5. Main stock image categories
(stock families / stock profiles)

"The stock profiler's toolbox"

[Chapter directly related to the Image coefficient tables A&B]

Some groupings in categories / types can be made with stocks having similar market
profiles,  in other words similar market properties and image brackets.

  Each category (family) is characterized by:

A level of market attractiveness (structural image level),

And a level of risk aversion (minimum image level).

Sometimes, the profile, thus the image bracket of a stock, changes notably, it shifts
to a
new category.

But this new "market positioning", as said in marketing circles, usually happens
only after several years, sometimes decades.

That stock profile change can be due to:

Either to a sudden shock that alters fundamentally the stock prospects, in a good 
   or bad way,

Or, more frequently, to the fact that stocks have their "life cycle", from birth to,
  
death as is said in demographics or, again, in marketing circles.

Handle with care!

One has to be careful to avoid to classify a stock in a category and an image bracket
on the first perception and to get anchored on a "stereotype".

Even if, precisely, those categories try to describe stereotypes that investor seem to
use in
their decisions and behaviors, either consciously and unconsciously.

Categories cannot by nature be totally precise.

Some stocks do not fully match a category

It should be checked how close a stock's traits fit the category description.

This avoids an illusive "representativeness heuristic" and to misclassify
it into a "family" that does not match its real profile.

Even if things match at a given time, nothing is foolproof as evolutions
   take place.

They occur as well in the life of a business and of a stock as well as in the
way markets see things.

Also, a stock might combine the traits of several categories.

pi-separ.gif (1205 octets)

1. The high images (glamour stocks)' stratosphere 

       Image coefficients for those usually overpriced stocks: 1.0 - 3.0

Great growth stocks are cult companies, with a high reputation.

Those stocks have been successful in every respect for a long time.

They show a linear, fast, endless earnings growth: at least 15% p.a. for 10, 20,
30 years, without dips or breaks, even during economic crisis.

There are good chances (but not 100%) that this Apollo rocket cum Swiss clock
progression stays the same in the coming years.

Shooting stars

     They  are false growth stocks that are experiencing a dazzling rise.

Here, love is not long established, but at first sight.

We may find various confusing cases:

pi-separ.gif (1205 octets)

2. The cellar of low images (ill-loved stocks)

       Image coefficients for those usually underpriced stocks:: 0.4 -1.2

Temporarily or lastingly, some stocks are ignored, ill loved, even hated.

These outcasts have tiny images, specially in depressed or even temperate periods.

It is normally the time and the place where we can fill our shopping bag with the
so-called "value stocks".

That supposes at least some screening among those apples before buying a kilo.

Or - to be more selective and better fit one's own investment style - to apply
the segmentation criteria shown below .

Declining firms.

Not only they have sad-looking fundamentals (prolonged sales and margins weakness),
but this is often coupled with a sullen image, worst than an understandable large risk
premium.

They are priced like nonentities. An exaggeration if some fine remains and the will
to jump back are still there.

  • The image deliquescence is often slow for businesses with a lengthy good history
    that fills our hearts with nostalgia (nostalgia stocks ?)

  • On the other hand, quick love, quick oblivion. If the firm's good standing was
    recent and the disappointment is big, the fall may be momentous.
    Here we find
    fallen angels, archeological remains of shooting / falling
    stars.

Forgotten stocks and small caps

Even if the market has a big heart, it cannot love all the stocks at the same time.

It shows no interest for many small "small caps" but also for various average-size,
and even large firms, relatively thriving or gifted with great hidden virtues.

Not only an antique hunter's paradise, but also a "value stock" lode for diggers !

Why do they stand, forgotten and abandoned, on the sideline?

The circumstances are various:

Bad reputation stocks.

If bad reputation is sometimes based on good reasons, sometimes it comes from
mysterious ones, but what can you do about xenophobia?

If the image recover, it can only be very slowly, or under a force 10 positive shock,
a thing you do not see everyday.

Very cyclical or erratic firms.

Some stocks bring you in a roller coaster

If a firm's results are zig-zagging, its stock's image tends to be low and volatile.

Its level exaggerates the actual uncertainties, at least in atrabilious market periods.

Special situations

Special situations include comeback / turnaround / recovery firms, take-over
targets, lottery tickets...

Those bizarre toads may become princes ...but only if the fairies feel like it.

This situation applies to firms not very successful presently, but that also,

The most worthy of interest are the emerging firms.  

Having shown some first successes, these little robin hoods are aplenty with nice
prospects... if economic vicissitudes don't swallow them.

Those firms, at the same time: 

Beware of decoy / false emerging stocks, the so-called stocks with a
     future or pre-emerging stocks
.

Some started with some sales, even profits, but not necessarily recurrent. Others
have only projects.

Comes to mind such- and- such big canal or tunnel, or new sector: biotechnology,
new energies, new media...

OK to bet on innovation. But not to pay a lofty image to buy a tiny EEV.

Such stocks are often launched on the market at stratospheric prices (see above)
ineuphoric periods when investors flock around anything with a new and flashy look.

Imagine the fall into Hell when the market sentiment turns around!

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 3 - The ocean of mitigated images

          Image coefficients: 0.6 -2.0

Half or two thirds of listed stocks have a structural (= average) image close to 1.

Their actual image is, for some, quite stable (bracket 0,7-1,5) and, for others, highly 
volatile (up to 0,4-2,0). 

In this mitigated images' area, appear also some stocks in transit, coming from less

temperate regions (lowest or highest drawers of table A).

The stock market restaurant's main course: fairly cycle-resistant
    blue chips
.
 

These ex-growth stocks have reached an impressive size. They are leaders or
co-leaders in their various markets.

Their activities are quite integrated, balanced and not too cyclical.

Their profit performances may be somewhat out of breath, but at least their good
management avoided a decline.

They get a lot of respect, but do not inspire so much passion anymore.

  Fairly cycle-resistant good medium-size firms are tasty little dishes.
    
  They, at the same time,

  Defensive stocks, a refuge for the rainy days.

By definition, these firms have their sales and costs protected against economic
cycles.

They supply bread and games, taking an example that goes back to the Antiquity.

Days and nights, through foul and fair stock market weather, their stocks keep the
same light-colored raincoat and the same dull image.

Stocks caught in a spotlight.  

We saw that some emerging, forgotten or special stocks are marooned at times in
the lower castes by the market.

But, here and there, some get thrown out of darkness.

They enjoy, oh just a little bit, the market favor. Their image shifts from unfavorable
to mitigated.

May it last! But, situations are so changing!

Shooting stars (described above) becoming falling angels

Shooting stars are rather easy to spot. After starting to fall, they transit through the
atmosphere's middle layer, get burnt in it, and keep falling.

One could think that, having reached again the neutral zone of images, their price is 
becoming a bit attractive.

Some temporary pause or recovery may make believe in a return to a better
treatment.

Alas, for these routed stocks , recoveries are seldom, better not to dream about it!

  Erratic and cyclical stocks may also transit in the area.

Let us heat up a gas: its molecules start wriggling.

When a general market heat wave occurs, it excites the image volatility of cyclical
and irregular stocks.

They soar vigorously, but usually stay under the average market image.

Except if some market distraction or fad drives them in a foray into the mitigated, or
even sky-high, images.

Their turnaround is so spectacular that the market upgrades temporarily their image
category, taking them for high growth firms.

  Here come the dessert, our great hope: the steadily emerging stocks.

Steadily emerging stocks are an intermediate species between emerging stocks and
great growth stocks.

To identify those passing by, peep behind a hole in a newspaper and use the following

anthropometric sheet:

  • Confirmation of the qualities of emerging firms, and ascent towards those
    of great growth stocks,

  • Attractive business sector, wider than just a niche, currently growing in
    size, and still promising and visible in the short and long term,

  • Large share of this market,

  • Fast and fairly steady sales and margins growth in the last 4-5 years,

  • Clear (commercial and technological) advance over competitors, good
    management / marketing : "dynamism" is not enough, efficiency is a must

  • Still not too high stock image.

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 This page last update: 10/11/14
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