YOU HAVE THE POWER AT YOUR FINGERTIPS WITH VECTORVEST! THE CONSUMER DISCRETIONARY SECTOR.
Written by: Robert and Russell Markham
Continuing from my theme of removing emotion from investing I wanted to pick on the retail sector. The simple words: Retail Sector! Does that strike fear into you, the investor? Most likely? Why so? Probably due to the endless news and media and sound bites telling us how rough it is for retailers at present. Many retailers are doing it tough and for those in the fire affected areas, things are made all that much tougher.
But taking a few steps back, let’s get back to the numbers. That is one thing I really appreciate about using VectorVest to make my decisions: I let the numbers do the talking. To rely upon the general media opinion or the sound clips you get at a barbeque gathering can be a disaster! Let’s get back to the Retail Sector. By the end of this Essay, I will narrow the sector down to 11 stocks that, when combined collectively, show a solid track record in the Retail Sector over the last 5 years.
First step, let’s find the retail sector stocks. Click on UniSearch and in the top left corner, click on the drop-down arrow just to the right of the icon with the page with the top right corner bent down. Select New Search. Click on the first blank box just below the word Parameter and hover your mouse over Stocks, then Filter By and then select Sector. In the corresponding Operator Box, select =. In the Value box, select Selected Sectors. A box will pop up for you to choose your given sectors. In this case, select the Consumer Discretionary sector and then click on OK. Click on Run Search to return all the stocks (make sure the box to the left of Return: Stocks has (All) selected). There are over 130 Consumer Discretionary Stocks!
Next step, we are going to put all of these into a WatchList. Click on the first stock in the results and scroll down, click on the Shift key on your keyboard and click on the last stock. Right click on the highlight and select Add to WatchList. When the Add to WatchList box comes up, find the Group called My WatchLists and click on this group. Identify the icon of the page with the top right corner bent down at the top of the list and click on the drop-down arrow and select New WatchList. A New Watchlist, name the WatchList: Consumer Discretionary. Click OK, then click OK on the Add to WatchList box.
Click on the Viewers Tab and your WatchList will be there, populated! As of 21st January, I have 135 stocks that fall into the Consumer Discretionary Sector classification.
Let’s check out the overall picture of the sector. Right click on the WatchList Average (anywhere on the average line) and then select View WatchList Average Graph. Set the graph back 5 years (click on the 5y button per the bottom right of the screen). Ensure that you are looking at the earnings (EPS) and the Price on the graph. If you do not have EPS on your graph, per the Graph Layout tab, you can click on the dropdown key and select the VectorVest Simple Layout. Turn off all other selections on the graphs such that you just have the Price and EPS. Notice how earnings for the total Consumer Discretionary market really started to fall away in late 2015. There has been a bit of a recovery going into 2019, but overall it is a very anaemic looking EPS profile along with a Price chart that has headed south at a rapid rate of knots. Close the graph. Now, what we are going to do is to find the quality Consumer Discretionary stocks out of the 135 odd stocks. You may be thinking that this is not possible based on what you’ve just seen and therein lies the lesson of today. There are always great stocks in sectors that are struggling. Let me demonstrate.
Your WatchList of all the stocks is sorted by VST (Value, Safety and Timing Vector) in descending order. Remove any stocks where the VST is below 1.20 (I am setting a very strict criteria here, nothing wrong with a VST score above 1.00, but I want the best of the best). To do this, click on the first stock that has a VST below 1.20 (ALG.AX). Then scroll down to the last stock and hold down your Shift key and click on the last stock. All the stocks where the VST score is below 1.20 should now be selected. Now click on the dropdown arrow just to the right of the button Delete button and select Delete Selected. I am now left with 16 stocks out of the 135 that I began with. I am not finished yet!
Next step, I want to ensure no RV (Relative Value) scores below 1.00. RV is on a scale of 0.00-2.00 and shows the long-term price appreciation potential of a stock. Click on the RV heading such that the list is sorted by RV in descending order. Remove any RV score below 1.00. I get 3 stocks (IEL.AX, JBH.AX and TRS.AX). Select the 3 stocks and delete them out (just like you did previously). That leaves 13 stocks.
Let’s now focus in on RS (Relative Safety). Click on the RS column such that all the stocks are sorted by RS in descending order. RS looks at the consistency and reliability of company financials and is also on a scale of 0.00-2.00. Remove any stocks where the RS is below 1.00 (Only 1 stock (NWS.AX)). Delete any stocks where your RS is below 1.00. That leaves me with 12.
The next indicator I want to check is CI (Comfort Index). CI is also on a scale of 0.00-2.00. Scores well below 1.00 show graph price patterns that are very erratic. The higher above 1.00, the smoother the left to right price pattern. With so few stocks remaining now, simply identify the stocks where the CI is below 1.00 and remove it out (CTD.AX). 11 stocks now down from the initial 135!
Last step; right click the WatchList Average line and select View WatchList Average Graph. Ensure the graph is again at 5 years. Wow! What a contrast to what we saw earlier! There is life in the Discretionary Retail Sector Yet! A good set of rising earnings (EPS) and the price has been steadily rising over the last 5 years. A bit of a setback towards the end of 2018 (like many stocks during that period), but a very strong recovery in 2019 onward. Since the start of January 2015, KME.AX and ALL.AX have returned over 400% each followed by CCX.AX which has returned over 250%. Who says there is no life in the discretionary retail sector?
You could have done this all using UniSearch in a much quicker fashion, but it is always useful to go back to the basics and do it manually to give you an appreciation of the power of UniSearch!
Try this exercise with any of the other sectors you are interested in for Australia or the US market. You have the power at your fingertips!