We examined Frontier (NYSE: FTR) 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, 9, 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 Frontier'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 18 times!

Here at Fool.com, we're more interested in other measures of company value. When we look at Frontier and its peers, here are the areas that interest us:

Metric

Frontier

AT&T (NYSE: T)

Windstream (Nasdaq: WIN)

Qwest (NYSE: Q)

Market Cap (in billions)

$2.37

$157.77

$5.27

$9.84

Quarterly YOY Revenue Growth

(3.40%)

0.20%

12.30%

(6.50%)

Revenue (TTM, in billions)

$2.10

$123.28

$3.09

$12.10

Operating Margin (TTM)

31.96%

18.15%

32.56%

16.99%

P/E (TTM)

18.79

12.45

15.83

19.96

PEG (5-year expected)

12.7

1.84

14.4

3.29

Sources: Yahoo! Finance and Capital IQ, a division of Standard and Poor's; 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 Frontier, don't evaluate it for crossing a momentum line. Buy or sell it because:

  • The elephant in the room for Frontier investors is the company's massive $0.75-per-share annual dividend, which works out to a yield around 10%. The situation isn't entirely unique, fellow rural-focused telecoms CenturyLink (which will soon be merging with Qwest) and Windstream also pay out major dividends on their own. As an investor, you're looking for the company to maintain revenue into the future while paying out high yields. For Frontier, the goal isn't so much on growth as it is on maximizing existing assets and cutting costs.
  • Frontier's busy integrating Verizon assets that nearly tripled the size of the company. However, Verizon let many of these assets deteriorate, and Frontier is having a difficult time integrating them into its network. For example, Frontier has begun mandatory 70-hour work weeks in West Virginia (the overtime is compensated) for union employees as it tries to get service levels on its acquired lines up to acceptable levels. If these integration costs continue to rise beyond initial levels, it could put Frontier's dividend in jeopardy.
  • Frontier has managed to keep up stellar return on equity over the past five years, and has seen a stunning 38% return on equity over the past 12 months. This has been achieved primarily by keeping a balance sheet that's low in cash and high on debt. Due to the reliable payment stream of its subscribers, Frontier has been able to keep up nearly the same level of debt over the past four years.  While the acquisition of Verizon's assets should decrease the company's overall leverage, its total debt will rise. Once again, this puts pressure on the company's dividend as cost overruns on swallowing up Verizon's vast and often neglected assets could cause Frontier to cut its dividend. Without a dividend, the company offers little organic growth opportunity, so investors would be best served looking elsewhere.

Want to buy Frontier based on technical merits today? Technically, odds are that you should flip and sell Frontier sometime very soon. If that sounds like madness to you, well, we here at the Fool.com 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. 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 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, which 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.  Frontier crossed the crossover 18 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 why at Fool.com we recommend individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth, and it'll spare 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 we're looking for. Although, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then Frontier looks like a buy right now.

Jeremy Phillips owns shares of no companies listed above. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.