The Concept of the Nine Box Matrix It

The Concept of the Nine Box Matrix It is all of 20 years ago when I first struck on the concept of pigeon-holing stocks into a nine box matrix to understand the potential value of stocks with Fundamental Momentum. Please appreciate that at that time, Technical Analysis was relatively speaking in its infancy though fast catching on with Candle Sticks, Heikin Ashi and such coming into vogue. Emphasis was on Earnings Growth and Low P-E was a must if one was to Buy Low to Go High. We soon found that Buying Low could go lower and Buying High could go higher, and all points in between. It didn’t take long for savvy investors to realize that Fundamental Analysis was essential to determine “What” to buy and Technical Analysis was mandatory to establish “When” to buy and sell if you were to buy “Right”. I am asked from time to time what prompted me to derive the Nine-Box Matrix, its various elements and how did it all come about. The objective of the Nine-Box Matrix and its appendages was to: Help people who are new to HGS Investing to ballpark their investment arena Differentiate great from good from mediocre stocks and Engage the market depending on people’s investing styles and health of the market.

For those who are new to HGS Investing, and understand the specific requirements of Earnings Growth for both 5 Years Annual and two most recent quarters, compared to a year ago being high, I devised a simple way for you to pigeon hole these stocks into boxes. The concept is based on the fact that the higher the Company’s Earnings the better and the cream always rises to the top. It also pre-supposes that you know the rule of 72! The rule of 72 states that for a given compounded Interest Rate dividing 72 by that rate will give you the number of years it will take for a security to double. Thus, if the bank was generous to give you 7. 2%/year on your money (you wish!), it would take you ten years to double it. If it gave you 10%/Year, it would double in 7. 2 years. Worse yet, if they gave you on average only 4% a year, it would take 18 years to double your money. These days we are lucky to get 1%! Hence it is imperative that you put SOME of your money into higher risk securities if you are to enjoy a nest egg that will cover your retirement years in comfort. That said, we can construct the Nine Box Matrix by using three levels for 5 Yr. Annual Growth and again for two qtrs, this qtr vs a year ago, and last qtr. vs a year ago. (See the diagram below). Box 1 has the biggest growers. If by chance they produced exactly 72% a year growth, it would take those companies in Box 1 to double in 1 year. Likewise, between friends in terms of the math, Box 5 will double in two years and Box 9 stocks will double in three to four years.

If you were to take a big enough sample over the years, Box 1 should provide the best Price Performance while Box 9 the least, though realize, substantially better than the rest of the field that don't even make it into this Matrix. The important point here is that the Nine-Box Matrix describes the "diamond" on which your ballgame is being played. Stray outside it in your selection process at your own peril. That is not to say there won't be stocks that perform better that don't meet the requirements, but it does imply that the odds are slimmer, since Wall Street usually rewards superior earnings and revenue performance with superior price performance. Life is never that simple. There always exceptions to the rule. You will also find that Wall Street rewards high revenue performance for up and coming new companies who have not as yet been around long enough to establish a solid 5 Yr track record, or those who have stubbed their toes in a poor period but in the last two quarters have come back with solid growth rates >100% in each qtr. So watch for Box 7 stocks, which we call Turn-Around Stocks. In effect Wall Street quickly recognizes that these companies are in the early stages of their Growth Cycle and are the ones to catch invariably at low prices until they come to fruition, mature and then die as far as Earnings Growth is concerned.

A List of Box 7 Turn-Around Stocks from a Month Ago… 1 -Day Results

The Results One Month Later in a Tricky Market – 8. 55% Up Note that over a Dozen Stocks Produced Double Digit Gains