One of my favorite news anchors gleefully read the card:
“Two-thirds of all mutual funds are at highs, reaching the levels not seen since the Great Recession.”
Equally accurate translation: “Over 60% of mutual funds have FINALLY reached the point where their 5-year returns are not negative.”
We’ve talked about this before. Most of us experienced “back to even” nearly three years ago.
We can’t help but take a closer look at the “dent” put in the long-term forecast for Landauer (LDR) — a recent favorite and a stock that we’ve featured in a number of venues. Is there any cause for concern or muted expectations?
The return forecasts for all of the electric utilities in this update are pretty weak and to yield chasers out there … don’t forget to keep total return expectations in your framework. We’ll take closer look at the electric utility industry also.
It was also nice to see long-time community favorite II-VI (IIVI) get a boost this week.
Materially Stronger: Badger Meter (BMI), Cooper (COO), Cutera (CUTR), Idexx Labs (IDXX), Two Six II-VI (IIVI), Manitowac (MTW), Newport (NEWP), Oshkosh (OSK), Toyota Motors ( TM )
Materially Weaker: Excelon (EXC), First Energy (FE), Landauer (LDR), PPL (PPL)
Market Barometers
The Value Line low total return (VLLTR) forecast held steady at 7.3% this week.
Presidential Portfolios on Parade
Happy President’s Day out there, everybody. Buy some furniture and boost the local economy. It’s part of our mantra. Invest in the Best, the leaders. So it makes sense to be presidential with our portfolios.
Have you ever wondered about the various published dashboards at Manifest Investing? Are you relatively unfamiliar with our demonstration portfolios?
Dashboard Diagnostics: February 19 at 8:30 ET
On Tuesday night, February 19, we’ll take a closer look at the various demonstrations starting with our flagship Tin Cup model portfolio. Launched in 1995, this model portfolio invests the maximum amount possible in a 401(k) simulation under the assumption that investing in individual stocks has been possible since inception. The selection methodology is consistent and based on a mechanical approach made possible by the Value Line Investment Survey (and subject to Manifest Investing interpretation.)
We describe Tin Cup as Schlossian — a perpetual tribute to Walter Schloss. Walter was a resident of Graham-and-Doddsville. Tin Cup is currently at $1,034,356 and has outperformed the general stock market 4-of-the-last-6 years. The relative return for this model portfolio, since inception, is approximately +7% (versus the Value Line Arithmetic Average).
Other portfolios that we’ll spend some time with include:
So what have we learned in 2,067 years?“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” — Cicero – 55 BC
Apparently not much.
Roman Candles & Cruise Missiles
Sometimes it can be rewarding to “play with fire” so long as you know when to let go or disembark. Yes, the accompanying image is Slim Pickens in the role of Major T.J. “King” Kong in his rocket-riding glory in the movie Dr. Strangelove.
In this screen, we take a look at some companies with the highest year-over-year percentage changes in earnings, specifically the 3-year period from 2012-2014. So it’s obviously dominated by earnings forecasts. Disclaimer/Disclosure: The fiscal 2014 EPS estimates for a number of companies are still filing in. A few of the companies in the screen are based on 2-out-of-3 reporting periods. In other words, they could change significantly when the analyst consensus estimates for 2014 take shape.
The results were also limited to companies with quality ratings of excellent (greater than 65) and good (55-65) … stopping any company that isn’t in the top two quality quintiles at the door.
Earnings Momentum Leaders
This set of five companies is pretty compelling. Most of them have been part of recent conversations and nudges to explore a little more. That’s cool. In the case of Michael Kors (KORS), the company is a credible threat to Coach (COH) and we’ve talked about relatively empty stores vs. standing-room-only at Coach. This serves as a reminder that your own personal experience is just a small part of a bigger picture. When I see empty KORS outlets, I need to remind myself and deflect the emotions of doubt … or at least, keep all of the information in proper perspective. This flies in the face of Peter Lynch’s famous advice about panty hose and packed parking lots. But do you really think his research stopped there? Really?
Liquidity Services (LQDT) showed up in many of our Groundhog (stock selection contest) entries for 2013 and we can see why. That said, there has been some turbulence of late and a little deeper digging might prove to be prudent.
During our January Round Table, I featured Body Central (BODY) but attendees also heard mention of Francesca’s (FRAN) — a Houston based specialty retailer that merits a closer look.
Tangoe (TNGO) is also compelling. I know very little of the company. TNGO provides communication lifecycle management software and services primarily to large and medium-sized businesses. With all of our attention to the information-based (CTSH) and communication companies (CSCO) and my recently-fried modem, TNGO is also worth a closer look to see if the EPS gold rush of 2012, 2013 and 2014 is a flash in the pan or a compelling opportunity that often accompanies a company/product life cycle emergence.
Attendees from the Orlando MoneyShow came back uttering a single word and it wasn’t Dustin Hoffman’s “plastic.” It was Energy. Energy. Energy. For that reason, a closer look at recent favorite Schlumberger (SLB) and companies like ENSCO (ESV) seems particularly and potentially energizing, too.
We’ll close with our long-held suggestion that an understanding of trailing stop losses for momentum-based companies is generally a good idea. (Think Apple and 2012) Do your best to understand and decide whether to use them. I can think of several roman candles (Peoplesoft) during my investing career whether they either helped or offered salvation. And if you latch on to the next 2012 Netflix, it’s prudent to have an exit strategy while continuing to ride that cruise missile to avoid ending up like Slim at the end of Dr. Strangelove.
Cognizant Technology (CTSH) is the top-ranked stock based on a combination of fundamental and technical analysis (our Fusion ranking) for the stocks in this week’s update.
As we shared in the stock selection feature for August 2011, Cognizant Technology (CTSH) is anything but a stranger to the subscribers of Manifest Investing and our long-term investing community.
“Knowledge is power.” — Francis Bacon
Apparently, knowing what to do with information is a path to returns based on the leadership returns achieved by all of the information-based companies in our MANIFEST 40 (Oracle, Cognizant, Quality Systems, FactSet etc.)
Cognizant Technology has been selected five times for the Round Table and $100 invested in CTSH as a top-performing member of the MANIFEST 40 tracking portfolio is now worth $440 — absolute total return of 340% and an annualized relative return of +35.4% since December 2008, one of the top-performing entries in this long-term demonstration.
Business Model Analysis
Using the last couple of actual results for years, in combination with analyst consensus estimates for 2013-2014, the sales growth trend/forecast is 17%. If Value Line’s 3-5 year revenue forecast is feasible, the growth forecast could climb to 19%.
Equity Analysis Audit
We’ll use the lower sales growth forecast of 17%, the consensus on projected net margin at 14% and a projected average P/E of 20×.
The result is a return forecast (PAR) of approximately 15%.
Tracking Momentum & Sentiment
To me, S&P is a little tangled in a knot. They have a “Hold” on CTSH despite a fair value of $99.80 that would suggest CTSH is undervalued by 23.5%. I blame the traders and short-term time horizon herd. The same is true for Morningstar. CTSH has been in a trading range for over a year. But I think the reason for the swoons (speed bumps, breathers, etc. — call it anything you want) is pretty clear. The 2008-2009 Great Recession hammered business at CTSH. And the same is true now with Europe lagging and the impact/influence on CTSH is material.
But if you’re in this for the long term — and we are — you believe that recessionary conditions will abate. In fact, you believe that they’ll be back again some day and you’re not stunned or aggravated by this reality.
And when the next round of meaningful recessionary abatement gets underway, this information technology juggernaut will probably reassume the flight trajectory shown the 5-year trailing average (blue line) on the chart.
CTSH is good at what they do. CTSH has a robust field of opportunity and no debt. I think we’re happy it’s a contributor to our Solomon Select, MANIFEST 40 and Round Table tracking portfolios and we’re not ready to send it packing, yet.
Ken Kavula and Mark Robertson will present an overview of investment analysis and portfolio design and management during this session in Lansing on Saturday, February 16, 2013.
For more details: http://www.manifestinvesting.com/events/110-manifest-investing-better-portfolios-february-16-2013
We were a little stunned to see Value Line drop the 3-5 year low price forecast on Microsoft (MSFT) from $50 to $40 — resulting in a significant “dent” in the low total return forecast for the company. The 3-5 year forecast for revenues was relatively unchanged.
Materially Stronger: Amazon (AMZN), CSG Systems (CSGS), Netflix (NFLX)
Materially Weaker: Baidu (BIDU), Microsoft (MSFT), Pandora Media (P)
Market Barometers
The Value Line low total return (VLLTR) forecast held steady at 7.3%, unchanged from one week ago.
The S&P 500 (SPY) continues to hover near overbought conditions — we continue to consider the index vulnerable to correction.
Watching last night’s Grammy Awards, I was once again reminded of many things. From Faith Hill’s “Don’t Hurry … But Don’t Wait” to the magic of Michael Jackson and his pile of awards. But for some reason, I was reminded distinctly of Mother Theresa. Did you know that Mother Theresa won the inaugural Templeton Award? In this feature from August 2008, we honored the legacy of lifetime achievement in investing by one Sir John Templeton.
Sir John Templeton (1912-2008) started his Wall Street career in 1937 and went on to create some of the world’s largest and most successful international investment funds. He was called by Money magazine “arguably the greatest global stock picker of the century.”Sir John Templeton gave us a legacy of long-term investing wisdom. Sadly, he passed away during July (2008) at the age of 95. A Rhodes Scholar, his adventures spanned the globe — seeking opportunity independent of domicile. His religion and philanthropy were very important to him. Did you know that Mother Theresa received the inaugural Templeton award, valued at $2 million? The monetary award is what it is because Sir John always wanted his faith-based awards to be worth more than the Nobel Prize. Inspired by MANIFEST subscriber Frank Bower, let’s take a look at some of Templeton’s guiding principles.
Over the years, Sir John Templeton published a number of articles and made speeches about his investing principles. This list was culled by John Christy from memories of working with Templeton for Forbes. Let’s visit these themes in our own words and methods.
For more: One World. One Dream.
“I’m the stock watcher for Microsoft (MSFT) and would like to e-mail a copy of my EAGLE to other members before our meeting, but haven’t been able to copy and paste it. Is it possible? Keep in mind I’m quite technology challenged.” 🙂
Let’s take this opportunity to walk through a few things … and along the way, hopefully you’ll get some materials that you can use with your fellow investment club partners.
EAGLE stands for Equity Analysis Guide to Long-Term Expectations. Or Equity Analysis Guide, in short — reflecting a summary of the most important influences, drivers and factors when studying a company in the effort to build a considered forecast. Taken collectively, it’s all about our approach to stock analysis — using a 5-year continuously scrolling time horizon. And it manifests itself in a variety of different places and applications scattered throughout the site.
We’ll cover the first here, the Company Report — this is the analysis results based on a consensus forecast of the rhino herd. We monitor analyst consensus estimates for sales, profitability and P/E ratios (in the framework of a five year time horizon) and derive a return forecast based on that consensus.
In the case of MSFT, here’s a snapshot of the Company Report right now:
If you’re relatively new to this, we like Value Line (www.valueline.com) a lot — and we think it’s a worthy part of any investor’s arsenal.
In this case, you can become more familiar with Value Line as a trusted resource by taking a look at the company report for Microsoft (MSFT) — because it’s available for FREE as part of the Dow 30 here: http://www.valueline.com/Dow30/index.aspx
Scroll down and pull up the report on MSFT. We think that a vast majority of the time, the Value Line low total return forecast (VLLTR, shown here) should RESEMBLE the results of your study. Keep in mind that this is the Value Line analyst’s 3-5 year return forecast (based on the price forecast range … and leaning towards the low end of the forecast range.) Trust us on this one. Actual returns 3-5 years from now are more likely to resemble the low total return forecast than the average or the high. (We can prove it.)
As shown here, the 3-5 year low total return forecast is 16%. Your study results should RESEMBLE (not necessarily match) this.
And for what it’s worth, correcting for the change in stock price since this report was issued (AND the change in forecast range) … the current VLLTR for MSFT is 21.7%.
Both of these forecasts will likely be updated with tomorrow’s release of Issue 13 … Value Line updates every company every thirteen weeks or quarterly. So do we for all companies with more frequent updates for the most widely-followed companies by our subscribers and/or any material news or forecast modifications between quarterly updates.
Business Model Analysis: Sales Growth Forecast
Based on this quick analysis of top-line conditions, and barring any major shifts in the 3-5 year forecast for MSFT tomorrow morning from Value Line, we’d expect the long-term sales growth forecast to moderate, albeit slightly, to 8% … as shown here.
Welcome To The Sandbox
That’s right. We provide you with a playground where you can conduct sensitivity analyses of the milestone assumptions and judgments during your stock study.
Sensitivity analysis? Relax. That’s just some jargon you can throw around at the next neighborhood party or the next time you slump into the chair at the hair salon. It’s just a fancy way of saying “what if?” At Manifest Investing, you can go to MyStudies and perform your own tinkering with the major parameters. We pull in the major numbers and any box with a green icon in the corner can be modified.
For example, pulling current EPS probably results in a pull of operating earnings that are not conditioned to correct for one-time events, etc. like they do for us at Value Line. In this case, when we launched the sand box, the current EPS was $1.82. A more representative current EPS can be delved from the attached Value Line quarterly data. (We switched it to $2.80 based on EPS thru 3/31/2013)
Keen-eyed observers will also pick up on a “weird” trailing 12-month sales figure for some companies. The reason for this is we’re continuously INTERPOLATING based on the analyst consensus estimates — basically constantly trying to think of revenues based on the trend line in the business model analysis. It’s one of our methods of CONTINUOUSLY updating the stocks we follow … adjusting as the days roll by AND/OR correcting for adjustments to the analyst consensus forecasts.
Modifications:
(1) EPS to $2.80
(2) Sales to $77 billion — merely rounding off.
(3) Sale growth forecast to 8% based on the previous business model trend.
(4) Payout ratio to 35% — pulling current published payout ratios are often “erratic” — and 45% was probably a little high for MSFT.
The result is an annualized return forecast closer to 20% or the high teens.
It’s been a while since we did one of these, but there’s an Excel version of the Equity Analysis Guide for those who want to dabble with other stocks, etc. or simply prefer this to the MyStudies module.
Here’s what it looks like for Microsoft (MSFT):
Expecting Alpha 