August 20, 2010, Newsletter Issue #170: Cover Stories Effect on Stocks

Tip of the Week

Magazine cover stories are a favorite sentiment indicator at Schaeffer´s Investment Research, as they work exceedingly well to illustrate our contrarian philosophy. The simplified tenet of cover-story evaluation is that when a stock becomes hot news (either on the bullish or the bearish front), it could mean change is on the way.

Periodicals are in the business of maximizing sales of each issue. To achieve this goal, editors will often jump on the "hot" topics of the day for their cover stories. As Bernie Schaeffer recently put it, "When a financial trend is featured on a magazine cover, the chances are that this trend is already:
>> Widely known
>> Universally accepted
>> In place for a decent length of time or very significant in magnitude."

If the latest issue of Forbes, BusinessWeek, Barron´s, or any financial news magazine features a cover story decrying company XYZ, it could very well mean that the worst is over for the shares. In contrast, an article touting the benefits of a particular company or fund could imply that it is overloved. Even more telling is when a more generalized publication (such as Time, Newsweek, People, etc.) devotes its cover to an investment-related issue.

When the story is reaching such a broad base of the reading public, it is likely old news. That is, by the time a story has become so mainstream that it lands on the cover of a major news publication, everyone who will be taking investment action based upon the news will likely act very soon. The news itself will quickly become outdated if not erroneous.

It is important to note that these publications are not lacking in quality content. The contrarian benefit to these cover stories is simply a case of stock prices often discounting news and not following it - the so-called "buy on the rumor, sell on the news" mentality.

Our Research department has been tracking cover stories and the resultant effects for several years. We typically look at stock performance over a three-month period following the release of the magazine. The results since late 1998 are shown below.

Cover Type: Bearish* Bullish**
No. of Covers: 12 38
5-day Return: 4% 0%
10-day Return: 2% -1%
1-month Return: -1% -3%
2-month Return: 7% -3%
3-month Return: 5% -7%

* Bullish Implications ** Bearish Implications

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