December Round Table Review

The Round Table has convened on monthly basis (generally near the end of every month with allowances for schedule adjustments) since July 2010.  The intent is for the participants to identify their single favorite investment opportunity.

Non-core selections are limited to a maximum of 25% of the total positions.

The goal is to build and maintain a tracking portfolio that achieves a long-term relative return of +5% (500 basis points higher) versus the Wilshire 5000.

As of 12/31/2013, 175 selections had been made and an annualized relative return of +3.6% achieved.

Our accuracy goal (% of selections outperforming the total stock market index) is 60-70%.

As of 12/31/2013, the outperformance accuracy is 57%.

The strong performance in 2013 (+10.8% average relative return for calendar year 2013) stemmed from powerful gains in companies like 3D Systems (DDD), Polaris (PII), Priceline (PCLN), McGraw-Hill (MHFI) and Southwest Airlines (LUV). Note the number of 2013 entries on this all-time performance leader board (based on relative return) since July 2010.

Company Presentations

While Hugh McManus shopped around and decided to “Pass” once again … not finding a deep value opportunity to his liking, there was no shortage of companies kicked around. In fact, “honorable mention” included the likes of Apple (AAPL), Bio-Reference Labs (BRLI), Cisco Systems (CSCO), Cognizant Technology (CTSH), Lilly (LLY), MSC Industrial (MSM), Novo Nordisk (NVO) and Target (TGT).

Cy Lynch presented long-time community favorite EMC Corp (EMC) citing strong growth characteristics and a strong “storage story” going forward. He also cited the 80% stake in VMware (VMW).

Most significant is the (1) return forecast at or near a multi-year high and the same is true with (2) the projected relative return. A company between 5-10% for projected relative return is in what we regard as the sweet spot.

The audience selected Fastenal (FAST) and SolarWinds (SWI) for inclusion in the Round Table tracking portfolio

On behalf of the Knights of the Round Table, our Guest Damsels and Guest Knights, we’d like to wish everybody a Healthy, Wealthy and Generous 2014. HAPPY NEW YEAR EVERYBODY!

The Otters of Wall Street?

Sea otters hold hands when they sleep so they don’t drift away from each other. Photo Credit: @FactHive pic.twitter.com/V3jOjksQso

With all the talk revolving around Wall Street wolves and Leonardo DiCaprio, we can’t help but wonder if modern investment clubs — in the role of otters — represent the best of long-term investing. We’ll spend a few moments discussing the year in the rear-view mirror, the YEARS in the windshield and how we come together to prevent drifting and safe swimming, even when the tides roll and waters get choppy.

Our Knights of the Round Table (including our guest Damsels, Knights and audience selections) have outperformed the Wilshire by 3.6% since July-2010 as our 175 selections since inception have beat the market 57% of the time.

Join us Monday evening (12/30 8:30 PM ET) for the December 2013 Round Table as we explore, discover and CELEBRATE the performance results of the tracking portfolio. 2013 has been very good to us and we’ll spend a few moments acknowledging that while ringing in 2014. Party hats optional, but recommended!

Reserve your Webinar seat now at:

https://www2.gotomeeting.com/register/666657130

Performance Results

Companies Likely To Be Discussed

  • EMC Corp. (EMC)
  • Fastenal (FAST)
  • SolarWinds (SWI)

MANIFEST 40 (December 2013)

The Stocks You Follow: December 2013 Update. 8 1/4 years. We’ve continuously monitored the 40 most-widely followed stocks by our community of subscribers at Manifest Investing for that long. We think it’s more than a fair assumption that many of these are in your real money portfolios … and for that, we’re optimistic and grateful. This managed “tracking collection” of your collective favorites has outperformed the Wilshire 5000 by +3.1% (relative rate of return, percentage points). The aggregate absolute return has been 9.0% during a period when the annualized total return for the general stock market has been 5.9%. With 8.25 years in the can, the average holding period is 5.7 years.

Peak Performance

Our MANIFEST 40 is a celebration of collective excellence in stock selection, strategy and disciplined patience.

With an average holding period of 5.7 years, the annualized relative return of the current tracking portfolio is approximately +3% versus the Wilshire 5000, approaching our long-term objective. With above average growth (8.5%) and a return forecast of 8.9% (vs. 5.3% for the general market) we see continuing solid performance ahead …

“We have always believed that the collective
decisions made by our community of
like-minded, long-term investors
are worth huddling over …
a place where ideas are born.”

A little over eight years. We established and have been tracking your most widely-followed stocks for more than eight years. Many of the original “40” are still on the list. There have been relative few kings-of-the-hill, including Bed Bath & Beyond (BBBY), Stryker (SYK) and current pole position and community favorite, Apple (AAPL).

Bottom Line(s)

The annualized rate of return for this tracking portfolio is 9.0%. The Wilshire 5000 has gained approximately 6.0% (annualized) since inception … so the relative return (alpha) of these community favorites is a stellar +3.0%.

The relative return of the ACTIVE, current 40 positions, in the tracking portfolio is also +3.1% annualized.

21-of-38 active entries have outperformed the Wilshire 5000 since selection for an accuracy rating of 55.3% compared to 62.5% in September 2013. 62.5% is well above “average” for selecting “winners” by the overall universe of investors and traders.

MANIFEST 40 (December 27, 2013). These are the most widely-followed stocks by subscribers at Manifest Investing. Current leader Apple (AAPL) was added to the list back on September 24, 2009 and steadily climbed the ranks while generating a relative return of +21.3% (annualized) over the trailing three years despite the swoon of 2013. Figures in parentheses are the ranking back on September 30, 2013.

Chargers

Qualcomm (QCOM) has, once again, continued to move up the charts, going from #16 to #12 over the last three months. QCOM had the greatest percentage gain in dashboard appearances. Other companies making strong showings of interest include recent Solomon Select feature Cognizant Technology (CTSH) and Portfolio Recovery (PRAA).

The results of $100 positions investing in any of the Top 40 companies can be viewed at any time at:

http://www.manifestinvesting.com/dashboards/public/manifest-40

Strongest Performers

The three top performers in the MANIFEST 40 since inception — based on annualized relative return — are Portfolio Recovery (+40.3%), Cognizant Technology (33.7%) and Buffalo Wild Wings (30.6%). $100 invested in Cognizant Technology (CTSH) on 12/15/2008 is now worth $572

Newcomers

We pay considerable attention to the chargers and new additions to the list. Apple was a new addition back on 9/24/2009 and $100 invested then is now worth $564 (relative return = +21.3%).The two newcomers are actually returning former residents: Intuitive Surgical (ISRG) and Gilead Sciences (GILD).

A Time For Howling?

 

The explosive finish to 2013 continues as a work in progress and the surge makes Santa Claus rallies of the past look like flurries. With relatively few trading days left in 2013, the Value Line Arithmetic Average is now up 37.8%, the S&P has surged 31.8%, the Wilshire 5000 some 32.9% and the NASDAQ, a mere 38.1%. The flaky stocks are still in 4-wheel drive with after burners engaged. Yes, if you were anywhere near “fully invested,” a time to howl.

Speaking of howling, I did go to see The Wolf of Wall Street starring Leonardo DiCaprio this week. It’s vintage Martin Scorsese and tells the tale (through the eyes of the perpetrator) of boiler room brokerage firm Stratton Oakmont. If you’ve seen Boiler Room, it’s the same story but from the snarky angle of those responsible for the carnage. I’m not sure how the film managed to maintain an “R” rating while delivering a steady stream of naked bodies, drugs (quaaludes, specifically) more drugs and as someone suggested, the only purpose of the freely-flowing alcohol was to wash down the drugs. If the “F” word makes your skin crawl, imagine the expletive frequency of Boiler Room combined with GlenGarry Glen Ross. Now double it. You’ve been warned.

Taken in whole, it’s quite a statement on segments of humanity. Think Gordon Gecko. Greed. Now double it and triple the sleaze factor. I am pretty sure that I was contacted by Stratton Oakmont some twenty years ago. I’ve heard the “SCRIPT” personally. I was able to resist because of a grounding in fundamental analysis and an understanding of long-term expectations and stock market performance.

They call it dark humor. It’s been a long time since I’ve heard a motion picture audience laugh that much … even if much of the laughter was painfully muted and dipped in disgust. It’s telling that when reliving the auto crash sequence at the end of the movie, the hero/author/villain neglects to share that a head-on collision placed a young woman in intensive care where she nearly lost her life. And at least the Boiler Room version exposed the damage done to cold-call victims, innocent would-be investors turned penny stock speculators with pockets emptied before they figured out they were being financially molested. And maybe that’s the real car wreck.

Leonardo’s character, after committing hundreds of millions of dollars of fraud, was offered a securities industry ban and a fine of something like $100,000 at the time. Really? And he declined the offer, ultimately ending up with a 4-year prison sentence (served 22 months) and a larger fine — that is still largely uncollected. Really?

But what really tugs at my heart and soul are the massive legions, the raunchy queue of opportunists who lined up at Stratton Oakmont’s front door following an expose in Forbes that detailed the scumbaggery. I can only hope that we can blame embellishment and cinematography for the chest-beating zombie predators, a large room full of agents of doom, that is documented near the end of the movie as they cheer Leonardo’s decision to renege on his SEC deal and hastily get back on the phone to maul a few more people.

That’s a whole lotta wreckage.

Companies of Interest

The opportunities in Issue 6 are still very slim, with a Morningstar P/FV of 111% and S&P checking in at 109%. The post-Christmas sales are more likely to be found at Target versus Issue 6. Jacobs Engineering (JEC) checks in with one of the better return forecasts (10%) but the Value Line low total return forecast for JEC is 1-2%.

Materially Stronger: Kimball (KBALB), Packaging Corp (PKG), La-Z-Boy (LZB)

Materially Weaker: Central Garden & Pet (CENT), KB Home (KBH), Texas Industries (TXI)

Market Barometers

The Value Line low total return (VLLTR) forecast is 3.1%, down from 3.4%. We’re not sure whether these are uncharted waters, but at 3.1% — we’re certainly in waters that have not been navigated “recently.”

Ghosts of P/Es Past

 

As 2013 winds to a close … and the Value Line Arithmetic Average soars some 34.2% over the trailing 12-months, we can be thankful that most of us benchmark against the S&P 500 (30.0%) or the Wilshire 5000 (31.1%).

30% seems like a lot … and it is.

But it’s still stock price recovery mode from the damage incurred during the Great Recession and I won’t be surprised to see/hear pundits like Jeff Gundlach out with remarks resembling “if the stock price advance in 2012 was unwarranted … 2013 redefined unworthy.” We’ll be taking a closer look at the internals of the surge (including the hint/nudge that when the Value Line average tops the others, there’s a pretty good chance the flaky stocks are churning — and they are/were.) We’ll also do the year-end close out with a look at the clarions and barometers next week.

But for now, the profitability forecasts for year-end 2013 (nearly actuals at this date) and the 2014 expectations are not all-that-great … and they continue to weaken.

What’s not weakening are P/E forecasts … and they’re getting frothy.

And that’s where the foundation for any house-of-cards is usually found. In the face of rising interest rates (supply-and-demand competition for stocks) that foundation could well be sinking sand.

Companies of Interest

Materially Stronger: Arris (ARRS), NuSkin (NUS)

Materially Weaker: Commercial Vehicle Group (CVGI), Fuel Systems (FSYS), Titan International (TWI), Bioscrip (BIOS), Alaska Communication Systems (ALSK)

Market Barometers

The median Value Line low total return forecast is 3.4%, unchanged from a week ago.

Alpha Central: Alive and Well

It’s become something of an annual pilgrimage. The Mid-Michigan chapter of NAIC, the umbrella organization for investment clubs, started a stock picking challenge twelve years ago. Clubs and individuals submit their entries and the results are tracked over the course of one “Halloween” to the next. (The annual breakfast is always between Halloween and Thanksgiving.)

This year, a club that goes by the name of Street Smarts (Saginaw, Michigan) took home the top prize by turning $100,000 into $175,000 over the 12-month period. 75%. Yowza. Wowza.

They were joined by another (16) clubs with returns besting 30% — in other words, out performing the market by at least five percentage points. In contrast, only 12-of-28 failed to beat the market … and the average result was 29%. Their consensus selections essentially matched the market — but the track record is strong as the consensus portfolio has beat the market in 10-of-11 years.

Kudos. I attend a lot of these. I watched recently as similar groups in other parts of the country handed winner’s certificates to portfolios finishing closer to 30%. Eddy Elfenbein of www.crossingwallstreet.com is closing in on another victorious year — hopefully his 7th in a row — with a Buy List portfolio tracking at 34-35% YTD.

The leaders of our annual Groundhog Day-to-Groundhog Day Iditarod are no slouches, either. Our defending champion investment club, the Broad Assets (St. Louis) stand at +83% in the current contest. (Since 2/2/2013) We chronicled their exploits for 2012 here as they finished #1 with a +27.5% total return last year. The finish line for our contest (2/2/2014) is still on the horizon, but Broad Assets has a mammoth lead going into the home stretch.

2013 Groundhog Challenge Scoreboard

We’ll be taking entries for Groundhog 2014 during the last week of January. All individuals and groups (clubs) are invited to submit 5-20 investments.

The fact that 57% of the Mid-Michigan entrants beat the market is not unusual. 51.7% of participating Groundhogs have done the same over the trailing 8 years.

It’s how they/we do it that matters. The swinging-from-the-heels is actually kept to a minimum. The list of top performers include Apple (AAPL), Bio-Reference Labs (BRLI), Coach (COH), Cognizant Technology (CTSH), Google (GOOG), IPC Hospitalist (IPCM), Qualcomm (QCOM), ResMed (RMD) … you get the idea. Many of our community favorites represented by our 40 most-widely held companies are present and accounted for, along with a suitable dose of promising small- and medium-sized companies that keeps the overall growth forecast of the portfolio where it should be (12% or more).

Companies of Interest

Would you be surprised if I told you that Edwards Lifesciences (EW) is on the radar screen of these successful Mid-Michigan stock pickers? Because it is. You shouldn’t be surprised. The road to Alpha is paved with companies with superior return forecasts in combination with high quality rankings.

Materially Stronger: Johnson & Johnson (JNJ), McKesson (MCK)

Materially Weaker: Cutera (CUTR), Thoratec (THOR), Nissan Motor (NSANY), Caterpillar (CAT) 1, Astec Industries (ASTE), II-VI (IIVI), Rofin-Sinar (RSTI), Abaxis (ABAX)

1 Would not usually make this list, but dropped from $105 to $95.

Market Barometers

The median Value Line low total return forecast (VLLTR) is now 3.7%, down from 3.9% last week.