Editor’s note: The markets and our Chaikin Analytics offices will be closed tomorrow, April 15, to commemorate Good Friday. Because of that, we won’t publish the Chaikin PowerFeed e-letter. Look for your next issue on Monday, April 18.
Investment stories are fantastic… And a great storyteller can almost always come up with one.
Researchers consistently find that stories are especially persuasive, too… Folks will often disregard facts in favor of a great story.
Now, maybe you’re thinking, “Not me, no way.”
But after roughly 40 years in finance, I still find myself persuaded by a great story… only to find when I check the facts later that the story isn’t quite as true to life as I hoped.
Thankfully, a simple tool helps me overcome this human failing…
It’s the “story check.”
First, when someone tells you a persuasive story… enjoy it. Then, after the story is finished, see for yourself if the facts align. It’s as easy as that.
I just had to do this the other day. I read a story that I really wanted to be true. But when I ran the story check afterward… it turned out that it was just a good story.
Let me explain…
A recent article about Analog Devices (ADI) caught my eye…
Analog Devices operates in the “uncool” part of electronic signal transmission. These days, digital signals get all the glory. But importantly, the story I read reminded me that fans of analog technology could benefit from cheaper stock valuations.
Regular Chaikin PowerFeed readers know I’m a sucker for a deal. And when you combine that with technology from yesteryear beating out the innovative technology of today…
It was a story I wanted to believe!
You see, analog transmission uses a signal in its original form. With audio, for example, a signal is taken directly from a microphone and put on a tape. In either place, it’s an analog wave.
Analog needs a bit more bandwidth and can pick up noise. But it’s easy to process. And it allows for infinite variety.
That story perfectly teed up a recommendation of Analog Devices. It primed me to expect a strong price chart and a “bullish” or “very bullish” rating in our Power Gauge system.
However, when I ran my story check with the Power Gauge… I was disappointed.
We do see a couple of positives… As suggested by the story I read, sentiment for the stock is generally “bullish” today. The Chaikin Money Flow indicator is “bullish” as well.
But there’s a reason the Power Gauge uses 20 factors instead of just one or two…
You can’t run the story check by looking at a single factor. You need more data than that when it comes to something as complex as a stock or exchange-traded fund.
Looking further, the company’s share-price performance over the past six months is poor. Now, the broad market struggled over that span, too. But Analog Devices underperformed.
I was especially disappointed to see a “very bearish” grade in the price-to-sales ratio factor and a “bearish” ranking in free cash flow. And overall, the Power Gauge rates Analog Devices as “neutral” today.
That isn’t what we want to see in a good investment.
Sure, I find the story behind analog investments persuasive. But when I use the Power Gauge for my story check, it tells me that Analog Devices isn’t a stock to own right now.
So the next time you hear a good story, ask yourself, “Does it pass the story check?” If it doesn’t, just enjoy the story and move on to the next one.
Good investing,
Marc Gerstein
