Wednesday, August 08, 2007

MFI Run?

Think about these facts:

Past 8 Trading Days: My MFI is down 2.8% S&P Small 600 is up 1.2%, S&P mid 400 up 1.2%
Past 13 trading Days: My MFI is down 10.8% S&P Small 600 is down 5.3%, S&P mid 400 -4.9%

What is going on? Why this 4 to 5 point differential with comparable indices? That is a big difference over such a short time frame. At first I thought it was a flight to quality. But when I look at this and see the difference exists in mid and small caps, it is more than that.

Today it seemed exacerbated. I saw PACR and UNTD, both of which I felt had strong earnings go from being nicely in the green early in the day to ending in the red. They were both down over 6% in the middle of the day. VPHM and GVHR were both down about 10% on absolutely no news on a big green day. What gives?

It isn't a sector. It isn't small caps. The only thing all these stocks have in common is MFI. Here is my hypothesis. JG himself suggested the same. The MFI stocks fell so much faster than the averages at the beginning of the correction that it has shaken people's faith in MFI. So since then, people have been selling on up days, pushing the MFI stocks into the red. I think a lot more people had been buying MFI stocks (and now selling) than perhaps we realize. And in addition, some of these stocks are not exactly high volume stocks, so if a small fund is unloading, it can really depress the price.

What does it mean if this is true? If you still have faith in MFI, it means this under-performance is temporary and we can expect the stocks to bounce strongly back. In fact, it implies that this is the best MFI buying opportunity since I started. What do readers think? Are investors giving up on MFI? If so, is that perversely good for those of us who stay the course?

Stock News

FTO - had an absolute blow out quarter (Frontier Oil Reports Most Profitable Quarter in Company History). I can not understand how the stock only went up 2%. Strangely, WNR (which did not report) was up 9%! FTO has an EV of about $3.5b. In the preceding 4 quarters (which were not shabby) FTO had EBITDA of $675m. In this quarter alone, their operating income before depreciation and taxes was 510m!!! That is ungodly. Yet the stock closed today at $36, essentially the same price from 12 months ago. Go figure. People will crunch the numbers and the stock will rise.

NOOF - what a disappointment (New Frontier Media Reports 2008 Fiscal First Quarter Results and Announces New CFO). Down 15% on subpar earnings. With these small companies, revenues can be extremely lumpy. I am not ready to throw out the bath water yet, but it was depressing.

UG - Ugh. You know it is bad news when the headline is bragging about how they have done in the past 6 months as opposed to the past quarter (United-Guardian Reports Strong Six-Month Sales & Earnings). Sure enough, when you strip out just the quarter it was just flat, this caused a 22% decline in the stock price. Y'know though, looking at everything, the 22% hit is ridiculous! I may step on the ledge (don't jump!) and claim that UG at $8,75 is extremely appealing.

Some one the Yahoo Board was clever. He said we all need to go home and download some porn while buying some Heelys. HLYS has been on the lists the past month or two and was down an unbelievable 48% today. I didn't study the report, but I can't believe the company is worth 1/2 today what it was yesterday. Ouch, my sympathy to those of you caught in that meatgrinder. Maybe I should not go to the top 25 approach.

Finally, I have switched my blog to a new color (green) to see if we can't get things going in the right direction again. Good investing everyone!


revit said...

I sympathize with your plight of late. I've been reading your blog for several weeks now and your thinking regarding various positions is very logical, and I am vicariously seeing the results...I guess I've been lucky enough that I've gotten my MFI portfolio started a few weeks ago (5 positions now) but I cannot explain the random movements of these stocks and the drastic fluctuations. You are right - some have done well recently (CHKE) but others are outright bizarre. I'll see where I am once I've built a full portfolio.

Nevertheless, keep up your writing, you're doing a great job.

pedaling fool said...

I'm seeing the same results in my portfolio. major indices up; my MFI down. All cap sizes. My 1st anniversary is on Aug 23. Only positive in my portfolio is my first round of 5 has returned 17%. That's a REAL return; no IRR. I'm pretty sure that's better than the S&P or close to it. I'm giving it 3 years. We all need to hang in there. I wouldn't want to be starting my MFI experience in this market, though.

Malcolm said...

I think there's been alot of extremes with MFI stocks lately. I had about 4 today that were up over +5% and 4 that were down around 6%. Retail stocks have been getting crushed lately like AEO and ARO.

It's interesting that in the contest there's a 15% spread between first and last place. When you read the book you know everyone will have different results because of different picks, but you think that picking from the same small group of stocks would diversify you enough in the MFI lists to have alot closer results.

I have a theory that the volatility lately is due to the smaller caps releasing earnings later than the larger stocks that make up the dow, so when we saw the quick rise in mfi a few weeks ago along with the rest of the market, we didn't have to go through earnings like other larger stocks did.

AyRon said...


Interesting theory...I've been pretty curious how many people are using MFI. JG claims everyone using it won't dilute its power. I'd be happy as can be if lots of other people abandon it. I actually think that's likely, less from temporary fear than it simply requires a lot of discipline that most people don't have. How many people can stick to a diet? People get tempted too easily (oooh, it's a GOOG banana split! MUST EAT!!!).

btw, who needs Yahoo finance? I find more news faster on most of my stocks at your blog than elsewhere. Thanks! (I had the same complaint about FTO going nowhere yesterday)