Look, i simply got it off another fella that posted it on here. I'm not saying it works. I simply gave it a shot, to see what results it would spit out. Presently, it seems to be doing quite well. Personally, i'm a fundamental investor, with a quick glance at the charts. This formula is purely for buying into stocks based on the following...........
Dr Kennedy came up with the equation:
Is it entirely correct? Well who is to say? Like most charting tools it is just a numerical statement of what we already intuitively believe to be true. If it is useful then I guess it is correct. It is designed to operate using only the data in the daily share tables. It is a good way to kill time on a long train trip, perhaps nothing more.
The figure of merit is the product of three terms:
The first term is the “value” term:
Val = 1/PE_ratio.
It favours stocks that have recently reported a decent profit relative to the current share price. The PE ratio must be non-zero. Ensure that the PE ratio incorporates recent share splits and/or capital raisings.
It ensures the reported profit was not just a one-off and that the market expects another good announcement soon, as suggested by a stock that is trading near recent highs. It filters out stocks that have a low PE ratio because the share price has fallen in response to profit warnings, as suggested by a stock that is trading near recent lows.
The third term is the “velocity” term:
Vel = 52_wk_high/52_wk_low.
It identifies stocks that may give appreciable capital growth in the near future simply because they have in the recent past.
As an absolute measure, a merit > 0.2 is probably very worthwhile buying; a merit > 0.1 is still good and might be worth a punt. Though, consult your financial adviser first, but please, don’t tell them anything about stock-picking equations you got from some weirdo on the net.
The figure of merit is of course relative. The “raw” merit (as computed above) of all listed companies in a sector of interest could perhaps be computed then summed. To obtain a “relative” merit, divide the raw merit by the sum and multiply by 100 to express the relative score as a percentage. Then pretend you are marking exams- 0%-50%: fail; 50%-65%: pass; 65%-75%: credit; 75%-85% distinction; 85%-100%: high distinction.
