Technically, YRC Worldwide Is a Buy

Technically, you should buy YRC Worldwide right now.

We examined YRC Worldwide (Nasdaq: YRCW) using moving average convergence-divergence, 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 YRC Worldwide'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 10 times!

Want to buy YRC Worldwide today? Technically, odds are that you should flip and sell YRC Worldwide 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 that "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. But at the same time, most technical analysis schemes are a relatively 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 Ph.D.-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 more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier. YRC Worldwide crossed the crossover 10 times over 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 Fool.com. When we look at YRC Worldwide and its peers, here are the areas that interest us:

Source: Capital IQ, a division of Standard & Poor's. 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 YRC Worldwide, don't evaluate it for crossing a momentum line. Buy or sell it because:

• While YRC is losing vast amounts of money, it has managed to squeeze concessions out of its cost structure. Earlier this year, union members agreed to a 10% wage cut in exchange for a 15% stake in the company. Also, the company has managed to defer pension payments while it continues slimming down to achieve profitability.
• However, the company's cash flow situation tells a scary tale. As fellow Fool Seth Jayson points out, in its measures to stay afloat and fend off bankruptcy, YRC has cut capital expenditures to the bone. Even if YRC can fend off bankruptcy, the future is still fraught with difficulties as the company hasn't been able to reinvest in recent years.
• Even in the best of times, YRC's business carries razor-thin margins. The company was able to increase its return on equity by levering up with debt, but as YRC shareholders have discovered, that strategy also brings about a higher chance of bankruptcy if economic conditions turn. In the future, YRC won't be able to inflate its return on equity by using a heavy level of debt. Capital poured into the business will be pursuing low-level returns.

These are the factors that will drive YRC Worldwide'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 YRC Worldwide right now.