Year: 2013

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

expectingalpha Investing

As many of you know, the average low total return forecast made available by Value Line ranks among our favorite market barometers. We continuously compile and calculate this average based on the standard edition of the Value Line Investment Survey. Therefore, the results on display here (forecast vs. actual) get pretty compelling.

Another 91 days … another result to report. For the quarter ended 3/31/2013, we compare the 4-year low total return forecast from 3/31/2009 (20.0%) versus the 4-year actual annualized return for the Value Line Arithmetic Index (28.6%).

It’s the shape that matters — and the forecasts four years ago were of the “back up the truck” variety.

Anybody who was able to turn and run in the opposite direction of the herds running for the hills back in March 2009 is distinguishable by the footprints on their forehead and the smile on their face.

Value Line Low Total Return Screen (4/5/2013)

expectingalpha Stocks , ,

Companies of Interest

We’re often asked for opinions on Apple (AAPL) and our approach/outlook is unchanged … at least not much. We do note that AAPL flipped to a bullish point-and-figure condition with a slight boost in price objective. But we still see the stock as vulnerable to a continued price drop or extended trading range. I still love the answer that Jeff Gundlach gave during the Q&A following a recent webcast. His response to “Should I buy Apple?”: “That depends. Are you really, really, really a long-term investor? How will you react if the price drops from $425 to the low $300s? If your time horizon is relatively long and you’re comfortable with a price that plummets from time to time, I’d say it’d be OK to buy/accumulate AAPL.” We still think that trailing stop protection on stocks like AAPL is a really good idea.

Expectations at Hugh’s Staples (SPLS) did relax a little bit — but the long-term outlook (for patient investors) is still strong.

Recent Round Table selection Intel (INTC) is among the best-positioned companies in the Issue 7 update.

Materially Stronger: Synaptics (SYNA), NCR Corp (NCR)

Materially Weaker: Logitech (LOGI), Garmin (GRMN), Skullcandy (SKUL), Standard Register (SR), Staples (SPLS), Cirrus Logic (CRUS)

Market Barometers

The median Value Line low total return forecast is 6.7% compared to 6.8% last week.

Sonic Restaurants (SONC): Did We Notice?

expectingalpha Stocks

Source: Tim Parker, Benzinga

Tim makes an interesting point and nudges us in the direction of an important question.

It’s not so important where Sonic Restaurants (SONC) are today in terms of expectations — although if you hold/follow SONC, you want to know that the return forecast is now 2.5% (thanks to the price surge brought to our attention by Tim) and that the company has a below-average quality ranking.

But we have to wonder whether we “noticed” Sonic before the price move?

We flagged SONC as “interesting” and it made our short list of study candidates back on 11/29/2011 — so we’d politely challenge the characterization that “nobody noticed.” Here’s the short list from that update:

Source: This Week Update, Manifest Investing, 11/29/2011

As shown on a current chronicle for SONC, the return forecast was elevated at stock price of $6.71 and the projected annual return was approximately 20-25%.

RSI Breaks, Death Crosses & Confirmations …

Observations:

1. The disruption period following the early 2005 relative strength break (RSI declining to less than 70 after a sustained period above 70) is not something that would surprise us.

2. The death cross (short-term trailing average breaks below long-term trailing average) circa Halloween 2007 basically “intervened” and disrupted (BIG) any potential recovery following an oversold break to the upside. As is often the case, carnage ensues — and carnage is exacerbated for poor and average quality stocks.

3. SONC was stuck in the carnage zone until a series of higher lows in the relative strength index (confirmation) materialized in late 2011.

4. SONC is still not potentially overbought (RSI = 68.6) but it’s getting there and with the projected annual return in low single digits, we’d be actively shopping for higher PAR replacements in any portfolios that contain SONC. (Those who deploy trailing stops should probably consider them — as a minimum — for SONC.)

We don’t operate under any pretense that we’re right all of the time. (Our target is to select outperforming stocks 60% of the time or more, that’s sufficient for differentiated superior performance — and can produce 3-5 percentage point relative returns over the long term.) But we do like to check historical “flags” and selections to see what we can learn. And that learning often includes huge doses of humility. We’ll be looking at some analyses that didn’t work out quite nearly as well … and seeing if dining on a little crow can bolster our long-term investing efforts too.

Thanks, Tim.

March Madness: Bring Out Your Dead

expectingalpha Investing

March Madness? Bring Out Your Dead.

This week’s Value Line update includes quite a surge for a number of companies. Take a look at the accompanying “Materially Stronger” list in the 3/29/2013 update. As a reminder, an appearance on this list means that the Value Line analyst has “step changed” the long-term low price forecast by 20-25% since the last report 13 weeks ago. And in the case of Issue 6 companies — relatively few of them are in our sweet spot or better, AFTER the bump. But they’ve gone from a return forecast dripping in red ink to in most cases, low to mid-single digits.

MORTICIAN: Bring out your dead!
[clang]
Bring out your dead!
[clang]
….
CUSTOMER: Here’s one — nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: What?
CUSTOMER: Nothing — here’s your nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: Here — he says he’s not dead!
CUSTOMER: Yes, he is.
DEAD PERSON: I’m not!
MORTICIAN: He isn’t.
CUSTOMER: Well, he will be soon, he’s very ill.
DEAD PERSON: I’m getting better!

Source: Monty Python and the Holy Grail (YouTube Video)

Insert [Value Line analyst] for CUSTOMER and you’ve got a pretty good rendition of the situation for many of the Issue 6 companies.

We have no difficulty imagining the gaggle of Issue 6 analysts in a group huddle with someone in a leadership position imploring the lot of them that these stocks aren’t dead yet. And the result of that group hug was a collective reassessment of expectations for the materials and homebuilding companies in their coverage.

In defense of the analyst gaggle, analysis of companies that have been subjected to a depression is quite challenging. The difficulty factor that accompanies normal cycles (variable frequency and amplitude) is compounded by a bath tub effect where it becomes difficult to envision “the other side.” We talked about this during the March Round Table citing conditions at Bank of America (BAC). In a nutshell, the banking industry went from a collective return on equity (along with significantly damaged book values) of 15-20% to 0-5% during the Great Recession. Many have recovered or are expected to recover to the 8-10% range — but it’s still a mystery as to how robust or rapid the recovery will be … or whether historical levels will ever be seen again.

But the current recovery is a work in progress. That is, until the next time the wheels come off and the analysts resume “bringing out their dead.”

Fusion Screen (3/26/2013)

expectingalpha Stocks , , ,
Fusion screen 20130326
Some stock study candidates based on a combination of fundamental characteristics (growth, profitability, valuation and return forecast in combination with the quality ranking) and timely technical characteristics (e.g. relative strength index momentum and price pressure, etc.)
Note the frequency of oil & gas field services along with a integrated petroleum company among the results.
The information technology companies (INFY, AAPL and INTC) continue to be prominent as well.

March Round Table: March Madness

expectingalpha Stocks , ,

Rt banner 20130326-512

During the March 2013 session of the Round Table, our noble knights (and fair damsel Anne Manning) elected to close out (“sell”) the positions in Adobe Systems (ADBE).

The annualized relative return achieved on the selections of ADBE by Anne Manning and Ken Kavula was +16.5% and +14.5% respectively. Huzzah and thanks, Anne.

Bank of America (BAC) was also batted about. The fundamentals have been a wreck and they’re still impacted by the Great Recession. Book value was hammered and is still recovering — a condition quite widespread amongst all banks. Return-on-equity (ROE) has been staggered and perhaps somewhat permanently altered. In the case of BAC, a quick sensitivity analysis on two different thresholds for projected ROE illustrates how muddy and choppy the waters still are for BAC. Hugh also noted the cobbled-together nature of many of these banks since 2008 during the crisis and that spinoffs and restructurings probably hold fairly promising — and quite confusing — potential.

What levels of profitability (ROE) will banks like BAC achieve going forward. We know that 15-20% was commonplace back in 2000-2005 … and that ROE levels have been restored to a fraction of their historical levels. As shown here, the analyst consensus for BAC is currently approximately 5%, but likely increasing. If it were to rebound to 10% (still far below 15-20% levels) … the return forecast (PAR) is 18% versus the paltry level shown on the dashboard. This is part of what Hugh has been thinking for a few years since his famous, “I want to own a bank.”

Where do you think ROE levels for banks in general are headed?

In celebration of William Shatner’s 82nd birthday, Ken and Cy added Priceline (PCLN) to the Round Table tracking portfolio. Continuing with the theme of mayhem and madness, Hugh and Mark also agreed on a selection (a condition that we’ve rarely seen amongst all the knights over the last three years) and presented Intel (INTC). Hugh shared some thoughts on diving beneath the surface of customary analysis to take a look at inventory trends.

If you’d like to hear Hugh expound on this theme, let us know and we’ll schedule a webcast to share legendary tales of companies like Lucent, SafeSkin and Cisco Systems.

The road ahead for Intel is not without a speed bump or two as the transition from PCs to other devices and hardware continues. The company always has been and likely will be, a growth-cyclical, and it will likely remain that way with a long-term growth trend in the 6-8% range for the foreseeable.

But it’s a clear leader in its industry with solid margins. As shown here, Value Line has the long-term low total return forecast at 17% — not too shabby.

The audience closed the session by voting for Priceline (PCLN) over Intel in a clear birthday cake tribute to Captain Kirk — and price negotiators everywhere.

Value Line Low Total Return Screen (3/29/2013)

expectingalpha Stocks , , ,

 

Companies of Interest

Whoa. We’ve not seen a listing for “Materially Stronger” like that in quite a while!

But keep it in context. Despite significant strengthening of fundamentals, virtually none of these show up on the study target list. And in fact, we had to stretch the parameters in order to have a list.

We made an exception for Blyth (BTH) because usually a quality ranking of 14 would normally keep it off the list. But the return is speculative and if you can build a case for a turnaround, BTH could be worth a closer look.  BTH is clearly a restructuring-in-progress.

Fluor Corp (FLR), a Beardstown Ladies favorite, is here as a reminder. Some of you may recall that the Ladies continued to hold FLR despite a low single-digit PAR a few years ago (something we explored during a Dashboard Diagnostics webcast). The reminder is that stocks can stay overbought for a long time — but that vigilance, and in some cases, protective measures can be prudent.

Colgate-Palmolive (CL) is on the list because 10.2% is a pretty solid return forecast when the average return forecast is only 6.8% and the excellent quality rating stands out here. (Plus, it’s my Dad’s favorite stock)

Sonoco Products isn’t about gasoline and it’s a good study although probably worth waiting for a stock price dip before getting wrapped up in it.

Materially Stronger: Lumber Liquidators (LL), Masco (MAS), Simpson Mfg (SSD), Universal Forest Products (UFPI), Eagle Materials (EXP), Martin Marietta (MLM), Texas Industries (TXI), Mastec (MTZ), HNI (HNI), Tempur-Pedic (TPX), KB Homes (KBH), Lennar (LEN), Pulte Homes (PHM), Ryland Group (RYL), Fastenal (FAST), International Paper (IP), Headwaters (HW), NRG Energy (NRG), Potlatch (PCH), Lowe’s (LOW), Tractor Supply (TSCO)

Materially Weaker: Foster Wheeler (FWLT), St. Joe (JOE), GT Advanced Tech (GTAT), AES (AES)

Market Barometers

The median Value Line low total return forecast is 6.8% vs. 6.8% last week.

As the first quarter of 2013 comes to a close, it’s probably time to check in on our run-for-the-hills indicator, the track record for new highs vs. new lows.

Despite the generally bullish and potentially overbought general market, there’s no reason to load up the family truck and head for the hills, Beverly or otherwise, Jed.