Technically, CenturyLink Is a Buy

Editor's note: The original version of this article referred to CenturyLink’s technical indicator as being a sell, when it was actually a buy. The Fool regrets the error.

Technically, you should buy CenturyLink right now.

We examined CenturyLink (NYSE: CTL) using Moving Average Convergence-Divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

There are many ways to interpret MACD, but a common interpretation is signal line crossover. Signal line crossover uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of CenturyLink's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! While we jest, it's actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 20 times!

Want to buy CenturyLink today? Technically, odds are that you should flip and sell CenturyLink sometime very soon. If that sounds like madness to you, well, we here at the Fool agree. In every market decline, technical analysis gets its share of proponents. The cries of "buy and hold is dead!" get louder, and individuals race to schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time most technical analysis schemes are a relative simple science: eliminating the vast complexities of evaluating true company value. It's an attractive theory, but one that is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with up to 75% of market trading now done by PhD-level programmers at massive high frequency funds, even if opportunities existed, what chance does an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to studies. There was Massey University's study across 49 countries that showed that over 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier. CenturyLink crossed the crossover 20 times across the past year! The amount of trading in most technical analysis schemes eats away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's the antithesis of what we preach at The Motley Fool. When we look at CenturyLink and its peers, here are the areas that interest us:

YOY = year over year. TTM = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These are areas that led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at CenturyLink, don't evaluate it for crossing a momentum line. Buy or sell it because:

• CenturyLink offers a massive 8.1% dividend yield to investors. The company is part of a growing trend where telecoms with high legacy assets such as traditional phone lines offer high dividends while trying to cut costs and stay as operationally efficient as possible.
• Thanks to its merger with Qwest, CenturyLink now has significantly more scale to compete with larger rivals Verizon and AT&T, but also gets significant broadband assets that should appeal to both government and large companies.
• On the other flip of the coin, you could look at CenturyLink's aggressive acquisition and merger spree and stay away from the company. CenturyLink still hasn't finished digesting its previous large acquisition, EMBARQ, so an investor has to be worried the company moved too soon. Also, the merger with Qwest adds a healthy debt slug to the company's balance sheet. If integration plans don't go forward as planned, that healthy dividend could be cut.

These are the factors that will drive CenturyLink's long-term wealth. Best of all, establishing a portfolio of well-managed companies with strong advantages over their competitors spares you having to sit bleary eyed in front of a computer buying in and out of companies with a Big Gulp full of coffee. That's the kind of future I'm looking for. Although, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then I recommend buying CenturyLink right now.