Introduction

I’ve been an Investors Business Daily Subscriber for several years now. I’ve attended two workshops, purchased his books, attended some of their local meetups. I’ve always liked the idea of CANSLIM…buying growth stocks, blending fundamental analysis with some technical analysis. Naturally, one would think a stock with good fundamentals would have a bias of hire returns. I setout to challenge the assumption that a stock with good fundamentals will perform better than a stock with poor fundamentals.

Methodology

I grabbed a pdf version of the eIBD and scrapped their eIBD table. Their table starts on section D.

 

Here’s an example of their data.

Because of the way their pdf is structured, I could only grab the data if it’s in a certain format. The format being, all the columns were filled, and the rating values were 10 or greater. I would not have 58.com because the SMR and AD columns don’t have values. In this case, 58.com is an IPO and I’m guess IBD didn’t have data for it.  Any stock that has been around and with decent fundamentals should have all the columns filled, and have ratings greater than 10. In my data sample, I only have half of the 7000 stocks on their list.

I then used Yahoo’s end of day data to generate the performance of the stocks listed, dumped it into excel, and then analyzed the data. I divided the gains up and correlated by Composie Rating, EPS rating, RS Rating, SMR, and A/D…basically, the first 5 columns from the eIBD.

My first set of analysis was using data gathered on August 20th, 2014. The performance calculations is from January 2nd close, till August 20th. I should have done the open of January 2nd, but I didn’t realize the error till I was done.

And before I even start, I am opening up all the data to scrutiny. I’m attaching the eIBD I used – the data starts on section D3. The spreadsheets below have the IBD information from January 2nd, as well as the percentage gain for each stock.

eIBD Jan 3rd

 

8 Month Performance Data

Composite Rating: January 2nd to August 20th

The left most column represents stocks with composite ratings between 10-19 (remember, I am unable to include stocks with values less than 10). These stocks showed the highest gains over the course of 8 months, for a 7.1% gain. the average in this universe of stock is 4.7% (S&P500 was 8.4%)

EPS Growth – Performance from January 2nd – August 20th

For EPS Growth, it appears that as long as you avoid the bottom 3 tier of EPS (less than 40) then you would have fared pretty well

Relative Strength – Performance from January – August

For relative strength, unexpectedly, the lower the relative strength, on average, the higher your gains would have been over the course of 8 months.

SMR (Sales, Profit Marin, Return on Equity) – Performance from Jan – August

 

For SMR, the stocks with the value of E dragged the averages down. However, it was not the A, or B, that on average had the best returns..but those of C.

Accumulation/Distribution Rating – Performance from Jan – August

For the A/D rating, the stocks with the higher ratings (A, A-, A+) fared worst than the other rated stocks.

 

8 Month Performance – Conclusion

The S&P is up 8.36% from Jan to August 20th, while the stock universe that I analyzed is only up 4.7%. This may be because I’m missing some IPOs that IBD still does not have all the columns populated (for example, 58.com as mentioned above). I am also missing data for stocks that have poor ratings..ratings less than 10. It’s possible the worst fundamental stocks made those massive gains (as my current data seems to suggest).

What’s interesting is that a stock with a good accumulation and distribution rating, or relative strength, did not do well after 8 months. It’s possible there was some kind of sector rotation…the ones that did well in January, did poorly later on. There were 2-3 pullbacks between Jan and August in the market that could have created new leaders.

 

1 Month Performance Data

Since there was a pullback in the market at the end of January, it would be interesting to see how the stocks fared. Did highly rated stocks hold up? Did high momentum stocks get killed?

Composite Rating: January 2nd to Jan 30th

As you can see, for stocks ending on January 31st, the better the composite rating, the worst the performance. On average, the stocks rated 10-29 actually had a gain!

Stocks with a higher SMR actually held up did poorly during the pullback

SMR Rating: Jan 2nd to Jan 30th

Stocks with low EPS growth held up.

EPS Growth – Jan 2nd to Jan 30th

Relative Strength Rating – Jan 2nd to Jan 30th

On the Relative Strength side…it seems like either buy the best..or aim towards the lower side.

Accumulation & Distribution: Performance from Jan 2nd to Jan 30th

The accumulation/distribution gave mixed signals.

1 Month Performance – Conclusion

Stocks with bad SMR and bad EPS growth held up well during the pullback. Maybe people have low expectations for those stocks and didn’t sell them during the correction – and people seeing those bad stocks holding up, purchased them.

3 Month Performance Data

I think a look of the 3 month performance would be interesting. This is essentially the peak after the pull back in January, though around this time the market is pretty choppy.

Composite Rating: Jan2nd – March 30th

Again, just like with the 1 month and 3 month performance, the lower the composite rating, the higher the gains.

SMR Rating – Performance from Jan 2nd to March 30th

A high SMR performed the worst.

EPS Growth: Performance from Jan 2nd – March 30th

No clear trend on EPS growth…but the higher the EPS growth the worst the performance.

3 Month Performance – Conclusion

Just like for the 8 month and 1 month performance…An inverse relationship with composite rating is still maintained.

5 Month Performance – Data

Now, lets take a look at 5 month, ending May 30th. The 5 month would be interesting because in mid April there was a bit of a pullback. So, we shall see which stocks have performed well since January –surviving, or thriving, in two pullbacks.

Composite Rating: Jan 2nd – May 30th

We’ll start off again with the composite rating, which, so far, has not failed to have an inverse effect. Here again, stocks with a performance rating between 10-19 did the best, while the highly rated ones of 90-99 did the worst.

EPS Growth: Performance from Jan 2nd – May 30th

With EPS growth, just like with the 8 month performance, just avoid the bottom of the pack and you should be fine.

Relative Strength: Performance from Jan 2nd – May 30th

With relative strength, surprisingly the 90-99 range did poorly of the bunch. The stocks that were given love in Jan were not loved 5 months later.

SMR: Performance from Jan 2nd – May 30th

For SMR, I was expecting/hoping that the highly rated ones would out perform. However it wasn’t the case. There still is a bias towards the upper end of SMR, though.

Accumulation & Distribution: Performance from Jan 2nd – May 30th

With the accumulation and distribution rating, the worst rating the stock was in January, the better it performed in May.

 

7 Month Performance Data

The last analysis I will look at is the 7 month analysis, ending on July 24th. July 24th was picked because it’s the peak of the S&P 500 before the August pullback. I want to see, when stocks are at its best, which stocks are driving it.

Composite Rating: Performance from Jan 2nd to July 24th

Looking at the  Composite rating, at least the highest rated composite rating stock was not last. What a relief!

Composite Rating: Performance from Jan 2nd to August 20th

Copying the image from the August analysis we can do a comparison. Comparing July and August, you can see that the poorly rated stocks actually *gained* between July and August…The 90-99 stocks were still down almost 2% on average. So it appears the highly rated stocks were beat down during this time and people were buying the crappy rated stocks.

Relative Strength: Performance from Jan 2nd – July 24th

The relative strength in January seems to have some positive effect on the gains in July. So the stocks doing well in the beginning of January were being bought in July.

Relative Strength: Performance from Jan 2nd – August 20th

However, just like with the composite rating, between July and August, the stocks that were rated poorly for relative strength in January, did a lot better during the pullback and even gained.

SMR : Performance from Jan 2nd – July 20th

For July I was hoping that a good SMR would mean good gains. For A and B, it looks to be about average gain.

Accumulation & Distribution: Performance from Jan 2nd – July 20th

Looking at the accumulation and distribution, it appears there is some positive effects. The A+ (green bar on the left) gained the highest up till July. So the stocks being bought in the beginning of January were being bought in July.

Conclusion

Realizing the shortfall of not having every single stock in IBD’s list…with some stocks excluded, I will try to come up with some sort of conclusion. I’ve analyzed the performance of the same set of stocks over a period of 8 months, during various phases of the market. With 3500 stocks, I would imagine it’s enough to verify some kind of trend on the market.

The performance gains seems to be all over the place. This tells me that…a highly rated stock does not always do well, or does not fare better during a pullback. The only time the high composite rating stocks did not do the worst was between January and July when the market hit the high. The stocks being bought in Jan, also were being bought in July. However, after July,  the highly rated stocks still haven’t recovered.

Another thing I want to point out, is that in my universe of stocks, the average gain was 4.7% between Jan and August. The S&P 500 gained 8.4%. The stocks that I am not covering probably had huge gains – and the stocks I am unable to cover either have poor, or missing ratings, or are IPO.

I personally am bit a hesitant to just buy the worst rated stocks, even though I’ve spent a lot of time going through this data. What I do take away from this is…don’t focus on fundamentals, or IBD ratings. Just focus on price action. In the past I was pretty obsessed with only buying A rated stocks, ratings over 80.

The IBD investment strategy is not based on their ratings – but rather their CAN SLIM methodology.

C = Current EPS

A = Annual EPS

N = New company

S = Supply and Demand (Accumulation/Distribution, I believe)

L = Leader/Laggard (RS Strength)

I = Institutional Sponsorship

M = Market Direction

Based on the data I analyzed, I believe it invalidates the C,A,S, and L of CAN SLIM for the period of time I analyzed.

Future Study

I would be curious to look in the past and see the results for the same analysis in 2013. I’d also like to figure out a way to get all of IBD’s list of 7000 stocks. The way they publish their pdf file makes it difficult to do so. I’d also like to see how IBD’s Relative Strength & A/D rating changes over the course of the months.

If a a highly rated stock in January underperforms over the next few months, IBD will have to downgrade the stock. How do the stocks that were rated a high RS in February, March performed until August?