The Brush Effect

After reading his columns for some time, I began to get the sense that stocks seemed to do well after being recommended by MSN Money columnist Michael Brush. I decided to research whether my anecdotal feeling was actually accurate. Based on an admittedly small sample size, it seems my intuition has some support. I've posted below an analysis of stocks picked by Brush in his articles, following them on a one-day and one-week basis after his pick. Brush's picks significantly outperformed the S&P 500 over these periods. A few caveats. I only used articles in which Brush recommended a finite number of stocks, e.g. "5 Big Names Ripe for Takeover, not articles in which Brush gave more general market analysis. My reasoning is that investors would have had a tougher time ferreting out investment ideas from the more general articles and were more likely to pass on them. An arbitrary determination to be sure, but not without some logic. In any event, I'm working on a trading strategy to capitalize on this and will report back:

MICHAEL BRUSH ANALYSIS

Thesis 1:  The media has a preeminent influence over behavior in the modern age and this influence extends to investing. 

Thesis 2:  Stocks recommended by Michael Brush, MSN Money columnist, experience a marked increase in value immediately after Brush recommends them.

Background:  I noticed that stocks recommended by MSN Money columnist Michael Brush seem to do well immediately after he recommends them.  I decided to see if this was true or only seemed to be the case.  I examined only a subset of Brush’s articles because he doesn’t specifically recommend stocks in every article.  I usually only focus on articles of the type “Six Stocks Insiders Are Snapping Up.”  He has other articles which don’t make specific recommendations or just talk generally about an issue.  I examined articles from 2011 and 2012.  I excluded two articles where he made recommendations of 10 and 12 stocks, respectively, because I thought this was too scattershot for investors (including me) to hone in on.    However, it might be necessary to look at these. 

Conclusion:  Indeed, stocks recommended by Brush outperform the S&P in the week following his recommendation by a significant percentage.  This effect appears most pronounced for stocks valued under $10.  The one week returns are better than the one day returns.  My suspicion is that the effect is the result of investors jumping into these stocks based on Brush’s recommendation, rather than his timing being exceptional (or indeed the picks themselves being exceptional).  It could also be that electronic trading platforms are programmed to buy his recommendations.  The articles which are the source of the data are listed after the table.  This sample may be too small to permit reliable conclusions, however.

 

Stock	Adjust. Close on Start Date	Adjust. Close 1 day out	1 day return	Adjusted Close 1 week out	1 week Return	High During 1 Week Period	S&P Return Over  1 day Period	S&P Return Over 1 week Period
WHR	63.54	65.28	2.7%	58.38	-8.1%	65.28	0%	-6.4%
SKYW	12.74	13.17	3.3%	12.82	0%	13.17	0%	-6.4%
XRX	8.68	8.76	.9%	8.04	-7.3%	8.76	0%	-6.4%
TSN	17.02	17.20	1%	16.61	-2.4%	17.20	0%	-6.4%
AET	38.86	38.89	0%	36.59	-8.4%	38.89	0%	-6.4%
MS	16.11	15.91	-1.2%	16.67	6.2%	16.67	-1.6%	1.5%
HAS	35.14	35.84	2.0%	36.45	3.7%	37.37	-1.6%	1.5%
RT	7.56	7.55	0%	7.80	3.2%	8.35	-1.6%	1.5%
KFT	33.02	32.67	-1.1%	32.82	1%	33.42	-1.6%	1.5%
EMR	42.28	41.80	-1.1%	43.77	3.5%	45.08	-1.6%	1.5%
BRK.A	104,814.00	102,600.00	-2.1%	103,491.00	-1.3%	106,350	-1.6%	1.5%
CMG	246.98	250.98	1.6%	272.20	10%	272.20	1%	2.4%
APKT	67.01	68.00	1.5%	72.07	7.4%	72.57	1%	2.4%
IRBT	29.28	29.55	.9%	32.81	12%	32.81	1%	2.4%
ISRG	320.93	330.50	2.8%	338.21	5.4%	338.21	1%	2.4%
ZOLT	13.30	13.51	1.6%	13.53	1.7%	13.53	1%	2.4%
PSUN	3.41	3.36	-1.5%	3.54	3.8%	3.54	1%	2.4%
SIRI	1.67	1.70	1.8%	1.72	3%	1.73	1%	2.4%
CRWN	2.24	2.35	4.9%	2.34	4.5%	2.40	1%	2.4%
TXCC	2.87	3.37	17.4%	4.47	56%	4.61	1%	2.4%
COWN	3.92	4.04	3.1%	4.08	4.1%		1%	2.4%
MKC	47.67	47.23	-.9%	46.35	-2.8%		-1.9%	-4.7%
AFL	55.25	54.17	-2%	49.49	-10.4%		-1.9%	-4.7%
ADP	49.44	48.93	-1%	46.96	-5%		-1.9%	-4.7%
PAYX	32.41	32.13	-.9%	30.27	-6.6%		-1.9%	-4.7%
TSCO	54.59	53.94	-1.2%	52.94	-3%		-1.9%	-4.7%
SHLAF	NA						-1.9%	-4.7%
AEO	14.12	15.40	9%	15.38	8.9%		0%	1.2%
Petrohawk	Acquired as Brush predicted; NA						0%	1.2%
WAL	8.08	8.11	0%	8.30	2.7%		0%	1.2%
Lawson	Taken private, as predicted; NA						0%	1.2%
CPNO	31.57	31.68	0%	32.36	2.5%		0%	1.2%
Pride Int’l	Acquired as predicted;NA						0%	1.2%
LKQ	25.14	25.38	.9%	25.64	2%		0%	1.2%
AMD	8.39	8.26	-1.5%	7.93	-5.5%		0%	0%
BBT	26.01	26.03	0%	26.43	1.6%		0%	0%
GE	17.88	17.82	0%	17.56	-1.8%		0%	0%
AMR	Unav.						0%	0%
MMM	85.84	85.24	0%	85.33	0%		0%	0%
CMRG	3.13	3.32	6%	3.56	14%		1%	4%
VVTV	1.59	1.67	5%	1.94	22%		1%	4%
ETAK	2.02	2.26	12%	2.39	18%		1%	4%
GSL	2.52	2.90	15%	3.43	36%		1%	4%
FBP	3.64	3.71	2%	4.00	10%		1%	4%
Combined  Average Total Return			2.7% (80.7% total return ÷ 39 investments)		4.4% (173.4% total return ÷ 39 investments)		-.21%         (-1.5% total return ÷ 7 investment periods)	-.29%         (-2.5% total return ÷ 7 investment periods)

Facebook: How Soon Will My Prediction Come True?

In one of my first posts on this blog, I predicted that in 5 years' time, Facebook would lose half of its value.  That may happen much quicker than I thought based on the recent IPO (my prediction was pre-IPO).  I noticed an interesting stat from a recent Pew Foundation study, however.  The average age of a Facebook user in 2010 was 38.  I would have guessed much younger.  Given this average age, one might think that Facebook's appeal will not be as tied to a young, "cool" factor as MySpace was -- and thus will not bleed users once the next generation of fickle youth want to choose their own defiing network rather than their parents' or older siblings' social media of choice.  The average age cuts both ways, however.  Consumption and gullibility generally decline with age.  This would seem to make Facebook's goal of monetizing its user base harder.  All in all, I'll stick with my prediction. 

The Strange Case of MCP

On May 11, 2012, Wired magazine ran an online story discussing how the US government is quite concerned that China has a stranglehold on "rare earth mining."  Rare earth refers to certain elements, such as neodymium, which are used in the manufacture of electronics.  Apparently, much of the world has ceded this business to the Chinese.  According to the Wired article, however, the concern over this Chinese hold on rare earth mining has become so great that an American company, Molycorp, has decided to reopen a large rare earth mine it owns in California.  This was a compelling story to me.  So I checked on Molycorp and discovered reasonably sound financials.  Thinking that, once this story got wide distribution, the stock would shoot up, I immediately purchased Molycorp on the morning of the story.  Well, the stock opened at $24.38 on May 11 and went as high as $26.10 that day before closing at $24.93 and subsequently closing at $25.43 on May 14, the next trading day.  So far, so good.  But then, the stock went into free fall.  It plunged through it's 52-week low in the $22 range before eventually breaking below $20.  There was some arguably bad news following the Wired story -- a downgrade by Street.com and, on May 14, the announcement that MCP would issue $650 million in secured notes.  This latter point could as easily be interpreted as raising money to pursue this new rare earth opportunity.  My point in all of this:  I never try to explain short term market movement but this has a suspicious element to it.  A possible pump and dump strategy by someone.  In any event, I'm sticking with the stock long term.

Short ETFs

I recently renewed my subscription to Barron's, after some years away.  My initial impression is that it is a good publication.  How do I judge that?  It's largely useless but every issue has a few nuggets worth thinking about.  That translates to good because most publications don't even have a few nuggets.  One column which has had a few interesting pieces is "ETF Focus" by Brendan Conway.  A recent post discussed research showing that flows into short ETF's is, contrary to what one might think, actually an indicator that stocks will go up.  There are two explanations for this:  (1) these ETF's are being used by sophisticated, bullish traders who use them to hedge increasing long positions; and (2) these ETF's are used by impatient individual investors who are generally wrong about market direction.  The difficulty here is that it is not possible to definitively know what the makeup of these ETF's is in terms of whether they are predominantly purchased by group 1 or group 2 above.  Still, it is an interesting finding (assuming the research is even right).  One might extend the finding to say that increasing flows into these funds on a month to month basis might indicate general economic improvement. 

Return

I've been away for some time, thinking and synthesizing.  I have not posted an alternate view to my last post, as I had originally intended, because the world seems to be heading down the road I outlined and I haven't been motivated to post an alternative.  That said, it may still be worth doing as a thought experiment.  So, I'll begin work.  I may also be posting a study I conducted about a certain MSN writer's effect on markets. But I want to test it with real money before reporting in.