Month: January 2013

Challenge Club (January 2013 Meeting)

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January Meeting Highlights

The 2012 Annual Report was presented. Relative return for 2012 was +1.4%.

Unit value at the time of the meeting is $24.21 — 6.9% since inception vs. 3.3% for Wilshire 5000.

Blog link (for sharing): https://expectingalpha.com/2013/01/17/challenge-club-january-2013/

Motions, Decisions

1. A motion to buy 100 shares of Green Mountain Coffee (GMCR) failed to pass.

2. The motion to accumulate 100 additional shares of AFLAC (AFL) passed (82%).

3. The motion to accumulate 125 shares of FactSet Research (FDS) passed (94%).

4. A motion to accumulate 100 shares of Coach (COH) failed to pass. (~50%)

The dashboard at meeting end (but before January contributions):

Challenge dash 20130118

 

March of Some Favorite Mentors

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A favorite from March 2012, celebrating the usefulness of Value Line and honoring a couple of legends — Chuck Allmon and Walter Schloss.

My responsibilities at Better Investing included the opportunity and privilege to correspond and spend time with some of the most exceptional investors in stock market history. From Peter Lynch to John Bogle and the likes of John Neff, the moments were treasured and the mission was a continuous focus/emphasis on deriving lessons that could be applied to our long-term perspective. The objective is simple. Discover wisdom and lean on experience in an effort to maximize the relative returns of everybody all around us.

Current day favorites include many of you, Jeremy Grantham, Brad Perry and until a few days ago … one of the denizens of Graham-and-Doddsville, Walter Schloss. More on Mr. Schloss in a minute. Another long-time is a favorite for many of you, Charles Allmon of Growth Stock Outlook legend and one of the best stock pickers that any of us could (or will) ever meet. We dubbed Chuck Allmon one of our favorite dancing bears — because the financial media often referred to him as a “permabear.”

We ran across this excerpt (a post on our Forum by Dan Hess) from November 2008 that honored Mr. Allmon’s lifetime achievements but also shared (12) stocks with the market clearly clenched in the teeth of a formidable — and very real bear — at the time. In Dan’s words at the time:

Many will recall Charles Allmon as a contributor to Better Investing for many years and also being a newsletter watched closely by the astute investor Joe Smith. After [a mere] 44 years of issuing the newsletter he will give this up in December. But being only 87 he is not retiring but taking on a new career in a venture capital start up. 🙂

You can read the Forbes Article at How to Pick a Growth Stock.

The article shows 12 stocks Allmon is highlighting in his most recent GSO newsletter. I note that Stryker (SYK) and FactSet (FDS) recently discussed here are on his list as well as a half dozen of stocks with green PARS.

Although Allmon has been a bear for many years it is interesting to see he expects P/E Ratios to fall further back toward the levels in the early 1970’s bear market.

It is sad to see Charles Allmon give up his newsletter but at 87 he plans to continue to his managed funds and start a new career but first he is going to take a well earned vacation at his Hawaii home.

Fast forward 3.3 years …

The Dancing Bear (Charles Allmon) achieved a relative return of +15.7% with this group of (12) favorites from November 2008 — some 3.3 years ago.

The collective return is 33.0% (yes, annualized) and 8-of-12 have outperformed the Wilshire 5000 since then for an accuracy rating of 66.7%.

Dance, Mr. Allmon, dance. Thanks, Dan!

A Few Moments to Honor A Legend …

We lost a great one during February, Walter Schloss — one of Warren Buffett’s SuperInvestors of Graham-and-Doddville.

http://www.bloomberg.com/news/2012-02-20/walter-schloss-superinvestor-who-earned-buffett-s-praise-dies-at-95.html

From recent posts on Walter …

The heart of our Tin Cup demonstration portfolio could be described as “Schlossian.”

Value Line is good enough for Warren Buffett, who wrote about the achievements of Walter Schloss with admiration in his work, The SuperInvestors of Graham and Doddsville. Schloss relied extensively on Value Line.

Over 39 years of investing had delivered annualized returns of slightly over 20% to the clients of Walter Schloss. He worked entirely from a few publications like Value Line.

In Buffett’s words, “Schloss practices investing in a way that any ordinary investor can.”

Challenge Club (January 2013)

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Challenge Club

We’ll hold the January 2013 (online) session of the Challenge Club on Thursday, January 17 at 8:30 PM ET.

Think of it as an open house — guests welcome to lurk, browse and participate as we make decisions intended to improve the model portfolio.

Registration: http://www.manifestinvesting.com/events/106-challenge-club-january-17-2013

The Challenge Club is an investment club emulation — launched back in 1999. The central theme is (1) the maintenance of a model portfolio and (2) sharing of ideas in a learning environment. The tools and resources deployed are based on the lessons and methods of the modern investment club movement.

Since 1999, the annualized total return is 6.5%. Since the Wilshire 5000 (Total Stock Market, VTSMX) has gained 3.3%/year over the same time frame — the Challenge Club has a annualized relative return of +3.2% (i.e. an “alpha” of 320 basis pts).

During 2012, the internal rate of return for the portfolio was 14.3% for a relative return of +1.4%.

Portfolio Discussion and Analysis

The following images provide an overview of the holdings, current dashboard and diversification graphics.

  • Overall Portfolio Return Forecast: 12.7% vs. 7.7% for market median — will get a boost when cash position is deployed.
  • Overall Quality: Check. (81.6) Maintain relatively high levels of quality and financial strength (90% = A+) when the median return forecast is below long-term averages.
  • Overall Growth Forecast: Check. 11.0% — the target range is 11-13%, so a blend of faster-growing companies should receive some emphasis while shopping for either accumulation candidates or screening for new additions to the portfolio.
  • Sector Diversification: Solid.

One Big Picture

As 2011 came to a disappointing close, we shared an image from www.onebigphoto.com that featured a group of people huddled and looking out over a vista.

As 2012 comes to an encouraging and successful close — continuing to reinforce a solid long-term track record, our advice is the same. Seek refuge from the noise and chaos. Focus on what’s important — the patience and discipline encouraged by the founders of the modern investment club movement. Carefully consider growth, profitability and valuation during diligent studies and continuous vigilance. Challenge assumptions. (Most participants are probably happy with our partial sale of Apple last month, “20% ago”, even if you voted against it.)

No one promised you a straight line from “A” to “B”. If they did, they should occupy the cell next to Bernie Madoff. No, the road ahead will have curves, inclines and troughs … and yes, a few weeds along the way.

But reaching that crest to enjoy a good sunset with a bunch of friends is really what long-term investing can be all about.

Value Line: Long Term Forecast (vs. Actual)

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Why do we pay attention to the Value Line low total return forecast?

Well, another quarter is in the can. With the quarter ended 12/31/2012, we’re able to compare the 4-year (3-5 years) forecast from 12/31/2008 (17.9%) versus the 4-year actual annualized total return in the Value Line Arithmetic Index (22.5%).

  • This is a bottom-up forecast based on the continuous analysis of 1700 companies in the Value Line Investment Survey.
  • It’s the shape that matters. We like what we see.
  • We’re also comfortable that our median forecast (MIPAR, based on 2500 stocks) tends to track pretty well with the Value Line low total return forecast.

Following a recent day-long session on successful long-term investing that we presented in Chicago, a friend of mine walked up and asked, “Do you realize how HUGE this is?” I smiled, nodded and responded “Yes, I think so.”

When a successful long-term investor sees validation, confirmation and potential — we’re grateful and doubling down on the principles that generate these types of returns for legions of individual investors and investment clubs that we work with.

Top 10 Reasons to be Bullish in 2013

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Full sarcasm drip: Many of you will recall the “book report” that we shared regarding the outlook of one Michael Belkin at last autumn’s Big Picture Conference.  Belkin was decidedly bearish on the tech sector — and his concerns have become manifest during 4Q2012 (the current earnings season could be a roller coaster) and it should be interesting to see how the sector fares during 1Q2013.  Some have questioned our 6% total return forecast for 2013 (actually -3% to 14%).  We noted that Jeff Gundlach shared a similar outlook, observing that “2012 was a whole lot better than it should have been.”  Continuing to read between the lines and with a sarcastic bent, it appears that Belkin doesn’t have the highest bar for 2013 either …

1) Congress and the Administration have spending, taxes and the budget deficit completely under control. Fiscal imbalances have been solved and won’t be a problem for the economy or markets anymore.

2) S&P500 earnings are declining and everyone knows stocks go up when earnings go down.

3) Hedge funds have their highest stock market exposure since just before the last time the S&P500 tumbled 50%. 10,000 hedge funds controlling $2 trillion can’t be wrong.

4) NYSE margin debt of $327 billion is the highest since Feb 2008. Forthcoming margin calls like those of 2008 are bullish, because leveraged investors will be forced to liquidate into a declining market.

5) Taxes are going up and government spending growth is going down – which Keynesian economists agree stimulates economic growth, corporate earnings  and the stock market.

6) Bernanke has deliberately squeezed investors into equities and the Fed has a perfect contrary record at preventing the last two 50% S&P500 bear markets during 2001-02 and 2007-09. Don’t fight the Fed.

7) Goldman is in bed with the Fed and bullish GS bigwigs say buy cyclicals. Don’t fight the squid.

8) Apple’s gargantuan $160 billion market cap loss (-24%) since September 19th is a generational stimulative event, since AAPL was a top 10 holding of 800 hedge funds and mutual funds at the end of Q3 2012.

9) Even if the market somehow goes down, every other portfolio manager will be down too – so your fund’s investors won’t care and won’t redeem their money.

10) 90% of market strategists and analysts polled by Reuters have a higher end-2013 market forecast. The sell-side consensus is always right and since they anticipate bear markets with pinpoint precision – this is an enormous  green light.

Source: http://www.ritholtz.com/blog/2013/01/top-10-reasons-to-be-bullish-in-2013/

Core Diem vs. Balanced Demo (1/15/2013)

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Core Diem vs. Balanced Budget: Update
January 15, 2013

We started this comparison demonstration a mere three months ago and the two portfolios are still running pretty much neck-and-neck, but they’re quite different — so it’ll be most interesting to see what happens with the next disruptive correction.

The relative return since inception for the Core Diem portfolio is +3.1% with an outperformance accuracy of 80%. Both portfolios have outperformed the Wilshire 5000 so far.

Core Diem: As a reminder, we invest an amount each day based on MIPAR into the three top of the top percentile stocks at Manifest Investing (MANIFEST Rank > 99.9). The amount depends on MIPAR. Yesterday, with MIPAR at 7.8%, we invested $7.80 into Coach (COH), Knight Transportation (KNX) and Qualcomm (QCOM). We’re still amazed at the accumulation into a fairly small group of stocks.

We make the same infusion ($7.80 times 3) into the Balanced Budget portfolio, in this case parking it in cash while we deploy between Gundlach’s bond fund and our Value Line Arithmetic Average proxy of three equally-weighted ETFs. The cash equivalents (bonds + cash) level roughly tracks the asset allocation recommendation from the Value Line Selection & Opinion — currently at approximately 45% cash.

Value Line Low Total Return Screen (1/18/2013)

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The Value Line low total return forecast (for approximately 1700 stocks) is 8.2%, down from 8.5% last week.

Companies of Interest

It was nice to see Hillenbrand (HI) get an upward nudge in long-term price forecast. We featured it three and six months ago … and the price has advanced nicely. This boost restores the low total return forecast to 4.5%.

MSC Industrial Direct (MSM) markets industrial products to small- and mid-sized customers throughout the U.S. MSM distributes a full line of industrial products such as cutting tools, abrasives, measuring instruments, safety equipment, fasteners, welding supplies and electrical supplies. Like Grainger (GWW), the company has been a long-time favorite and is worthy of further study — a good opportunity if you believe in a continuing economic recovery.

Materially Stronger: Hillenbrand (HI), Middleby (MIDD), United Rentals (URI), American Water (AWK)

Materially Weaker: Digital River (DRIV), Stonemor (STON), Tecumseh Products (TECUA)

Q&A: Novo Nordisk (NVO)

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Subscriber Correspondence: In this week’s update you mentioned that Novo Nordisk is “something of a gold standard from a pounce pile perspective” and “that although attractive, NVO isn’t quite there yet when it comes to considering purchase.” Could you elaborate on these statements? Please help me to see what you’re looking at and why. Thank you.

Thanks for the question.

We’ll take this opportunity for a little demonstration. Demonstration is a way of life for us at Manifest Investing. Some of you are reading this via our FREE blog at http://expectingalpha.com

Others experience this via our 24/7 Forum where questions and topics are actively encouraged and welcomed. Yes, we do requests.

What other features and benefits are available at http://www.manifestinvesting.com?

We invite you to explore. FREE 30-day trial accounts are available for a good test drive.

Create an account

If you’d rather avoid the credit card confirmation/authorization, send a test drive request to manifest@manifestinvesting.com — we’ll be happy to set up an account for you. The same holds true for all partners of an investment club. If you’d like to explore as a group, send us your club name and roster (name, email, zip code) for all partners and we’d be happy to set up trial accounts for ALL of you. (The group price is $400/year and an individual subscription is ONLY $79)

We think you’ll discover that there’s more to this iceberg. Explore. Enjoy.

… and Now, On With Novo Nordisk (NVO)

With similar comments and requests from a few of you, this seems like a good opportunity to expound and explain.

Let’s start with the pounce pile comment. As most of you know, I no longer feel the same way. Pounce piles were a reference to a group of stocks that we’d like to own — kept in some form of a watch list several years ago. (In many cases, the watch lists were on paper, index cards and the sort … and generally were the result of performing a study that displayed an exceptional company but with an insufficient return forecast at the time of the study.) The companies on our index cards generally seemed to be industry leaders, quite often brand champions. They often exhibited leadership growth and profitability at the same time.

Hence, what we were really hoarding and hoping for buying opportunities were discoveries of high-quality companies.

And this is the essence of why I think watch lists (particularly index card versions) are now obsolete. Because we can now generate a list of the highest quality companies with a few key strokes.

First, let’s take a look at the quality rating track record of Novo Nordisk (NVO) using a chronicle.

This is a time series look back at the last few years (monthly) with a display of quality, return forecast (PAR) and stock price.

Keep in mind that any quality rating greater than 65 (dotted blue line) is deemed excellent and considered to be among the top 20% of all companies. In this case, Novo Nordisk (NVO) has a quality rating of 87.2 and if anything — the quality rating has been trending upward during the historical period displayed.

Quality: Top Shelf

How “high” is that Novo Nordisk (NVO) quality rating?

Pretty high.

This is why I now feel like Pounce Piles are somewhat obsolete. Why? Because you can generate a list of the highest quality stocks at Manifest Investing with a few key strokes. (Go to StockSearch and input a minimum quality rating of 87)

As shown here, Novo Nordisk (NVO) ranks 26th, clearly “top shelf” … and keep in mind that we’re talking 26th out of approximately 2500 companies.

Company Description

Novo Nordisk is a healthcare company and a world leader in diabetes care. The company has the broadest diabetes product portfolio in the industry, including advanced products within the area of insulin delivery systems. In addition, Novo Nordisk has a leading position within areas such as haemostasis management, growth hormone therapy and hormone replacement therapy. Novo Nordisk manufactures and markets pharmaceutical products and services that make a significant difference to patients, the medical profession and society.

Shopping … Studying … Patiently Waiting

On the subject of value or potential purchase:

“Not there yet?” “What do you mean by that?”

For this, we return to the company chronicle. But this time we shift our attention to the long-term return forecast (red line).

The current level of the long-term return forecast (projected annual return, or PAR) is actually at a fairly low point compared to the last 4-5 years. At a current PAR of 6-7%, this compares rather unfavorably to the median forecast (7.7%) for the 2500 companies that we track — and feel are representative of the general stock market. In other words, at 6.4%, we actually expect Novo Nordisk (NVO) to UNDERPERFORM the market going forward … and over the long term.

It’s not always this way. Note the peaks shown here. Many, many stocks were on sale during March 2009 and NVO was no exception. But a more compelling display of patient vigilance — and pouncing opportunities — comes as recently as September 2011 when the PAR spiked to unusually high levels (~15%).

Technically Speaking

As September 2011 approached, Europe was clearly entering (or already in) a period of significant challenge. A large correction in the wake of a recession — and geographic depressions — was already underway.

But were the institutions and analysts over reacting? Was there a chance that traders and investors were unfairly punishing the price of companies like Novo Nordisk (NVO)?

I think so. Fact: Only 29% of NVO 2011 sales were from Europe. 40% come from North America alone and there’s geographic distribution to Japan, Korea, China and “Other” (31%).

With a relative strength index rebounding from 30 (Potentially Oversold) and showing signs of a bullish divergence, the argument seemed fairly logical at the time.

So Far. So Good.

Novo Nordisk (NVO) has gained 52.4% (annualized) since 8/25/2011 while the Wilshire 5000 has delivered 21.1% over the same time frame for an alpha (relative return) of +31.3%.

Yes, Virginia, we can be patient and wait for the next world class opportunity.

That day will come again for Novo Nordisk someday … and we’ll be waiting.

In fact, that’s what we do — day in and day out, as a community of long-term investors — seeking and sharing these types of opportunities. So yes, now is not the time for this exceptional high-quality company but there will be another. Meanwhile, we take the energy we save by refusing to chase performance and seek other opportunities in our return forecast screens and watch for opportunities that would make Tigger smile.

If you’re a MANIFEST subscriber, thank you. We’re grateful for your patronage and the selfless sharing that’s been a hallmark of our community for decades. Please share http://expectingalpha.com with friends and family. Urge them to create a trial account at Manifest Investing. The potential difference that we can make in the futures of our loved ones is substantial.

Fear Is Melting Away

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As Eddy ElfenbeiImagen recently pointed out, another 6% move to the upside for the S&P 500 and the index will finally be “flat” for the trailing six years.  If stock prices continue to surge and earnings forecasts continue to atrophy, that flat spot could have some downward slope to it.

1. “2012 returns were better than they were supposed to be.” — Jeff Gundlach.

2. Disposable income just took a hit — it’s hard to imagine that it won’t cause some dislocation and economic turbulence.

Updates on a number of community favorites in this week’s Crossing Wall Street:

Fear Is Melting Away