Here's the theory behind the magazine cover indicator. By the time a something’s success or failure reaches the cover page of a major publication, it is so well known that it is fully known by everyone and those who want to capitalize financially have already done so. For example, once all the good news is out and a company makes the cover of business week, the stock is destined to underperform. The reverse holds for negative stories. It doesn’t have to just be about businesses, it can be about social themes too … remember the 2007-08 housing boom.
An academic study by three finance professors at the University of Richmond put the magazine cover story indicator to the test -- specifically as it focuses on coverage of individual companies. The professors culled headlines from stories in Business Week, Fortune, and Forbes for a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance. "Superior" and "inferior" were determined in comparison with an index or another company in the same industry and of the same size.
Here's what the professors found. The research supported the use of magazine cover stories as a contrarian indicator. The most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%. The conclusion? Positive stories generally indicate that the stock's price performance has topped out. Negative stories often come right at the time of a turnaround.
The study confirms that it is better to bet against journalists than alongside them. It would be easy to jump to the self-congratulatory conclusion that journalists are incompetent. But that conclusion misses the point. Journalists aren't writing cover stories to make investors money. They are writing cover stories to sell magazines. And "hot topics" sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.
With that in mind, this weeks Business Week cover should raise some eyebrows….
Just because the Government’s measured “version” of inflation, CPI, has been in stall speed for years, doesn’t meant it will always be. Additionally, and most importantly, not everything tracks the inflation rate. Health care is a great example as it has been rising almost 2x the annual “measured” inflation rate. For a what that means over time, take a look, and try not to laugh, at the hospital bill below for what it cost to have a baby in 1958. I think the total bill would be less than the cost than the charge of 2 ibuprofen in today’s medical reality (those that have had a recent surgery can attest to what I say)