Algorithmic Forecast Performance

Fundamental Analysis of Top 5 Brazilian Stocks

I Know First Stock Algorithm, along with Fundamental Analysis, generated a forecast on December 14th with strong bullish signals of long position for 5 popular Brazilian stocks. But before the results we are going to give a quick explanation on how the forecast works.

Stock Market Prediction

The I Know First algorithm identifies waves in the stock market to forecast its trajectory. Every day the algorithm analyzes raw data to generate an updated forecast for each market. Each forecast includes 2 indicators: signal and predictability.

Signal

The signal represents the predicted movement and direction, be it an increase or decrease, for each particular asset; not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price.

Predictability

The predictability is the historical correlation between the past algorithmic predictions and the actual market movement for each particular asset. The algorithm then averages the results of all the historical predictions, while giving more weight to more recent performances.

Predictability is measured on a scale ranging from negative 1 to positive 1; this metric is an adaptation of the Pearson correlation coefficient.

P=-1 means the actual market moved in the opposite direction than the algorithm predicted.

P=0 means that there is no correlation between the prediction and the actual market movement.

P=1 means that there is perfect correlation between the actual market movement and its predicted movement.

Any value of P above zero indicates a positive predictability, the higher the better. For stocks we monitor and predict, the Predictability (P) generally ranges between P=0.2 and P=0.7.

Analysis

From now on we are going to analyze each company that had strong bullish signals in Dec. 14th.

1 – Vale S.A. – Metals and mining company

Forecast

Signal 58.99

Predictability 0.55

The company

Vale is a Brazilian multinational mining company and one of the largest logistics operators in Brazil. It is the third largest mining company in the world. In the electric power sector, the company participates in consortiums and currently operates nine hydroelectric plants.

Vale has been enjoying the good moment for the mining sector with China as a big buyer of iron ore and the prices of iron ore going up (USD 51.36 in Jun 2016 to USD 79.75 in Dec 2016). The devaluation of Brazilian currency also made it easier for the company to export.

Fundamental Analysis

Vale had interesting numbers. Despite the economic crisis in Brazil it was still able to grow its Net Profit. The current ratio is above 1, showing that the company had more current assets than current liabilities. Its ROE was above the mining sector average of -43%. The price/book was still reasonable since it’s not much higher than 1, the trailing P/E was low and it might indicate a good bargain to buy stocks, especially when the forward p/e is pointing to a huge appreciation of the company in the future.

Conclusion

After the Fundamental Analysis and the scenario, it can be seen that this stock had presented an optimistic forecast, as the algorithm fore shown. The recommended position was for 1 month, and the results are below:

Vale’s stock grew 1.09 USD in about one month, giving the algorithm a performance of 12.84%.

2 – SID (Companhia Siderúrgica Nacional) – Company engaged in the steel industry

Forecast

Signal 92.58

Predictability 0.49

The company

Companhia Siderúrgica Nacional (CSN) is the largest steel industry in Brazil and Latin America. It controls companies, such as CSN Paraná, Metallic, Namisa and has equity participations in MRS Logística, Transnordestina Logística and others.

Similarly to Vale, CSN has been enjoying the good moment for the mining sector with China as a big buyer of iron ore and the prices going up, at the same time that Brazilian currency is devaluating, making it easier to export.

Fundamental Analysis

CSN’s current ratio is good. Its operating profit was incredibly big, being much higher than the net worth of the company, and showing the potential growth of the company still to come. Despite the negative net profit, the net worth of the company grew 148% when compared to the previous year, which might indicate the acquisition of assets for future projects. ROE is negative, however, is still above the sector’s average. The price/book and the trailing P/E show that the company might have been slightly overvaluated and trailing annual dividend yield shows that the company has not been paying dividends which are bad signs. Still, its aggressive Beta pointed to a high increase of the stock value, since the Bovespa was pointed to go up.

Conclusion

After the Fundamental Analysis and the scenario, it can be seen that this stock had presented an optimistic forecast, as the algorithm fore shown. The recommended position was for 1 month, and the results are below:

CSN’s stock grew 0.54 USD in about one month, giving the algorithm a performance of 16.77%.

3 – BAK (Braskem) – Produces thermoplastic resins

Forecast

Signal 89.53

Predictability 0.23

The company

Braskem, controlled by Organização Odebrecht (Odebrecht Organization) with expressive participation of Petrobras, is a Brazilian chemical and petrochemical company. It stands out for being the global leader in biopolymers production and the biggest producer of thermoplastic resins in the Americas.

Braskem is the largest producer of polyethylene, polypropylene and PVC in Brazil. The company is also the leader in the US polypropylene market and has a big production capacity in Germany.

Alaska (investment fund in Brazil) started building a stake in petrochemicals maker Braskem about four months ago. Barros (CEO) likes the company because it is fundamentally sound and valuations are low, Braskem’s price-to-earnings ratio is 8.3, less than half the level three years ago, he said (Dec/2016).

Fundamental Analysis

Current Ratio is above 1. The operating profit has been tremendously big in the periods, being much larger than the net worth of the company and showing its true potential. The net profit was really bigger than the net worth and the ROE was easy above the sector’s average. Price/Book and Trailing P/E are saying that the company might be overpriced, however, it does happen often when the company has solid fundaments and a good perception of investors, so this is why its price is up. Trailing annual dividend yield is good and Beta just shows that the company is strongly tied with the evolution of the market.

Conclusion

After the Fundamental Analysis and the scenario, it can be seen that this stock had presented an optimistic forecast, as the algorithm fore shown. The recommended position was for 1 month, and the results are below:

Braskem’s stock grew 2.23 USD in about one month, giving the algorithm a performance of 11.25%.

4 – GGB (Gerdau) – Manufacturer of long steel in the North and South America

Forecast

Signal 5.59

Predictability 0.63

The company

Gerdau is a Brazilian steel company. It has industrial operations in 14 countries – in the Americas, Europe and Asia – with an installed capacity of more than 25 million tons per year. It is the largest recycler in Latin America and, worldwide, it transforms millions of tons of scrap annually into steel.

Fundamental Analysis

Gerdau’s current ratio was excellent, having almost 3 times more current assets than current liabilities. Operating profit incredibly high and net profit recovering from the strong negative result in 2015. Its ROE is above the steel sector’s average of -17%. The Price/Book and also the trailing P/E indicate that it should be an excellent moment to buy the stock with a huge bargain. Trailing annual dividend yield is low, but it’s the start of a recovery from last year disaster. This Beta indicates that with the growth of the market it might jump even higher.

Conclusion

After the Fundamental Analysis and the scenario, it can be seen that this stock had presented an optimistic forecast, as the algorithm fore shown. The recommended position was for 1 month, and the results are below:

Gerdau’s stock grew 0.53 USD in about one month, giving the algorithm a performance of 15.06%.

5 – TSU (Tim Participações S.A.) – Provider of mobile telecommunication services

Forecast

Signal 42.29

Predictability 0.57

The company

Tim Participações is a Brazilian telephone company subsidiary of Telecom Italia. In Brazil, it was founded in 1998, but its network concept occurred in 2002, when its coverage had already reached the level of 2,500 cities. It pioneered the launch of EDGE technology in the country. TIM became the second largest cell phone company in Brazil in terms of number of customers and leader in net service revenue. In August 2015 the company had 73.38 million (26.21%) of active lines in the country.

Fundamental Analysis

Tim had a good current ratio. The operating profit was almost as big as the whole company’s net worth. Net profit decreased strongly when compared to 2015, however, it’s still positive. Despite the decrease in net profit, Tim was still able to gain net worth. Price/Book and Trailing P/E indicate that the company might be strongly overpriced, but when we look to Forward P/E, it’s possible to see that it might even become more expensive, so even with the high prices, it is a bullish prediction. Dividends were low, as expected with a smaller net profit.

Conclusion

After the Fundamental Analysis and the scenario, it can be seen that this stock had presented an optimistic forecast, as the algorithm fore shown. The recommended position was for 1 month, and the results are below:

Tim’s stock grew 1.26 USD in about one month, giving the algorithm a performance of 10.07%.