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Which Stock is a Knight in Shining Armor?

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Which Stock is a Knight in Shining Armor

Which Stock is a Knight in Shining Armor?

Aug 10 2015, 07.08am GMT

STOCK.com

In order to find the shining light in the market, you might have to follow the slow and steady stock rather than the spectacular market dazzler.

Analyst Mark Hulbert looks at the fortunes of two stocks from a starting point in August 2011. He writes about how Research Affiliates founder and chairman, Robert Arnott bet on the tortoise rather than on the hare to win the race.

The hare in this case was Apple (AAPL, +0.34%) which was riding the crest of a wave and on the brink of becoming the largest company in the world measured by market value.

The tortoise in contrast was the Bank of America (BAC, -0.34%) which was really struggling against the odds with its stocks almost 50% down from their 52 week high.

With these facts on hand, Arnott was willing to bet that the Bank of America stock would outperform Apple over the longer term.

Amazingly, Apple’s recent fall from investor favor means that Arnott is in the money with his bet. Apple stock has delivered a good performance despite the recent plunge to still show an annualized growth of 23.5% over the period while BAC has done even better with an annualized increase in stock value of 28%.

The lesson for investors out of this anecdote is that while forecasts such as that made by Arnott might not always materialize, the expectations are far greater for high riding stocks than they are for one that is viewed negatively by investors. Just as a small misstep and fall will slow the hare perceptibly, the effect of any negative news about the high riding stock brings it back to earth rapidly.

The poor performer on the other hand only has to up the game slightly to deliver steadily better results for the stock to move upwards slowly, but consistently.

In the latest tortoise and the hare analogy, Chris Brightman, head of investment at Research Affiliates is controversially backing Chevron (CVX, -1.69%) to outperform Facebook (FB, -0.86%) over the longer term.

His views stress the fact that close examination of the fundamentals surrounding a stock are far more important than investor sentiment that is often driven by hype and perceptions rather than by hard facts.

Brightman had this to say about Chevron which is trading at nine times its trailing EPS, “Even if Chevron drops by a third from 2014 to $6 per share, at a normal multiple of 15, its stock price would be higher than today’s price at this future trough in earnings. That seems like a healthy margin of safety.”

Facebook, on the other hand, he describes as the “poster child of our new tech bubble” because the company is trading at 92 times its trailing EPS of $1.03 and needs to deliver constantly growing earnings at a very high rate. While he agrees that Facebook’s earnings are growing rapidly and that its 2016 P/E ratio is “only” 35 times the projected EPS of $2.75, he also says that “to get down to a normal price to earnings ratio of 15, Facebook's EPS must not just meet this expected near tripling by 2016, but then more than double it again.”

He added, “Over a multiple year horizon, I like Chevron over Facebook.”

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