As we discussed in previous articles, the Interactive Charts feature allows you to generate visuals that illustrate useful financial trends among company stocks, from a simple comparison of two companies’ Piotroski F-scores to a “P/S valuation bands” chart highlighting good times to invest in a cyclical company.
In Part 1, we introduced Interactive Charts and briefly discussed preliminary features. We then explored several predefined charts in Parts 2 and 3. In the final parts, we will conclude the article series with an exploration of several advanced features, including creating customized series, saving user-defined charts and incorporating technical indicators into the chart. These features go beyond the predefined charts, allowing the user to interact with the interface (hence the name “Interactive Chart”).
Brief recap
We introduced the Interactive Charts feature in Part 1 with a simple chart comparing the historical trend of Piotroski F-scores for three major technology companies, Apple Inc. (AAPL, Financial), Alphabet Inc. (GOOG, Financial) (GOOGL, Financial) and Microsoft Corp. (MSFT, Financial). The trends are summarized in Figure 1 below.
Figure 1
After we discussed the preliminary features of Interactive Charts, we explored three predefined charts: the Income Statement Chart, the Balance Sheet Chart and the P/S valuation chart. Based on our discussions on the charts and statistical analyses, we observed that travel companies offer high growth potential due to strong income statements while biotechnology companies offer strong value potential due to undervaluation based on historical price-to-sales ratios. We highlighted several stocks, including Allegiant Travel Co. (ALGT, Financial), The Priceline Group Inc. (PCLN, Financial), Biogen Inc. (BIIB, Financial) and JAZZ Pharmaceuticals PLC (JAZZ, Financial).
A user-friendly interface: customized series and user-defined charts
As its name suggests, the Interactive Chart offers several user-friendly tools: customized series and user-defined charts. The former allows you to graph personalized series while the latter allows you to save your customized charts for later use.
The customized series feature allows you to draw series not featured among the predefined series. For example, if you try to search for the “Sloan Ratio” series, you will notice that all tabs except for “Most Popular” are grayed out and only “Price” is visible.
As discussed in a previous article, the Sloan ratio determines the quality of a company’s earnings. Companies that have Sloan ratios close to zero generally have pristine earnings. However, if the company’s Sloan ratio increases above 20% for declines below -20%, the company’s earnings become marred with accruals, decreasing earnings quality. University of Michigan researcher Richard Sloan observed that companies with low Sloan ratios significantly outperform the companies with high Sloan ratios. A strategy that bought companies with the lowest Sloan ratios and shorted those with the highest Sloan ratios outperformed the Standard & Poor’s 500 index benchmark by about 11% during the backtesting period from 1962 to 2001.
The Sloan ratio is calculated as net income less the sum of cash flows from investing and operating, all divided by the company’s total assets. We can graph a company’s Sloan ratio using the customized series feature.
Two rows of buttons appear above the Interactive Chart: one row that allows you to add companies to the chart and the second row that allows you to select predefined charts. This row contains six buttons, three on the left and three on the right. “Customized Series” is the right-most of the three buttons on the left. Clicking this button will reveal a popup screen like the one shown in Figure 2.
You can type in the formula for your customized series in the box given. As you type the series, you can use the drop-down menu as a guide. To graph the Sloan ratio as a percentage, we need the following formula:
Sloan Ratio % = 100 * ('Net Income' – 'Cash Flow from Investing' – 'Cash Flow from Operations') / 'Total Assets'
Note some peculiars about the formula:
- Each parameter requires single quotation marks around the name.
- The commutative property allows you to interchange the ‘Cash Flow from Investing’ and the ‘Cash Flow from Operations’ parameters.
- We multiplied the ratio by 100 so that the result is a percentage.
Please see Figure 2.1 as a reference.
Once you finish typing the series, please click on the blue “Next Step” button. You will see a screen that tells you if your series is valid, allows you to name your series and gives you options for the Y-axis. (See Figure 2.2.)
As the Sloan ratio is a percentage, we will use Y-axis Option 2, the one used for the price-earnings (P/E) ratio, price-sales (P/S) ratio, etc. Click the “Finish” button to save the series.
(Note: If you type in a formula that is NOT Valid, you will still see the three Y-axis options and the “Finish” button. You can click on “Finish,” but you will get a “Customized series name cannot be empty” error message. As shown in Figure 2.3, you will not see the “Name your Customized Series” option. Please use the “Back” button and retype your formula.)
Figure 2.3
Figure 3 shows the historical Sloan ratio for Baidu Inc. (BIDU, Financial). As observed in Figure 3, Baidu’s Sloan ratio declined from 15.33% to -6.56% during 2008 before increasing over 50% during 2011. Although it subsequently declined to around 20% by 2015, the Chinese online media site’s Sloan ratio increased to its December 2015 value of 30.78%. As of the third quarter, Baidu’s Sloan ratio is 20.09%, which is still relatively high. The company has four warning signs including poor earnings quality.
Figure 3
The Interactive Charts feature also allows you to save user-defined charts and use them at a later time. Once you select the series you want to graph, you can save the custom chart using the “Chart Name: Save” button, which is between the “Predefined Charts” and “Customized Series” buttons. You can view your saved charts below the predefined charts by clicking the “Predefined Charts” drop-down menu.
One important feature of a company stock is the predictability rank. As discussed in the research article, GuruFocus determines a company’s business predictability based on the consistency of the company’s revenue per share and EBITDA per share. A one-star predictability rank is reserved for companies that have an unpredictable business, either due to a downward trend in per-share revenue or multiple year-over-year decreases in per-share EBITDA. Otherwise, a company receives two to five stars (in half-star increments) based on its 10-year revenue per share and EBITDA per share trend. Companies who have just one unprofitable year (decline in per-share revenue or EBITDA) yet have an overall positive linear trend can still get two to three stars. In order to get four to five stars, a company generally must have no declines in per-share revenue or per-share EBITDA during the past 10 years. Figures 4.1 to 4.5 show the “Predictability Chart” for a one-star company to a five-star company, in that order.
Figure 4.1: Wells Fargo & Co. (WFC, Financial). Predict rank ★
Figure 4.2: International Business Machines Corp. (IBM). Predict rank ★★
Figure 4.3: Apple Inc. (AAPL, Financial). Predict rank ★★★
Figure 4.4: Baidu Inc. (BIDU, Financial). Predict rank ★★★★
Figure 4.5: Amazon.com Inc. (AMZN). Predict rank ★★★★★
A deep analysis of these five charts suggests that the predictability rank depends more on the revenue per share trend than the EBITDA per share trend. Baidu’s predictability rank is not five stars likely due to a slight decrease in per-share revenue during 2007. Even though Amazon’s EBITDA per share slightly declined in 2011, the online special retail company likely got five stars for its consistent per-share revenue growth, as indicated by a relatively straight line. On the other hand, Wells Fargo’s per-share revenue is relatively volatile with a sharp increase in 2009 followed by a decline in 2010, 2011 and 2013. As Apple’s revenue per share declined in the past year, the company’s predictability rank dropped to three stars.
Up next
In Parts 2 to 3, we have discussed three of the predefined charts. This article introduced the customized series feature, as well as user-defined charts with a simple Predictability Chart.
We will conclude our discussion on the Interactive Charts feature with miscellaneous charts, including the Peter Lynch chart with estimates and charts involving technical indicators, in Part 5. You can view the user manual on interactive charts by clicking the “PDF Tutorial” button in the upper-right corner, between the “Reset All” and “Video” buttons. Although free members have limited access to Interactive Charts, most of the features require premium membership. If you are not a premium member, we invite you to a free seven-day trial.
Disclosure: The author has no position in the stocks mentioned in this article.
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