Bristol Myers Squibb looks attractive

What would you do if the CEO of a company buys 100,000 stocks at the market price. And what if today's stock price is less than what CEO bought them for. That is what is happening at Bristol Myers Squibb Co(BMY). CEO James Cornelius made this transaction on May 7th. What is he seeing that we are not?

One main attraction is the dividend yield at 5.6%, and let us see if there are any more.

Company Profile: Bristol-Myers Squibb Co engages in sale of pharmaceuticals and other health care related products worldwide. It operates in three segments: Pharmaceuticals, Nutritionals, and ConvaTec. The Pharmaceuticals segment offers cardiovascular products, oncology products, and other psychiatric disorder products. The Nutritionals segment manufactures and sells infant formulas and other nutritional products. The ConvaTec segment manufactures and sells ostomy, and wound and skin care products primarily to hospitals and medical professions.

The company was formerly known as Bristol-Myers Company and changed its name to Bristol-Myers Squibb Company in 1989 and is headquartered in New York, New York.

Fundamental Analysis: The following reports are as of March 31th 2008 results.

Financial health:
* Current Ratio = Current Assets/Current Liabilities = 1.25
* Total Liabilities/EBITDA Ratio = 3.45
* Total Liabilities/Operating Cashflow = 1.90
* Total Liability/Share-holder equity = 1.49
* Total Liability/Total Assets = 0.6

Looks good and nothing really stands out as a complaint or as a compliment.

Profitability:

* TTM Sales growth: 6.16%
* Last year Sales growth: 12.12%
* Latest Qtr over year ago Quarter sales growth: 20%

* TTM Operating Margin improvement: 20.1%
* TTM Return on Asset: 8.11%

* Last 2 year Gross Margin: 67.3%
* TTM Gross Margin: 67.6%

* Last 2 years Net Margin: 12.5%
* TTM Net Margin: 14.5%

Though Sales growth rate has declined, the operating margins have improved. Since reduced outlook is the current norm in the market, you do not want read too much into this sales decline.

Analysts Rating:
* Strong Buys: 5
* Buys: 2
* Hold: 7
* Sell: 0
No strong direction.

Weakness/Threats: NO big growth driver seen yet.

Technical Analysis: Current weakness in the market can provide opportunity for higher yields.

My Bottomline: BMY can be a good value play for the next few months enjoying good dividend, but make you get in during dips.

-Nidhi

Bond market yields and stock market

Smart money is always vying for quicker ways to make money. That is why they pay so much to researchers and analysts, to identify the next best possible sector to invest in. When a particular sector is due for a breakout, the smart money moves in, rides out the wave and make windfall profits. Smart money can move among stock markets, bond markets, gold market, real estate, international markets and many others. In this segment, lets see one way of how money can move between Stock markets and Bond markets. Many analysts use variations of this analysis as an indicator to track the smart money trail.

Chart1 below shows the variation of S&P 500 with the ratio of SP500 yield/10 year yield. As the ratio goes above 1, the SP500 yield becomes attractive than 10 year yield, and money will start moving into stock market. The idea is that the money moving into stocks is attracted by the earnings yield of SP 500.
You might also notice that during 1998-1999, the ratio was declining but the market kept moving up. That could not have sustained for long since the divergence on the chart would have made the bond markets lot more attractive. The divergence is indicated by the arrows.

Another way to look at the same data is to reverse the ratio. Chart2 below plots S&P 500 against the ratio, 10yr-yield/SP500-yield. Usually the portfolio managers will not switch as soon as the ratio moves across 1, but they rather wait to make sure that the crossover is a sustained one and not a volatile spike. Hence I made a small tweak to Chart 2 - the ratio is now the difference of 10 year yield over 1.15 times the SP500 yield. The signal is bearish for stock market when the pink line crosses above 0.Chart 3 below is similar data, but using yield differential rather than the ratio. That is, it is a plot of SP 500 against the difference between 10 year yield and SP 500 yield. Generally when the yield differential is greater than 2 percent points, then that signifies bearish signal for the stock market.
These charts are depicting the yield spreads and ratios only till the fourth quarter of 2007. You can see that Chart 3 is not bearish for stocks yet, but Chart1 and Chart2 are somewhere in the border of Tip-over point.

Let me know if there is any other web page where we can get data sooner. I know that as of this week, 92% of the S&P 500 companies have reported earnings. SP500 yield data for 1Q 2008 is not available on S&P website yet, otherwise I would have uploaded the charts with 1Q data.

-Nidhi

Combining Technical Indicators

We all read and use Technical Indicators to determine Buy points and Sell points on the stock chart. Usually experts recommend that we use at least three separate indicators to decide on the Buy/Sell points. The ideas being that you use independent means (indicators) to arrive at the same conclusion, which means we need to understand what indicators are independent.

That is, if you are using RSI, Stochastics and Oscillators to decide on the Buy/Sell points then you may not be using independent means to conclude on the point. You will have to use indicators that measure different aspects of the stock chart: Price action, Momentum, Volume action, Leading/Lagging Indicators, etc., to arrive at the same conclusion separately.

One way to categorize Technical indicators is into:

• Trend-following or Lagging – for trending phase
• Over-bought/oversold studies – for trading phase

Let us see when these indicators make more sense to use them. A stock can go through both trending and trading phases. It is sometimes difficult to determine when a trend will stop and a trading range will begin or when a trading range will stop and a trend will begin. So the first step before using any technical indicator is to determine if a chart is in Trending or in Trading Phase. In the chart below that I borrowed from stockcharts.com, the red circles indicate trading range phases that are interspersed among trending periods.

Sometimes just a visual inspection of chart like the one below can reveal if the security is trending or trading. Other times we can use indicators like ADX (Average Direction Index) to evaluate the strength of the current trend, be it up or down. It's important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.

In its simplest form, a security's price can be doing only one of three things: trending up, trending down or trading in a range. An uptrend is established when a security forms a series of higher highs and higher lows. A downtrend is established when a security forms a series of lower lows and lower highs. A trading range is established if a security cannot establish an uptrend or downtrend. If a security is in a trading range, an uptrend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken.

Trend following Indicator or Lagging Indicators:

Indicators such as Moving Averages, DMI (Directional Movement Index, which indicates how much of a trend is there), and to some extent the MACD (moving average convergence-divergence, which indicates a directional change), are ideally suited for markets that have established well-defined trends, but tend to get chopped up in range-bound markets. The trend following indicators will not predict change in trend, but rather follow behind the current trend. Therefore they are best suited for trend identification and trend following purposes, not for prediction.

Over-bought/Oversold Indicators:

On the other hand, overbought/oversold indicators, such as Stochastics, RSI (Relative Strength Index, which smoothes price movement and compares strength of move to trend), Rate of change, Momentum, Line oscillators and %R (compares the close with the highest high) are well suited for markets that are locked in sideways trading ranges or markets locked in up or down channels. They tend to be less reliable when markets enter strong trends either up or down. To combine any or all of these indicators into a successful trading system, you must determine the market stage you're in to know which indicators to use.

Resources on the Internet

With a perspective of what indicators you want to use to in order to determine your Buy points or Sell points, get familiar with technical indicators in each category. There are many excellent resources on the web to read up on each of these indicators separately. I personally like www.stockcharts.com, which provides free charting as well as excellent tutorial on each of the technical indicators. But there are numerous websites that offer good services like: bigcharts.com, incrediblecharts.com, etc.

-Nidhi

Sell in May and go away ...

Statistically speaking, the weaker half of the stock market year started this week. That is why they say, "sell in May and go away" - Dump the entire portfolio, take a vacation, and forget about the stock market.

This Market Timing system is interesting because is doesn't look at any fundamental or technical information from the stock market; entirely based on the calendar. Many studies have shown that stock markets, worldwide, generally make a large portion of their gains between November and April. Investing only from November to April allows to capture 75%-80% of the Market Returns but at a much lower risk. Risk is reduced, not just because you are in the market half of the time, but because you are in the market during less volatile periods.

Research published by Yale Hirsch in the "Trader's Almanac" shows that the market year is broken into two different six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher.

Well, what you read above is what the statistics say. But how did the market perform last year with respect to this rule of thumb. Carl Swenlin presents the chart and his take on stock market performance in 2007 here. Notice that he cautions about the unfavorable 6 months being in the bear market!

-NIdhi

Working on few items

I have not been updating posts lately since I am little busy writing some programs to collect data and hence generate charts. After few days, I should be back in speed again. Thanks for your patience.

- Nidhi

Google Stock Screener

Google Finance announced their new stock screener earlier this April. There are many interesting features in this screener.

The screener interface seem very friendly. Besides, the entire search is live -- no buttons to press. Another cool feature is that it shows the entire range for any given metric. For example, you can choose the 52 week % change to whatever you want, but the screener shows the entire range for 52 week % change for the entire stock universe (say, -98% to 345%). This shows what kind of screening are you making with respect to the entire stock universe.

Check it out at: Google Stock Screener. More about this screener at Google Finance blog.

- Nidhi