Sunday, June 15, 2014

Alfidi Capital On Fundamental Factors And Event Arbitrage

I am a fundamental investor, not a technical investor.  I was never really intrigued by technical "chartists" at all.  Perusing investment periodicals where technical traders held forth on magic formulas predicting direction was a source of amusement for me about ten years ago.  I put down those mags once I got to the ads in the back touting trade prediction services.  Folks, if a black box algorithm or crystal ball could predict stock market moves with uncanny accuracy, the author of said program would never let it see the light of day.

Hedge funds are no better than those useless ads and chart touters.  They just have a lot more money to play with than a typical technical investor.  Measuring thousands of signals for degradation is a waste of both human talent and computing power.  Investors in hedge funds may not realize they're paying a premium for a status-conscious product.  Maybe they do realize it and they just don't care.

Fundamentals matter.  Earnings determine whether a company is viable.  Quality of earnings (i.e., consistent operations and conservative accounting practices) determines whether a company will remain viable.  Modest long-term debt loads determine whether a company can survive a bad economic climate without violating any debt covenants.  Positive free cash flow suggests whether a company's capital spending supports its growth.  Market share determines whether a company has a durable competitive advantage that supports its pricing power.  The trailing twelve month P/E ratio tells us whether a stock is priced at a premium or a discount to the rest of the market.  Any P/E ratio over the US economy's long-term average of 14 is probably a premium, and any P/E that's at least 25% below that number is a candidate for deep value analysis.

Events can move stocks in the short term, but fundamentals drive value in the long term.  The market's "random walk" on any given day has nothing to do with candlesticks, moving averages, and trading volume ratios.  Events can move a stock's random walk in any direction.  The closer these events are to the heart of a company's operations, the more the move will matter if it opens an attractive entry point.  Apparently good news, like a one-time gain from an asset sale, can degrade earnings quality.  Bad news (like an earnings miss) can trigger the market's reevaluation of a stock.  A good intuitive analyst can figure out whether those news events reflect some persistent phenomena.  Merger and acquisition announcements open up arbitrage opportunities for those investors bold enough to buy the target and short the acquirer.  I've made some decent money in the options chains of announced merger transactions.  An index change opens another opportunity to find a discounted stock when index funds sell out of stocks dropped from widely followed benchmarks.

The Alfidi Capital approach takes the basics of investing very seriously.  The intellectual capital I invest into my analysis will eventually drive whatever financial capital I commit.  My thought process is unique and no other investor can duplicate my thinking.  That's why no one else can invest the way I do.  Any stupid losers out there who think they can imitate me would be wasting their time.  Investors who do their own thinking can outperform the market but they are truly rare.  Just sit back and admire the genetic rarity that is Yours Truly, Anthony J. Alfidi.