PowerStocks Methodology

We will compare shares from the JSE ALSH ORD stock set to see how they have grown since the bottom of the last significant bear market in May 2003 to the peak of the last bull market in May 2008 (click on attached graphic for a detailed view.)



We will compare the growth rates of each stock over the 5 year ("A" to "B") period to key fundamental "value" indicators/ratios of each stock at the bottom ("A") of the last bear market. We will look at P/E, PEG, Price/NAV, Debt Ratios, Earnings growth etc.

We will then try to determine any correlation between these indicators/ratios and extent of growth achieved to finally derive a model for selecting (screening) value stocks most likely to achieve superior growth from point "C" onwards. Only "tradeable" stocks are considered that have at least 3 trades executed per day. There are about 100 stocks on the JSE that do not meet this criteria and we will not consider them since they are hard to trade and equally hard to liquidate to realise a profit.

We will also evaluate some famous "Score based" systems such as the Piotroski "F" Score system used to select stocks most likely to survive bear markets, and their effectiveness in predicting the stocks that showed superior growth since the last bear market. We will publish the first ever Piotroski ranking system of the JSE.

Finally we will use combinations of the above to present the first ever JSE fundamentals-based stock screening, ranking and scoring system that investors can use to select robust, powerful stocks most likely to outperform the market in the next bull run. Using our screening methodology in the last big bear market we would have picked 6 stocks that eventually grew in excess of 1,000 percent on average as opposed to the ALSI growth of 350%.

All of the above three objectives have not been done on the JSE and/or published for the general South African public before.

NEXT UP : Introduction to the PE Ratio

A History of JSE Bear Markets

Our first lesson is an important one. You need to understand that the current bear market is normal. In fact it is welcomed for the wily investor. To quote Warren Buffet "Be scared when everyone is greedy and be greedy when everyone is scared". Now think of this - the US markets have seen their greatest drops since the great depression and Buffet has started buying American stocks!



Look at the chart above of 11 significant downturns on the JSE over the last 21 years. There have been many more "mini bears" but the ones above are the grown-up bears. Grown up bears last longer than 90 days and represent a decline of more than 15%. The periods above are the only times this has happened. Each time the market bottoms-out, it has risen to higher than all the periods before! These are normal cycles that flush the system as contrary to popular belief the markets are not that efficient. Markets either price things to high due to over exuberance, which leads to collapses and then the subsequent collapses go completely overboard in the ensuing panic. All the investment greats recognised this as golden opportunities for buying stocks for far less than they are worth and selling them for far more than they are worth. How else do you think these men made billions of dollars?

Back to the chart - you will note that we are 154 days into the current downturn and the JSE ALSH is at 18,100 (a record 44.5% down!) Yummy - this looks like the time to pack our rifles and doing some hunting! But before we willy-nilly buy any old stocks (which will lead you to fail) we need to take you through a few more lessons based on our research of the last 18 months. After all, a market is a tide upon which all boats float when it rises, but not all stocks are likely to recover from the downturn and will be smashed against the rocks as the tides drop, never to float again. With JSE PowerStocks there is a detailed and thorough process that needs to be followed to pick those Phoenixes that will rise again from the ashes.

NEXT UP : Bulls and Bears of the Past

Our Philosophy

We subscribe to the time tested value investing methodologies of the industry greats, such as Warren Buffet, Benjamin Graham and William J O'Neil and research their works extensively. We then use unique methodologies and automated research systems to track various data on the JSE and turn that into unique never before seen information that allows you to subscribe to "Value investing" principles pioneered by these great men.

Our methodologies focus on being active in large bear markets to seek out stocks of companies that are financially powerful, well run, leaders in their segments, resilient in the face of downturns and above all properly valued or even undervalued. These stocks will exhibit superior growth during and after the downturn and will exhibit large "buffers of safety" after being purchased to make your investment virtually indestructible.

These are the South African PowerStocks - rock solid, powerful and virtually guaranteed to significantly outperform the market over a period of 3-5 years, and best of all going for a song. We will demonstrate the use of quantitative analysis, never before seen in South Africa to compare stocks for selection. In short the methods we will introduce are completely new to South Africa and are going to rivet you to your seat and your screen.

To be clear, we are not speculators nor financial advisers. We merely offer you unique never before seen tools and analysis tailored for investment on the JSE and ALT-X. We built these methodologies and tools out of necessity for ourselves, since although most of them may exist for the US markets and investment public, nothing like it is available for the South African public.

NEXT UP : A history of JSE Bear Markets

About PowerStocks Research

Welcome to our first blog post. PowerStocks is a group of private investors who conduct unique research for their own private investment purposes. Through this blog we will share some of the results of the unique research methods we use for the general investing public. We feel the current financial crises offers a once-in-20 years opportunity for ordinary investors to get into the stock market at never before seen prices and set themselves up tidy nest-eggs for the future.

The research methods we use are usually the preserve of large investments funds and private client wealth managers coupled with some very unique and new concepts to South Africa. Some of our more detailed groundbreaking research will be made available for purchase from time to time, however the free information we offer will still be eye-popping, highly educational and very topical.

Enjoy, and happy hunting!

NEXT UP : Our Philosophy