by Michael Tarsala
This weekend’s Barron’s story featuring Bob Gay, manager of several Covestor investment models, provides some insight into the technology behind his stock picks.
As Barron’s reports, Gay, the former Director of Quantitative Research at DLJ, and the current head of GEARS, has created a sophisticated technology to extract financial statement data and create fundamentals on the 1,500 largest U.S. companies over the past 17 years. He dismantles the long-term historical growth record of the company into its component drivers, and visually shows the relationship between those metrics and the historical share price.
By doing so, he can measure the fundamentals that most drive a stock’s price and watch those fundamentals for inflection points.
Gay has let me see it; it’s cool stuff! And it’s the basis of his decision-making on the stocks he adds and subtracts from his models.
In Gay’s Earnings Surprise model, his top holding is Bed Bath and Beyond (BBBY). He says it’s been a strong performing stock, in that it’s one of few non-defensive large caps that remains in a steady uptrend even after the recent market selloff. The technology he developed helped Gay to find this stock early in its uptrend cycle, back in June 2010 at $39.33, based on a combination of stronger revenue growth, rising gross profit margins and falling SG&A expenses. It now trades at around $71 a share.
Yet it also is telling him the time to sell is coming soon. Costs are now unusually low, and might become more difficult to manage for Bed Bath & Beyond going forward — especially in a period of lower sales and gross margins. That and free cash flow margin — which Gay says is 90% correlated with BBBY’s stock price — has been on the decline since Q3 2011. It’s a situation he expects will soon weigh on the stock.
To time his entries and exits, Gay also performs a weekly volatility analysis that gauges where a stock is trading relative to its standard range. As of this week, BBBY is at the top of its range, which is why he plans to sell his top holding in coming days.
Not every stock in Gay’s portfolio is pullback-proof. Scientific instrument maker FEI Co. (FEIC), his third-largest holding, is down 15% from its May peak.
Yet Gay says his technology helps him make good decisions over the long-haul.
You can check out his annualized performance of his Earnings Surprise model, and two other models relative to the S&P 500, on the Covestor site.
Following is an excerpt from the Barron’s story… and you can read the entire article here.
With the stock market searching for direction and economic uncertainty high, investors would do well to focus on one measure that’s been showing strength—capital spending relative to sales.
The indicator, which began rising in the first quarter of 2011, reached its highest level since 2002 in this year’s initial three months, says Robert Gay, director of research at institutional investment manager Buford, Dickson, Harper & Sparrow.
Gay has created a technology to extract key performance data on the 1,500 biggest U.S. companies. He also runs some model portfolios, based on this technology, on social investing platform Covestor, where he has been a top performer.
One indicator is pointing to sectors sensitive to capital spending as being ripe for investors’ attention. Gay, a former director of quantitative research at Donaldson, Lufkin & Jenrette, identifies sectors sensitive to industrial capital spending, including energy, technology and basic industries, and tags them as most likely to outperform.
Among recent Buys: Oracle (ORCL), EOG Resources (EOG) and Kimberly-Clark (KMB).
