ZFX zinifex limited

value is not everything

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    Macquaire doesn't seem immediate value in ZFX (23/6/06)...EXTRACT

    Value without the trap - Avoiding value pitfalls

    Event
    We identify stocks that are undervalued on Macquarie.s quant models, but are
    not cheap due to poor short-term performance, or for other obvious reasons
    such as poor growth or lack of earnings certainty.
    Rather than a simple screen of stock names, this is implemented as a
    portfolio-type strategy with historical performance measured.
    Impact
    This strategy is more effective than simply buying the cheapest stocks (eg buying the lowest PER stocks) as it weeds out companies that the market has
    correctly priced.
    Stocks currently fitting the .value without the trap. criteria are listed in the table
    at left and include Zinifex (ZFX), Funtastic (FUN) and Smorgon Steel (SSX).
    Analysis
    In Australia, simply buying stocks that are cheap (eg those on a low PE) is a profitable trading strategy.
    However, there are stocks that trade on a low PER for valid reasons . buying these stocks may impede further outperformance. Finding a way to identify
    and avoid such stocks improves the effectiveness of a low PER strategy.
    Avoid stocks with negative short-term price momentum
    Stocks with negative short-term price momentum can look cheap because the
    market reacts immediately to bad news. However, it takes a while for this to
    feed through to analyst earnings forecasts.
    In a PE sense these stocks trade on a low PE because the .P. has adjusted
    but is still awaiting the adjustment to the .E. that will soon occur.
    Stocks that are cheap for a reason
    Stocks can look cheap when there is reason to doubt the quality of the
    forecast earnings. Specifically, the market will punish stocks:
    ⇒With poor earnings certainty (a large dispersion of analyst forecasts);
    ⇒Paying out low amounts of earnings in dividends;
    ⇒With a poor track record of delivering EPS growth.
    In a PE sense, these stocks are not cheap. They are trading on appropriate
    .P. for the quality of the .E..
    Stocks are sold from the portfolio when:
    ⇒Last month.s performance was in the bottom 10% of
    the market;
    ⇒Last month.s performance and the previous month.s
    performance were in the bottom 30% of the market;
    or
    ⇒Three month earnings revisions signal in the bottom
    30% of the market.
    The rationale for this is to quickly remove stocks from the
    portfolio if they are not meeting our expectations. This
    allows stocks more time to perform once they meet the
    criteria, as the filter is a longer term strategy. It also
    reduces the potential of holding stocks that continue to
    fall while satisfying the filter criteria which may be a
    result of lagged data or other negative attributes not
    captured by the filter.
    Outperforms simple value strategy
    Stocks that satisfy only the first two criteria (cheap on PE
    and excluding poor dividend yield) demonstrate the
    strength of filtering out poor quality stocks based on the
    three additional criteria (poor earnings certainty,
    earnings growth and earnings revisions).
    .Value without the trap. is a more successful strategy
    than a .value only. strategy as measured by active
    annualised returns and information ratios, although it is
    also more volatile.






 
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