Additional Tickers for the October Reshaping and Reader Questions

Posted on by David Merkel

Here are therebalan additional tickers for the upcoming reshaping:

AE ALE ARA ATO BAC BAMM BBW BONT BWS C CEC CHIC CHRS CPB CTR DBRN DF DLM DTE DUK FINL FL FMD GEHL GYI HAIN HLYS HNZ HZO JOSB JPM KSWS MW NI NWY ODP OGE PLCE POR PSS PTEN PTRY RSC RT SCVL SGU SHOO SLGN SMRT SRE TUES UNH WLFC WR WTSLA ZONS

And now for a reader question on the original reshaping candidates list:

What?s your ranking system? Have you written a note about it? Also, what was the criteria for inclusion in the list above?

I?ll probably suggest some other stocks as a function of the above. Also, as a value investor myself, I think the following pair of questions is worthy of reflection and debate: 1) Is undervaluation better thought of as a ranking factor or a safety factor – e.g. should one try to pick the most undervalued stocks so they go up the most, or should I try to pick stocks with most improving outlook and use undervaluation and/or low growth estimates as a safety net in case they blow up? 2) To what extent should I use the valuation measure that makes the most rational sense to me vs. the one that gives the best empirical match to market behavior ( fine to reference mean reversion in the answer, but I expect that one can fit data over a long time frame and still find important differences between the two).

Answering in order:

  • The ranking system comes in the next phase.
  • Inclusion criteria was that it looked interesting at some point in the last four months.? Anytime I get an idea, I write it down, and wait for the reshaping.? By waiting, I avoid making hasty decisions, or trusting the authority of another clever investor.
  • Undervaluation — ranking or safety?? Why choose?? They are by nature both at the same time.? Truly undervalued companies have higher upside and lower downside compared to more richly valued peers.
  • Your last question is one that I have thought about a lot and concluded that there is either no good answer, or the data involved is out of my reach.? If you use the one that matches market behavior, then you end up doing relative value trades, but if you use one that takes into account average valuation over time, you can play for mean reversion, but may miss some relative value.? If we had enough data, and a regression package that could do cross-sectional time-series, we could try to isolate both effects, and perhaps figure out when companies and factors are cheap, independent of each other.? Would love to try it, but that would be costly.

One more reader question:

I am interested in your feelings on GLYT. I have recently bought this company. The reported in-line earnings back in July but guided lower, and the market took out their frustrations on them.

They have shown growth both in revenues and earnings and have been pairing down their debt.

Let me know your thoughts


I’ve owned GLYT twice in the 90s.? Great management team; wish I’d never sold it, even though I made good money on it both times.? It’s more expensive today than when I owned it before, and the growth opportunities may not be as good as they were.? If it scores closer to the top of my list, I’ll take a closer look.

2 thoughts on “Additional Tickers for the October Reshaping and Reader Questions”

  1. Thanks for the answers. I’ll expound a bit on the questions…

    Q1:Is undervaluation better thought of as a ranking factor or a safety factor – e.g. should one try to pick the most undervalued stocks so they go up the most, or should I try to pick stocks with most improving outlook and use undervaluation and/or low growth estimates as a safety net in case they blow up?

    A1:Undervaluation ? ranking or safety? Why choose? They are by nature both at the same time. Truly undervalued companies have higher upside and lower downside compared to more richly valued peers.

    F1: Because many market participants favor stocks of companies with improving outlook, perhaps more so than absolute valuation, it wouldn’t be crazy to think that stocks with improving outlook (perhaps restricted to the set that is below fair value) may give a better return per unit holding time in the short to medium term with equal or better safety over that time interval. To avoid circularity, let’s say that “improving outlook” means estimates of forward cash flow over each of the next five years are increasing, at least by one’s model if not by analysts. I don’t know if that’s right, but it might be.

    Q2: To what extent should I use the valuation measure that makes the most rational sense to me vs. the one that gives the best empirical match to market behavior ( fine to reference mean reversion in the answer, but I expect that one can fit data over a long time frame and still find important differences between the two).

    A2: Your last question is one that I have thought about a lot and concluded that there is either no good answer, or the data involved is out of my reach. If you use the one that matches market behavior, then you end up doing relative value trades, but if you use one that takes into account average valuation over time, you can play for mean reversion, but may miss some relative value. If we had enough data, and a regression package that could do cross-sectional time-series, we could try to isolate both effects, and perhaps figure out when companies and factors are cheap, independent of each other. Would love to try it, but that would be costly.

    F2: The question wasn’t very specific, but the concrete versions I had in mind are different from relative value and most mean reversion strategies (except in the trivial sense that value investing implies a type of reversion to one’s model valuation estimate). Here’s three possibilities: first, as suggested and defined above, the market gives a lot of weight to improving outlook for individual stocks alongside expected DCF; second, because of the way money flows through funds/ETFs, the market gives extra weight to industries dominated by stocks that have improving outlook; and third, the market gives valuation weight to larger market cap and trading liquidity. As you say, it’s practically, if not theoretically tough to capture enough of the relevant inputs to do pure quantification. But it’s probably still worthwhile to do so qualitatively.

    I’ll throw out some other tickers: ACTS, AXR, BHO, E, KEG, IBA, IMOS, LMC, RAMR, SDTH, VPHM, WDC.

    If I remember right you already have IBA at even weight in your portfolio, but a lot of stuff seems to be lining up for them right now (e.g. planned U.S. imports while U.S. govt. is cracking down on undocumented workers at processing plants).

    Fall is usually good for discounted CE’s like ESD, IAE, PGP, since people who, as a group, care less about discount to NAV, tend to care less about ex-div.

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