Timing the peaks and troughs of market trends is undoubtedly a tricky business. Although there are laudable arguments for both the pitfalls and merits of trend analysis, there are some companies that offer strong growth potential, though they may not appear particularly sound financially. These are often riskier plays, however, that can prove quite nerve-wracking for the average investor. Still, trend analysis is a technical style, driven by the theory that a stock’s historical price movement can offer strong indications as to the direction the equity will proceed in the future. This strategy of buying into a trend can be highly lucrative, but the key is to know how to predict a trend’s reversal and to sell or short that particular idea before the market moves against you. This method is a more momentum based approach to investing.
An opposing school of thought, fundamental analysis, contends that the only true way to project stock price appreciation with any reliable consistency is by estimating its intrinsic value based on various qualitative and quantitative factors, including macroeconomics, financial condition, and management style. This process is expected to give the investor an idea of the company’s current worth, allowing one to compare it to the market price and determine how to invest accordingly. This method is applicable to the value-oriented investment approach that generally adheres to a more long-term, buy-and-hold principle.
Although these two highly contrasted techniques are often polarized by their respective conceptual perspectives on investing, the Value Line page is where some vital aspects of both styles meet in the middle. Taking a look at Home Depot (HD - Free Home Depot Stock Report), for example, there are various characteristics about this company that may raise the eyebrows of both the trend-oriented momentum investor, as well as those seeking a more stable and steady vehicle for long-term capital gains.
For instance, in the Ranks box at the top left of the report, Home Depot is ranked 1 (Highest) for Timeliness. This suggests that the equity’s price performance is likely to notably outpace most of the other 1,700 stocks in the Value Line Investment Survey over the next six to 12 months. This Ranking System takes into account the 10-year trend of relative earnings and prices, as well as earnings surprises. That said, based on the Rank 1 status, a more venturesome investor seeking a momentum play may want to take a closer look at Home Depot.
One can view each of the aforementioned elements on the Value Line page by looking at the quarterly earnings box and the statistical array to evaluate historical earnings performance, as well as the analyst’s (Matthew Spencer) expectations over the next 3 to 5 years. In addition, one can then move to the price chart above the array to track the equity’s relative price strength and its fiscal-year highs and lows. Upon doing this, a potential investor could see how the company’s price moves on the chart correlate to its earnings performance.
In this case, Home Depot’s price chart has been on a steady upward trajectory since mid-2009, which is in line with the end of the last (2007-2009) recession and perhaps marked a turnaround in sentiment based on broader economic factors and earnings stabilization. Indeed, the quarterly earnings box indicates that share-net profits began to rebound significantly in the fiscal first quarter of 2010.
Though, a closer look at the relative price strength versus the Value Line universe (represented by the small dots in the legends box) suggests that the stock’s performance was not particularly compelling until the second half of 2011. Furthermore, upon scanning downward to the lower right hand portion of the page, the ratings box consists of some important data points, including the historical Price Growth Persistence scale (5 – 100), for which HD shares received relatively low marks.
Nonetheless, the Financial Strength rating is the highest among Value Line’s coverage. Moreover, the Price Stability and Earnings Predictability marks are in the top quartile of their respective scales (5 – 100), which have contributed to the Safety rank of 1 (Highest). This, coupled with the rising dividend, should appeal to more risk-averse investors seeking a steady flow of income. These characteristics reinforce Matthew Spencer’s investment thesis, which touts Home Depot as a “solid core holding for conservative investors.”
All told, perusing the Value Line page reveals several technical, as well as fundamental elements that ought to help one make conscientious investment decisions, thereby defying the widely held notion that these methods are akin to oil and water, instead offering market participants ample tools to cultivate a well-rounded and successful capital-appreciation model.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.