Value Line Low Total Return Screen (11/1/2013)

The subtle deterioration of fundamentals continues unabated and the number of companies considered “materially weaker” outnumber the “materially stronger” entries again this week. This means that the long-term forecasts continue to show more downside pressure.

This week includes the shopping (retail) stocks and the sale opportunities continue to be fairly thin and far between.

Companies of Interest

Materially Stronger: Zale (ZLC), GameStop (GME)

Materially Weaker: Body Central (BODY), Coach (COH) 1, Ascena (ASNA), Bed Bath & Beyond (BBBY), Wal-Mart (WMT) 2, American Eagle (AEO), Nordstrom (JWN), Penney J.C. (JCP), Aeropostale (ARO)

1 Coach (COH) 3-5 year low price forecast reduced from $75 to $65.
2 Wal-Mart reduced from $100 to $95. (FYI)

Market Barometers

The median Value Line low total return forecast (VLLTR) is 4.0%, up slightly from last week’s 3.9%.

Hallowed Round Table (October 2013)

Join us tonight (8:30 ET) for the October 2013 Round Table as we explore, discover and CELEBRATE the performance results of the tracking portfolio. Yes, it appears that the armored hound can hunt!

FREE webcast! Register at:

There’s no truth to the rumor that Ken, Cy, Hugh and Mark have joined the legions of “Walkers” even if they look a little pale this month. We’ll take a look back at Halloween selections of Yore — unless it’s too spooky. Speaking of spooky, we’re certain to spend some time with the Forbes Best Small Companies for 2013 during the session. Ken will spend some time “off the radar” with some compelling smaller companies.

Companies Likely To Be Studied/Presented:

  • Mesa Labs (MLAB)
  • Qualcomm (QCOM)
  • Schlumberger (SLB)


Round Table Tracking Dashboard

Red October: Forbes Best Small Companies for 2013

Great Pumpkin Realities

Photo Credit: wash52121 via Compfight cc

One of the reasons that we do this is that sometimes we discover a really great pumpkin.

There are no guarantees … and the Great Pumpkin doesn’t seem to come every year. But our relentless emphasis on the quest for high-quality companies with promise that seem to offering superior long-term returns is never dull. And it can be rewarding. As a case in point, we’ve featured United Electronics (UEIC) a couple of times over the few years of quarterly updates. It’s a stock that Ken Kavula frequently mentioned with respect to his investment club, his Groundhog (stock picking contest portfolio), educational sessions … and he mentioned it often during 2008 and early 2009 at price levels of $12-15.

Earlier this year, with UEIC at $18.82 … we suggested that while locating the remote for the Super Bowl that we also study and consider the company. See: Seen The Remote?. UEIC is up 104.6% since January. We mentioned it again at $16.85 during the 4/23/2012 weekly update batch.

They don’t always work out that way. And we’re interested in the pumpkin patch versus isolated incidents, successful and not-so-successful. What does it all add up to? In future updates, we’ll start tracking some of the long-term results achieved by the companies in this weekly presentation of quarterly updates. Leaning on the positive relative returns of your most widely-followed MANIFEST 40, Solomon Select, Tin Cup and other demonstrations like the BareNaked Million, we think we’re going to like this pie.

(By the way, the BareNaked Million — $1,000,000 invested in a relatively passive portfolio back in December 2006 — topped $2,000,000 last week.) Huzzah!

Companies of Interest

The pumpkin pickins are actually a little slim. The average Value Line low total return forecast for the Issue 10 group is 3.9% — matching the Value Line universe of approximately 1700 stocks. But there are some worthy growth and return studies in the patch.

Calavo Growers (CVGW) was among the Forbes Best Small Companies for 2013. The quality ranking and return forecast merit a closer look. Synchronoss Technology is back (again) and we’ll take a closer look at this company this week. Strayer Education (STRA) just might be an opportunity to explore painful lessons learned by long-term investors (specifically, me) if I can muster the courage to talk about it.

Materially Stronger: Activision Blizzard (ATVI), Treehouse Foods (THS), Bridgepoint Education (BPI)

Materially Weaker: RealD (RLD), Corinthian Colleges (COCO), The Pantry (PTRY)

Market Barometers

The median Value Line low total return forecast (VLLTR) is 3.9%, down from 4.0% last week.

This is a multi-year low for this indicator … at least the lowest level on the accompanying chart, so we’ll take a look at a more extensive parade of market barometers this week.

We start Market Barometer roll call with our median return projection (MIPAR). This parameter is a “first cousin” of VLLTR, but includes a wider berth of stocks — some 2400 in total and will generally include a few more smaller companies. The long-term return forecast is now 5.6%, still slightly above the historical lows reached back around Halloween 2007.

Checking in on the overall trends of the Wilshire 5000 (VTSMX), we find it relatively overbought (RSI = 77.9) with the caveat that markets (and individual stocks) can remain relatively overbought for a long, long time. We also note that the 12-month change for VTSMX is now 28.2%! The pins-and-needles are a whole lot easier to take when momentum is solid. Again we suggest that the momentum indicator (ROC) back in the 2004-2007 time frame provided “cover” during a period when the market was frothy for an extended period. There’s a substantial dose of “covering momentum” under current conditions. If that breeches 0% — as it did circa Halloween 2007, we’ll sound the alarm for DefCon 2 (at least.)

We use the overall New Highs vs. New Lows ($USHL) long-term trend as another confirming indicator. Again, check out the sub-zero trend back at Halloween 2007 and compare versus current healthy levels.

Morningstar provides a price-to-fair value (P/FV) ratio on their universe of covered stocks. For more, see: This is even more reinforcement. Note the 114% P/FV ratio back in the middle of that long period of overbought stocks. Stocks (and markets) can get significantly overbought during periods when they’re generally overbought for extended periods.

Sam Stovall of Standard & Poors recently suggested that a case could be made for an overall market price-to-fair value of 1742.92/1820 or 96%.

Investors in capital preservation mode should take note that the Value Line recommended asset allocation to cash/cash equivalents is relatively high at 40% — holding at levels suggested since July 2013, a sign that Value Line analysts believe the market is vulnerable to a significant correction.

If there’s a chance that the Transports (yes, channeling some Dow Theory) could be an early warning system … there’s no sign of a current alarm:

Taking a look at some specific Transports, the overall average is still pretty close to the median market return with relatively few signs of weakness. The return forecast on FedEx (FDX) is a little weak (PAR = 1.7%, RSI = 75.7% and 12-month ROC = 39%) consistent with an overheated trailing 12-months. We’ll be watching for incremental strengthening in fundamentals for FDX with the next update.

There’s been no shortage of articles shoveling dirt on the consumer in recent days and weeks. With an RSI of 84 (overbought) it’s easy to see why. Many of these stocks are probably vulnerable (temporarily overbought) and it’s a self-esteem opportunity for some pundit, talking head or financial journalist when one of them — or a couple of them — take a 20% smackdown. But it’s the long-term that matters, and there’s considerable momentum here in the face of some widespread de-leveraging by American consumers.

Bottom Line

The market and many individual stocks are overbought, in some cases temporarily overbought … and the fundamentals continue to weaken slightly while stock prices trudge ahead. Based on the momentum trends shown in some of our favorite indicators, we’ll be unsurprised by corrections. The stocks and market are vulnerable to some speed bumps. And we’ll be watching for any breakdown in the $USHL indicator. For now, seek the highest-quality stocks in the pumpkin patch and avoid settling for lackluster return forecasts. Those in capital preservation mode might consider selling lower-quality stocks with return forecasts less than MIPAR for sources of funds and elevate your cash equivalent component. For the young and adventuresome, or those well beyond “critical mass”, shop in earnest and let us know if you discover any Great Pumpkin opportunities!

Red October: Forbes Best Small Cos (2013)

It’s that time of year again. Red October. Some people refer to small company stocks as Red Chips and we take our annual look at one of our favorite shopping lists — a tradition that has bagged a number of extremely rewarding investments over the years.

Forbes is out with their annual list of spooky small companies, the Best Small Companies for 2013.

This year’s headliner is Questcor Pharmaceuticals (QCOR). Questcor is among eleven healthcare companies in this year’s list. Acthar is the company’s main drug, used in the treatment of multiple sclerosis, infantile spasms and rheumatic disorders. The drug accounted for the bulk of QCOR’s annual sales total.

The companies featured at the top of Forbes list are:

1. Questcor Pharma (QCOR)
2. Grand Canyon Education (LOPE)
3. Proto Labs (PRLB)
4. Invensense (INVN)
5. Sturm, Ruger (RGR)

We’ll audit, confirm, study and whittle the list down to identify our favorites and see how they compare.

But these potential future titans don’t have to be scary. As we’ve hunted down buying opportunities from this annual listing over the last several years, we’ve discovered that the best returns tend to come from the entrants with the highest quality ratings.

Dashboards Past

We obviously still like to talk about the companies featured in 2008. These are the selections we bring up at the hair salon or barber shop. There are lessons to be learned (and celebrated) in companies like Neogen (2006), DXP Enterprises (2007), Stratasys (2008), Middleby (2008), Dril-Quip (2008), Boston Beer (2008), Bio-Reference Labs (2008 & 2011), Buffalo Wild Wings (2007-2011), Carbo Ceramics (2012), FactSet Research (2008), Mesa Labs (2012), NIC (2012), Peet’s Coffee (2009), Portfolio Recovery (2007,2010-2011), SolarWinds (2011) and SS&C Technologies (2012).

We note that Bio-Reference Labs (BRLI) is now the second most widely-followed company by MANIFEST subscribers, having first appeared on this list back in 2008.

It’s interesting to see Grand Canyon Education (LOPE) near the top of the list because of the damage done by the likes of from the educational services stocks like Strayer and Capella in recent years … and Quality Systems (2006-2008,2010-2011) — a multiple selection that’s done considerable damage to the all-time results.

It’s been a good year for our Forbes Best Small Company tracking portfolios. All in all, the outperformance accuracy is 51.4% and the relative return since 2006 is +2.3% (17.4% vs. 15.1%).

Halloween: Our Cue To Haunt Some Studies

Ken Kavula noticed that Forbes had released the 2013 listing earlier this week. I hope you’re not surprised that Ken is all over this as one of our favorite small company advocates.

So we start whittling with all 100 thanks to Ken:

We’ll require a minimum growth forecast of at least 10%, a quality ranking of 80 or better, and a return forecast greater than 11%. The screening results will be maintained here:

Here’s the results of auditing the 100 candidates … a short list of companies with small company growth characteristics, exceptional quality … that appear to be attractively priced.

The difference between tricks and treats? Quality.

What’s Different This Time?

Value Line Low Total Return Screen (10/11/2013)

Be specific.

It’s a question that revolves around that prolonged flat spot in the return forecast from 2004-2007. (See accompanying Value Line Low Total Return forecast graphic below) The return forecast in the second half of 2002 was in the 10-14% and proceeded to subside down to approximately 4% in mid-2004. From those return forecast lows in March and December 2004, the overall market proceeded to gain at an annualized rate of 14% between Halloween 2004 and Halloween 2007.

And then the wheels came off.

Here’s something that is specifically different, this time around. The year/year change in earnings was pretty robust in 2004-2006 … and the recession comes clear in 2008-2009 as earnings contracted significantly. The 2010 recovery was also pretty robust.

But we’re not seeing that now.

From the perspective of profitability, this recovery is pretty weak according to the forecasts for 2013 and 2014. And yes, we do keep in mind that the year-ahead forecasts are almost universally optimistic at the beginning of the year, generally waning as we turn each page of the calendar and the actual results come home to roost.

At yesterday’s Big Picture Conference, Stephanie Pomboy of MacroMavens pointed out that it’s even worse than it appears. She observed that “60% of earnings improvements over the last few years have been propped up by easing and low interest rates. A big portion of earnings improvements over the last few years have been reduced interest costs.” Pomboy believes that a sudden removal of the punch bowl could have dire effects on the overall market.

As we continue the weekly updates, we once again note that “NONE” makes another appearance with respect to “Materially Stronger” companies in the current batch. With a nod to the reality that some erosion of expectations is historically natural as the year goes by, those 2014E year-end estimates are still nothing to write home about — and the atrophy hasn’t started there, yet.

Compare the profitability trend for 2004-2007 to what’s happening now … and one of the conclusions I reach is that the current 4.2% for VLLTR is different this time, versus the flavor seen in 2004. The probability of that same type of market advance from 2014-2017 does not seem likely, without an underlying strengthening shift in fundamentals.

Continue the quest for highest-quality, superior return stocks … and I’m having trouble arguing with Value Line’s recent uptick in the recommended asset allocation for cash equivalents in portfolios with a capital preservation focus.

Companies of Interest

Materially Stronger: NONE

Materially Weaker: Kinross Gold (KGC), Pan American Silver (PAAS), Potash (POT), Silver Wheaton (SLW), Alcoa (AA), Manulife (MFC), Newmont Mining (NEM)

Market Barometers

The median Value Line low total return (VLLTR) forecast is 4.2%, unchanged from the last week (despite the drop in the stock market which should generally cause the VLLTR to increase.)