Month: April 2013

April Round Table: Our Quest for Excellence

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Gather Round … Steeling Away (Continued)

“As iron sharpens iron, so one person sharpens another.” — Proverbs 27:17

Ken Kavula and I spent the weekend in Pittsburgh with a couple of groups of disciplined long-term investors. It seems natural to think of extending beyond iron … and instead, think about steel on steel — and the process of sharpening other like-minded investors.

Some of the earliest model clubs were formed in Pittsburgh a couple of decades ago. In fact, one of them received a 20-year certificate this past weekend. And we note the considerable learning and sharing promulgated by a group of people, including but FAR from limited to: Herb Barnett, Pat Donnelly, Theresa Greissinger, Terry Lyons, Larry Robinson, 2011 Groundhog Champion Nick Stratigos and a wide variety of other volunteers and contributors.

We’ve followed the Pittsburgh groups of investors for quite some time — and on this weekend did some quick benchmarking. One club had a +5.5% relative return over 20 years — absolutely exceptional and another checked in at +1.0%. Still another checked in at +0.8% … all in all, some 60-80% of the clubs involved this weekend have generated positive relative returns. Placed in the context of negative 1-2% relative returns for an institutional investing universe and the NEGATIVE 5.6%/year (over 20 years) for “average investors” documented by DALBAR — we’re talking about some exceptional people and some highly differentiated performance.

How do we do it?

1. Imagine. Build an expectation of what the companies you study and own will look like in five years.

2. Invest in the Best. Comprehend quality. Recognize that quality is an insurance policy during corrections, bear markets and recessions … and a bedrock of consistency for long-term results.

3. Be Prudent. Diversify. Be certain to design and maintain a portfolio with the right mix of small, medium and large companies with an overall growth forecast that is sufficient. What is sufficient? A weighted average of 10-12%.

We’ll gather for the April Round Table on Tuesday, April 30 at 8:30 ET. On wings of steel and a relentless quest to not only be a better investor … but to improve the experience of our friends and colleagues on this journey, we look forward to sharing some of our best ideas with all who gather.

It’s FREE and it’s literally come one, come all. Register at: http://www.manifestinvesting.com/events/117-round-table-april-30-2013

Value Line Low Total Return Screen (5/3/2013)

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Companies of Interest

Pittsburgh-based Rue 21 (RUE) is among some of the more interesting shopping opportunities this week. It’s joined by legacy community favorite Bed Bath & Beyond (BBBY) as this retailer seems to have returned to broader appeal after something of a shakeout hiatus. We’ll be taking a closer look at BBBY this week.

There weren’t a lot of shoes (or purses) dropping in this weekly update. Most of the adjustments to the long-term low price forecast amounted to nudges. Several of the companies with the highest return forecasts were trimmed — but not enough (less than 20% change) to be mentioned in the Materially Stronger/Weaker roll call.

The “Big Boxes” like Wal-Mart (WMT), Costco Wholesale (COST) and Target (TGT) all got modest boosts for their long-term low price forecast. No one is quite sure what to expect from the management change at J.C. Penney (JCP) … a flood of traditional discount coupons notwithstanding … but the low price forecast was dropped from $20 to $15.

We’re not sure what to think of the massive forecast adjustment (from $20 to $35) in Best Buy (BBY) but it’s probably in line with recent price action … and we’ll adopt a show-me position, perhaps a little skeptical as to whether the fundamentals will really improve all that much, or that suddenly. Value Line also took their foot off the brakes at GNC Holdings (GNC).

Coldwater Creek (CWTR) went from $2 to $3 (+50%) for the 3-5 year price forecast. Caveat emptor.

Materially Stronger: Williams-Sonoma (WSM), Hot Topic (HOTT), American Eagle (AEO), TJX Companies (TJX), Hertz Global (HTZ), Gap (GPS), OReilly Automotive (ORLY), Best Buy (BBY), Haverty Furniture (HVT), GNC Holdings (GNC), Cabela’s (CAB), Black Hills Corp (BKH), Coldwater Creek (CWTR)

Materially Weaker: Hibbett Sporting Goods (HIBB), RadioShack (RSH), Citi Trends (CTRN)

Market Barometers

The Value Line low total return (VLLTR) forecast is 6.8% this week, compared to 6.8% last week.

  • The long-term range for the VLLTR varies from low single digits to approximately 20%. The current value of 6.8% is at the low end of the range — suggesting that an emphasis on highest-quality stocks is in order.
  • The relative strength index for the Wilshire 5000 is overbought, but this can remain this way (for markets, sectors and individual stocks) for an extended period. We’re more vigilant and concerned about RSI “breaks” like the one on display here back at Halloween 2007. The caution flag is up — but no sign of an RSI break for the Wilshire 5000 right now.
  • We’re exploring the momentum indicator suggested by Ned Davis, specifically Rate-of-Change … or ROC in this analysis. It’s “pure price momentum” and in our deployment — applied across the months and years, perhaps more appropriately tagged “investing momentum.” Any positive value (shaded in green on the graphic) is indicative of price momentum. Note the extended period of RSI greater than 70 (overbought) back in 2006-2007. Like we said, markets, sectors and stocks can stay overbought for quite some time and in this case, price momentum is still intact. Shop carefully. Emphasize high quality and financial strength.

Weekender Screen: FOSL COH RUE

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Tomorrow’s Value Line edition update is basically the “Shopping Edition.” It includes a bunch of retailers, apparel and specialty retail companies with a few others. But it’s clearly deluged with those consumer discretionary companies that torment us.

To kick things off, for those in rainy day refuge or looking for some stocks to study in advance of the update, here’s some of the stocks we’ll most likely be chewing on over the next few days.

All of these stocks have relatively high return forecasts, either good or excellent quality rankings, relative price strength and momentum and in most cases, symptoms of positive (upward) price pressure.

Fossil (FOSL) and Nick Stratigos’ Round Table Selection of Rue 21 (RUE) head this list and qualify on all counts. Our 8th most widely-followed stock, Coach (COH) qualifies with the exception that COH still seems to languishing in bearish sentiment — although last week’s positive news probably places that weaker characteristic in jeopardy.

Weekender screen 20130428

That Long-Term Return Forecast (3/31/2013)

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Just a refresher on the forecast vs. actual results for the Value Line Low Total Return Forecast (VLLTR) … a close cousin of Mark Hulbert’s VLMAP … and taking Mr. Hulbert up on his suggestion to benchmark versus the Wilshire 5000 (VTSMX).

As shown here, even the Value Line LOW total return forecast has been fairly consistently 3-4 percentage points higher than actual results.

And to reinforce, we consistently see alignment between VLLTR for individual companies and their projected annual return (PAR) at Manifest Investing. Why is this the case? We believe that the inclusion of analyst research from the likes of Morningstar and Standard & Poor’s moderately tempers the overall analysis. (We obviously include Value Line in the analysis of every company, too.) Time after time, we see slightly lower growth, profitability or projected P/E forecasts when we aggregate and combine — and find that collectively, this combined result aligns more closely with VLLTR and actual total return results over the last several years.

For the bigger picture, here’s the Wilshire 5000 actual results vs. the VLLTR forecasts (quarterly back to 1999):

Eddy Elfenbein on Apple (AAPL)

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Eddy Elfenbein on Apple (AAPL) from his weekly Crossing Wall Street note … and a reminder that if you’re owning or watching any of the stocks on his Buy List for 2013, he will help you.

Apple Gives $100 Billion to Shareholders

One of the big catalysts for the stock market this week was the dividend hike from Apple (AAPL). Although the legendary iStock isn’t on my Buy List this year, the company is so large, it can move the market all by itself.

Apple said that it’s raising its dividend by 15% to $3.05 per share. The company is also increasing its share-repurchase program by $10 billion to $60 billion. The combined total of the dividend and share repurchase comes to $100 billion that Apple is paying out to shareholders. To put that in context, the new dividend works out to $12.20 per share for the year. Ten years ago this week, the whole stock was going for $6.60 per share. Apple is now sitting on a bank account of $145 billion. That’s enough to buy every single team in the NFL, NHL, NBA and major-league baseball.

Interestingly, Apple is borrowing money for its dividend and buybacks. That may sound odd, but rates are so low — hey, why not? I think the Apple news clearly gave investors a big confidence boost. This was especially true after the AP’s Twitter account was hacked. The hackers sent out some bogus tweets, and within a few seconds, $160 billion in market value was erased. So yeah, that kind of stuff tends to put people on edge.

Another sign of a calmer market is that the yield spread between junk bonds and Treasury bonds has fallen to a two-year low. This is exactly what we want to see. Investors are willing to take on more risk with their money. That’s why these higher dividends are so important. They can lure money away from rock-bottom yields in the Treasury market.

Value Line Low Total Return Screen (4/26/2013)

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Companies of Interest

Again we see what a difference a week makes … some of the food-related companies hold down the Materially Stronger fort — but keep in mind that Zhongpin (HOGS) is likely on its way to going private at $13.50.

Educational Services once again provides us with the usual list of suspects as the industry continues to get shellacked. Notable by their absence from the Materially Weaker list are DeVry (DV) and Strayer Education (STRA). Perhaps the triage is starting to take hold?

Materially Stronger: Zhongpin (HOGS), ConAgra (CAG), Core-Mark (CORE), Flowers Foods (FLO)

Materially Weaker: Career Education (CECO), ITT Educational Services (ESI), Apollo Group (APOL), Corinthian Colleges (COCO), Hitachi (HTHIY), Dole Foods (DOLE)

Market Barometers

The Value Line low total return forecast is 6.8%, compared to 6.8% last week.

Finding The Best 4-Year Forecast Method

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Mark Hulbert and I compare notes again on using Value Line for long-term forecasting for individual stocks and markets.  As Hulbert points out, the Value Line Median Appreciation Projection (VLMAP) has a pretty solid track record.

We agree — and side with the likes of Walter Schloss and pure discipline itself — when we use our own version of VLMAP, specifically an emphasis on the median Value Line low total return forecast (VLLTR) … a parameter that includes dividends, extending beyond long-term price appreciation and aligns even more favorably when we compare Forecast vs. Actual with the past couple of decades in the rear-view mirror.

http://www.marketwatch.com/story/finding-the-best-four-year-market-forecaster-2013-04-19

HMS Holdings (HMSY)

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Company Description

HMS Holdings (HMSY) provides cost containment and payment accuracy services for government-sponsored health and human services programs in the United States. Their coordination of benefits services route claims already paid by a government program to a liable third party, which then reimburses the government payor. Its cost avoidance services provide validated insurance coverage information that is used by government payors to reject claims that are the responsibility of a third party, typically a group health plan sponsored by the beneficiary’s employer. HMS also offers independent external medical review on issues of quality of care.

Business Model

Profitability Analysis

Technical Analysis: Long Term Perspective

Here is where it gets a little bit dicey for HMSY — because we can’t be sure that the company is “out of the woods” yet.

In its favor, that long-term price trend is strong … and there’s a fair amount of technical support in the realm of $22-23, perhaps even $25.

Equity Analysis Guide: Worksheet

Points of View

Morningstar discontinued coverage back in November 2012 and has reduced their Financial Health rating on HMSY.

Friends Make Marathons Achievable

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by Laurie Frederiksen, www.bivio.com

A marathon is a fitting metaphor for a lot of hard things we do in our lives.

A marathon runner trains by getting up every morning without fail and putting one foot in front of the other, day after day after day.

That is what leads to success. Not good luck. Success is starting the race and crossing the finish line. It’s not measured relative to anyone but the runner themselves.

Investing is a marathon. Some days it’s hard to keep going, but progress is only made by hanging in there, moving forward one step at a time and not giving up.

Horrific acts can demoralize us all. They sap our strength and make us feel like there’s no point in moving forward. But that is when we have the marathon runners to remind us. Keep putting one foot in front of the other and you’ll make it to where you are going.

Our hearts go out to those who were hurt yesterday. They will be a constant reminder that sometimes the going gets really tough. But success will come to us all as we endure. The senseless acts to demoralize only make us stronger as we collectively share in the outpouring of compassion and resolve that rushes in to combat the horror.

Our thoughts and prayers are with all of you in Boston. Thank you for reminding us again that sometimes just to keep moving forward is a big accomplishment.

Laurie Frederiksen
Invest with your friends!
www.bivio.com

Value Line Low Total Return Screen (4/19/2013)

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Companies of Interest

In keeping with last week’s Phoenix theme, many companies were bolstered in this release of updated company reports … leading to one of the stronger “Materially Stronger” collections we’ve seen in quite some time. (The definition of materially stronger is that the long-term low price forecast issued by Value Line has ‘step changed’ 20-25% over the last three months.)

General Electric (GE) is #18 in the MANIFEST 40 and has steadily been making portfolio and business/capital structural changes while continuing to position the company in high opportunity potential areas for future. Pentair (PNR) is making some of the same types of strategic moves recently. Checkpoint Software (CHKP) has some of the strongest fundamental and technical characteristics in this update field — and sports a fusion ranking of 99.

Materially Stronger: General Electric (GE), Pentair (PNR), Hillenbrand (HI), GATX (GMT), Roper Industries (ROP), Whirlpool (WHR), Gencorp (GY), Lindsay Corp (LNN), Tecumseh Products (TECUA), Morgan Stanley (MS)

Materially Weaker: E*Trade (ETFC)

Market Barometers

The median Value Line low total return forecast is 6.8%, compared to 6.7% last week.  (The long term average for this forecast is 8.5%)