistics are being developed for the FREE and exclusive use of true Value Investors, and they should be available on the web early in 2008:  

• The Investment Grade Value Stock Index (IGVSI), which tracks the Market Value of the stocks described above.  

• Issue Breadth Statistics, of the approximately 450 stocks in the IGVSI, track the daily number of advancing and declining issues.  

• New High and New Low Statistics help to pinpoint cyclical developments within the Equity Universe.  

• A monitor of the number of "bargain stocks" within the IGVSI helps to confirm uninvested smart cash levels in equity portfolios.  

Note: The 2nd Edition of "Brainwashing" is here!

Steve Selengut