Best Long Term Forecasts

This Week at MANIFEST (4/24/2015)

One of the Best Long-Term Forecasting Methods

“If you have to forecast, forecast often.” — Edgar R. Fiedler in The Three Rs of Economic Forecasting-Irrational, Irrelevant and Irreverent , June 1977.

It was two years ago that Mark Hulbert featured some words about our approach to long-term forecasting in the context of some editorial on the efficacy of The Value Line Investment Survey.

We have noted — over the years — that actual returns tend to more closely resemble the low return forecasts on the company research pages for Value Line. Since 2001, the average Value Line low total return forecast has been 7.9%. The actual returns over that time frame have been 6.5%.

Here’s a quarter-by-quarter illustration of forecast vs. actual for the Value Line companies:

This was essentially what Mark Hulbert was sharing in the article, Finding The Best Four Year Market Forecaster.

To us, although the absolute math is important — what really matters is the “shape.” This would suggest that we’ve still got a few quarters of upward-sloped plateau ahead of us. But the “swoon vulnerability” is still pretty high and the reality is that no one knows when the next market break will hit or how “corrective” it will prove to be.

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 3.0% — lower than the 3.7% for the Value Line 1700.

Less turbulence again this week in the updates although there were more companies dropped from coverage than we’ve seen in a very long time.

Materially Stronger: GEO Group (GEO), Daktronics (DAKT)

Materially Weaker: DeVry (DV), Philip Morris International (PM), Career Education (CECO), Zynga (ZNGA), Boulder Brands (BDBD)

Standard Coverage Initiated:

Discontinued: Safeway (SWY), Pantry (PTRY), Silicon Image (SIMG), Chiquita Brands (CQB), LeapFrog (LF)

Market Barometer

Value Line Low Total Return (VLLTR) Forecast. The long-term low total return forecast for the 1700 companies featured in the Value Line Investment Survey is 3.7%, a slight decrease from 3.8% last week. For context, this indicator has ranged from low single digits (when stocks are generally overvalued) to approximately 20% when stocks are in the teeth of bear markets like 2008-2009.

For more on this chart: Origins of the $USHL Indicator

Stocks to Study (4/24/2015)

  • Synchronoss Tech (SNCR) — Highest MANIFEST Rank
  • Daktronics (DAKT) — Highest Low Return Forecast (VL)
  • ROVI (ROVI) — Lowest P/FV (Morningstar)
  • Fresh Market (TFM) — Lowest P/FV (S&P)
  • Rosetta Stone (RST) — Best 1-Yr Outlook (ACE)
  • Tyson Foods (TSN) — Best 1-Yr Outlook (S&P)
  • Keurig Green Mountain (GMCR) — Best 1-Yr Outlook (GS)

I’ve been giving some thought to a database-wide screening summary of “deeper value” opportunities that we’d publish on Tuesdays. Keep in mind that the results of our Monday morning efforts are focused — as they should be — on 1/13th of the stocks we cover and on behalf of shareholders and stock watchers.

Proposing a “Dirty Dozen”

OK, it’s really a Baker’s Dozen — culled from the full database and it’s based on two things:

  • Better Than Average Quality
  • Highest Analyst Consensus Estimate-based (ACE) Expectations for the year ahead

I’m thinking that it could be meaningful when these opportunities converge with the longer term opportunities. The table provides the top (13) such companies on 4/21/2015 — and we’ll see how this behaves/performs over the next few months.

Stocks to Study (4/18/2015)

Screening Results (April 2015)

Shopping In Prairie Dog Mode

If you’ve been to Devil’s Tower, watched enough Animal Planet and/or visited your local zoo, you’ve seen vigilance. Think about the images or scenes of prairie dogs where a “town” or “clan” hears an unusual noise. Immediately, several of the critters will stand on their hind legs and they’ll generally look East, West, North and South as they collaborate to detect potential danger.

Vigilance in Context

Same thing here. Although we’re reluctant to refer to our community of investors as animals, we know that we’re well served when we remain vigilant.

In this case, we’re continually mindful of the parade of opinions from the rhinos that cover and exude/spew opinions on our companies. For this month’s screening results, we hit the ejector button on any qualifying companies that failed to exceed the averages of a number of forecasts.

“Ignore the words issued by analysts (buy/sell/hold) but heed their numbers and homework.” — Walter Kirchberger

The companies in the accompanying list are sorted by MANIFEST Rank Descending and therefore have strong return forecasts and quality rankings. Every week we check our update batch for drifts (downward and upward) in expectations — heeding their numbers. This is little different as we value consensus and elevated financial strength under these market conditions. For perspective, the average Value Line low total return forecast is 3.7%. The average P/FV at Morningstar is 104% and S&P checks in at 99%. The average 1-year total return expectation from ACE is 13.5%. S&P sees the year ahead at 9.5% and Goldman Sachs (GS) is a little more grumpy and pessimistic at 7.0%.

All of a sudden, this whole investing thing was no longer just a hobby. (grin)

Whiskey and Water

Whiskey’s For Drinking, Water’s For Fighting

by Walter Kirchberger, Sigma Investment Counselors

Generally attributed to Mark Twain, this is just as true to day as it was in the 1800s. Consider California and its increasingly onerous restrictions on water usage.

Water is an essential ingredient of life, and businesses require reliable and economic supplies of water in order to operate.

California’s apparent inability to effectively manage its water resources is likely to have far reaching implications for population and business activity.

Water shortages, in many parts of the world, including California, tend to be cyclical, with years of plenty followed by years of drought. The solutions are not complex. Technologies for producing potable water from sea water and other sources are well known, economic, and proven in arid areas around the world.

Water problems are almost always political. Consider the wrangling over the allocation of California’s limited supplies between environmental, agricultural, and general consumption, for example. Or, the not in my back yard approach to desalination projects.

Investors should stay tuned. The recent increase in California’s problems have yet to trigger major movements in population or capital investment, but the full impact of the current restrictions on water use have not been fully felt. Moreover, there does not appear to be any movement towards a comprehensive solution.

All comments and suggestions are welcome.

About The Author

Walter joined Sigma in 2003 and has more than 50 years of experience in security analysis, equity research and investment banking, including 12 years at National Bank of Detroit (now JPMorgan Chase) and 33 years at UBS AG/Paine Webber. Walter is a graduate of the University of Wisconsin with a degree in Economics. He earned the Chartered Financial Analyst (CFA®) designation in 1966 and has successfully completed the General Securities Representative Series 7 examination. Walter primarily serves as a research consultant and advisor to Sigma’s Investment Committee. Walter is a member of CFA® Institute, the CFA® Society of Detroit and serves on the Editorial Advisory and Securities Review Committees of the National Association of Investors Corp’s magazine, Better Investing.

Industry Study: Water Utilities
by Mark Robertson

I have fond memories of Walter Kirchberger and Bob Bilkie (CEO, Sigma Investment Counselors) and their considerable contributions to the Better Investing editorial advisory team. As many of you know, investment club champion George Nicholson, Jr. personally selected the stocks for the monthly features in the magazine from 1951 until the mid-1970s when he sought to bring some external perspectives and ideas to a nation of long-term investors. In my years on the stock selection committee, I was impressed by the ideas and performance results of both of these guys.

Walter is the classic independent analyst — serving in investment banking roles while operating out of Detroit. Some would say sheltered from the chaos and we’ve spent time talking about how “boondocks” can be an asset, an oasis from the noise. I recall that he had a few favorite themes. One was a general reluctance/avoidance of healthcare stocks. Walter didn’t like the vulnerability of the playing field to the whims of unbridled politics. A second theme was WATER and the reality that a vital resource will present actionable/investable opportunities if you remain vigilant.

Some of you “bristled” at our November 2009 selection of Aqua America (WTR) as a Solomon Select feature. We received an unusually high number of opinions that we’d drifted and that we really needed to pay more attention to growth stocks, etc. etc. etc. It was Walter Kirchberger who I thought of as I gritted my teeth and hoped for the best. As the accompanying graphic shows, Aqua America proceeded to significantly outperform the market over the next couple of years.

I don’t know whether opportunity will surface in this charging market of the last several years, but it’s time for a deeper dive into water-related industries and companies.

Water Utilities — Industry Characteristics


Revenue growth is a function of population and inflation — in general. Walter is right, there are some hiccups and bubbles along the way. Over the long term, the average sales growth for the industry is 4-5%.

In the absence of growth, for legitimate infrastructure reasons, the average current yield for the Water Utility industry is 3.0%.


It’s here that we may see some of the pressures and turbulence (and perhaps even opportunity) mentioned by Walter. This trend has been in place for some time and shows no sign of slowing. Greater efficiencies combine with concerns about supply. Might this be a situation similar to the opportunistic purchase of railroads — citing the reality that no more railroads will be built. In that same line of thinking, industry consolidation and optimization appears to be well underway.

The long-term projected industry net margin by Value Line is 16.8%.

The EPS stability for the Water Utility industry is a relatively high 77.

This is a case where — supported by the trend in the accompanying graphic — the future estimates of net margins in specific stock studies could actually be boosted slightly.


The industry average P/E is 20x with relatively small variations. There are gulps and hiccups along the way but the long-term characteristic is quite steady.

The average quality ranking is 78, ranging from a high of 95 for Connecticut Water Service (CTWS) to a low of 56 for American Water Works (AWK) — the gorilla in the group.

Goldman Sachs: Buy and Avoid

This was a tangential subject of discussion during the March Round Table. We’ve added Goldman Sachs price targets and will be monitoring them versus ACE and S&P.

Nutshell: Might this be a way to gauge sentiment? In this case, these differentials could deliver influence or impact, providing a potentially meaningful sentiment indicator.

Gs buy avoid list 20150331

As a quick reminder to be careful out there, this is what this morning held for Garmin (GRMN).

That’s a reduction from $63 to $54.


Grmn gs opinion 20150402

More Fun With Goldman Sachs

When they’re not doing “God’s work” or referring to retail investors as Muppets, Goldman Sachs (GS) makes some calls — long and short — that can be influential in the market. In some Wall Street circles, the legions of Goldman Sachs are playfully known as Masters of the Universe.

In addition to the two lists shared above, here’s a list of nineteen stocks that Goldman Sachs believes are headed for price swoons — a list of stocks to sell short.

Goldman Sachs offers three criteria on how to pick stocks to short:

  • Look for individual stocks with high valuations that have a tendency to underperform;
  • take hints from mutual funds as they do a good job of selecting shorts;
  • and look for stocks that are likely to move on company-specific factors and are less prone to moving with general market and sector trends.

Among the overvalued stocks Goldman thinks could drop are Celgene (CELG), OReilly Automotive (ORLY) and Red Hat (RHT). Stocks underweight by mutual funds that could fall are HST, CTL and EQR; and likely to deviate from the broad market and their sectors are KLAC, JEC and COH.

Rounding out Goldman’s 19 stock recommendations that could reward short sellers: ARG, DO, DISCA, FLS, KSS, MOS, NDAQ, NVDA, TDC, WU.

Tracking Dashboard:

Here are the tracking dashboards for the Goldman MOST UPSIDE and MOST DOWNSIDE stocks as of 3/31/2015:

Celgene (CELG)

Celgene (CELG)

Celgene seeks to deliver truly innovative and life-changing drugs for patients. This major pharmaceutical company focuses on the discovery, development and commercialization of products for the treatment of cancer and other severe immune inflammatory conditions.

This one is worth a closer look. Celgene (CELG) ranks at the top of the list for this week’s update batch based on the combination of return forecast (PAR) and quality rating.

But the long-term low total return forecast via Value Line is -5%! What gives?

This provides an opportunity for a closer look at the consensus aspect of what we do.

Weekly Update Summary (Stocks to Study). This listing accompanies every batch update on Monday morning. It represents the consensus-based forecast based on a number of favorite sources.

Thanks for the question. I was really hoping that someone would ask.

With any forecast, it really does come down to the three judgment milestones and your question can basically be framed by seeking differences between Value Line, your own personal study and perhaps the analyst consensus.

The three most influential factors are:

  • Sales Growth Forecast (%)
  • Expected Net Margin (%)
  • Projected Average P/E Ratio

The first place you can turn for these comparisons after the batch update is the Company Report page (excerpt/snapshot shown here).

Remember, these are the consensus estimates based on a number of sources.

The influences include: Value Line, Standard & Poor’s, Morningstar, the Analyst Consensus Estimates and to some degree, Goldman Sachs (although this is a work in progress, more on that in a minute).

The next step is to check them versus the Value Line assumptions to see if we can determine where the differences/variances are — because there’s a world of difference between a -5% forecast and a double-digit forecast.

The date on the Value Line company report and our batch update will say April 10, 2015. But the Value Line analysis was performed on 3/30/2015 — something we can determine by finding the date that corresponds with $120.02 here Keep in mind that the Value Line-based low total return forecast is adjusted for (1) change in price and (2) change in time horizon when published at MANIFEST.

Sales Growth Forecast: Although Value Line displays 13.5% in the Annual Rates box … the growth rate for the 3-5 year time horizon is (13000/9000)^(1/4)-1 = 9.6%. (Keep in mind that the Annual Rates box data can be greatly distorted by mergers, acquisitions and/or divestitures.) The growth rate displayed in the Business Model (visual analysis) is 13.7%. I think most of us would be comfortable with expectations of 10-12% for Celgene.

Profitability: These are identical. Nothing to see here.

Projected Average P/E Ratio: Here’s where the disparate opinions kick in. Value Line is using 26×. Morningstar sees the stock as currently relatively fairly valued at a P/E of 39.5x or 47.9x … and Standard & Poor’s actually sees CELG with a price-to-fair value of 78%.

This is the crux. And it’s probably the basis for Celgene (CELG) being massacred and being the stock with the worst (avoid like the plague) rating over at Goldman Sachs. Goldman probably has a lower projected P/E ratio than Value Line for their long-term forecast. It’s clear by their 1-year outlook that they think P/E decay could even come “home to roost” during the next year.

I realize that most of us are loathe to go above 30x … perhaps 35x … for a long-term P/E expectation — and this is good policy. For my own study, I’d avoid using 39x — but, for now, that does represent the consensus. Who’s right? Time will tell, but this company is successfully navigating and delivering in a challenging but promising and desperately needed environment.

The Stocks We Follow (MANIFEST 40)


MANIFEST 40 Update

Our MANIFEST 40 is a celebration of collective excellence in stock selection, strategy and disciplined patience. We continuously monitor the 40 most-widely followed stocks by our community of subscribers at Manifest Investing.

“We have always believed that the collective decisions made by our community of like-minded, long-term investors are worth huddling over … a place where ideas are born.”

This managed “tracking portfolio” of your collective favorites has outperformed the Wilshire 5000 by +3.3%. The absolute rate of return for the trailing 9.5 years is 9.6%.

Capturing Attention: Chargers

QUALCOMM (QCOM) continues to ascend, moving from #12 to #11. CVS Health (CVS) has been bolstered of late and moves from #38 to #37.

The results of $100 positions investing in any of the Top 40 companies can be viewed at any time at:


T. Rowe Price (TROW) is a newcomer to the MANIFEST 40. The company was featured in Solomon Select in the July 2014 issue and has been discussed during a number of Round Tables and during other events. The asset manager is highly regarded in this long-term investing community and has been a favorite for decades.

Strongest Performers

The three top performers in the MANIFEST 40 since inception, based on annualized relative rate of return, are Cognizant Technology (+30.7%!), Apple (27.5%), PRA Group (20.2%).

The charter members of the MANIFEST 40: Microsoft (3), Stryker (4), AFLAC (5), Johnson & Johnson (6), General Electric (7), Cisco Systems (10), Walgreen (12), FactSet Research (13), Oracle Corp (17), PepsiCo (18), Teva Pharmaceutical (20), Intel Corp (22), Medtronic (23), Danaher (27) and Wal-Mart (33).

We’ll continue to pay the most attention to these community favorites. Keep up the good hunting!

More Fun With The MANIFEST 40

Here’s the listing (ranked from Most Widely Held, Descending) with a display of Opinions on Parade courtesy of Manifest Investing (consensus-based), Value Line, Morningstar, Standard & Poor’s, Analyst Consensus Estimates and Goldman Sachs.

Mi 40 opinions 20150410