Market Mystery Solved!

Breaking. The stock market is a teenage daughter.

Expecting Alpha

As the year winds down — and we get this blog launched — we’ll be going back to a number of our favorites, a few oldies-but-goodies.  Some will share fodder for investment-related and life-related pondering.  Others will convey research methods and findings, but they’re all intended to help you (particularly if you’re new to Manifest Investing) to get to know us better.  This was written after attending a Martina McBride concert this summer — and it’s clear that the stock market does behave very much like a teenage daughter, sometimes.

Benjamin Graham had it all wrong.

I’ll let that heresy sink in for a minute.

I ain’t complainin’, but I’m tired.
So I’m just sayin’ what I think.
And if we’re being honest,
Then honestly I think [we all] need a drink.

Graham — hailed as the father of fundamental analysis and value investing — often used a characterization for…

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National Waffle Day

Going Gets Tough — Gone Shopping

Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline. — Philip Roth

Today is National Waffle Day.

And did the markets ever waffle. Although our focus is always on individual stocks, it was hard to ignore that the Dow Jones Industrial Average toppled from 16459.75 to 15370.33 at the open — a plummet of 6.6% before most people finished their morning coffee.

Apple (AAPL) opened at 105.76 and dropped to 92.00 — a swoon of 13.0% in a matter of minutes.

As we complete the update of our weekly batch, we’ll present a roll call of high-quality study candidates that could be worthy of pouncing — as the wafflers waffle. Our investing friends don’t let friends waffle because volatile markets often deliver out-sized opportunities.

Stocks to Study In A Volatile Market

We set a limit of Quality Ranking > 90 so that we’d be looking at only the excellent companies in our database — only those companies falling in the top decile of all companies based on ranking of financial strength, earnings consistency and relative growth forecast and profitability vs. peers/competitors.

There are number of reasons for this. If the correction deepens, it’s likely that the highest-quality companies will suffer smaller price drops. High company quality can be a life insurance policy. This is particularly true for companies with thin (low) profit margins if recessionary conditions develop. For poor quality companies, recessions can be fatal. (For more on this subject, review the high quality discussion of Arnold Bernhard’s 1958 Best Companies that we covered last year.)

Volatile markets can create opportunity because frankly, average investors do stupid things.

When asked, I’ve been urging young assertive investors with understanding and risk tolerance to shop assertively. One friend bought Apple (AAPL) in the low $90s this morning. One of our favorite market barometers ($USHL) has now entered “yellow light” cautionary territory and for those thinking capital preservation, it could make sense to convert lower-quality companies and/or low return forecasts to cash just in case we get another 25-40% price drop. Raising cash equivalents isn’t done so much for defensive purposes — because the swoon could stabilize and the secular bull market could trudge on. It really could be a situation of building reserves to take advantage of future opportunities.

  • Cognizant Technology (CTSH) — Highest MANIFEST Rank
  • Fresh Market (TFM) — Highest MANIFEST Projected Annual Return
  • Joy Global (JOY) — Highest Low Return Forecast (VL)
  • Joy Global (JOY) — Lowest P/FV (Morningstar)
  • Fresh Market (TFM) — Lowest P/FV (S&P)
  • Joy Global (JOY) — Best 1-Yr Outlook (ACE)
  • Baidu (BIDU) — Best 1-Yr Outlook (S&P)
  • Apple (AAPL) — Best 1-Yr Outlook (GS)

Note: The price targets from Goldman Sachs are from public releases and represent a partial sample. The price target is logged as of the most recent public analyst report. Although every effort is made to keep this information as current as possible, some of the ratings may not reflect more recent research and updates.

A Matter of Perspectives

This Week at MANIFEST (8/21/2015)

It’s a matter of perspective.

It is true that from a behavioral economics perspective [that average investors] are fallible, easily confused, not that smart, and often irrational. [They] are more like Homer Simpson than Superman. So from this perspective it [could be] rather depressing. But at the same time there is also a silver lining. There are free lunches! — Dan Ariely

The recipe for said free lunch depends on our willingness to be better investors — capturing all that patience and discipline will offer. Because the misbehavior of the herd ranks up there with death, taxes and gravity.

This week, we’ll spend a few moments taking a look at the weekly perspectives that we share from sources like Value Line, Morningstar, Standard & Poor’s, analyst consensus estimates and Goldman Sachs. What are their opinions and expectations? Forecasts? Time horizons? Do they always see things the same?

Of course not. And time horizon matters — a lot. But the profile of their opinions yields the stocks that capture our attention during every weekly update.

We also believe that taken collectively, much like our usage of MIPAR, the average “rating/score” can tell us something about the pessimism or optimism of the various research entities.

Value Line Investment Survey … A Most-Trusted Resource

We start with the Value Line Investment Survey — mostly because it provides the foundation of our weekly updates. 1/13th of the 1700 Value Line companies are updated each week.

As shown in the accompanying figure, the bell curve distribution of low total return forecasts features an average forecast (for the companies in the Issue 1 population) of 3.8%. Some of the higher return forecasts belong to GeoSpace (GEOS) and Navistar (NAV). We’re generally most interested in any high-quality companies that land in the blue circle as candidates for further study. Some of these can be found in our weekly summary table (see Value Line: Companies of Interest below).

Companies that are not “on sale” from the Value Line perspective would be Tesla Motors (TSLA) and Dexcom (DXCM).

Keep in mind that the only inputs to these results are (1) current price, (2) projected low price and (3) projected yield over an approximate 4 year period. (We continuously adjust the calculation for the actual number of years)

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 3.8% — slightly lower than the 4.5% for the Value Line 1700.

Materially Stronger: Douglas Dynamics (PLOW), NextEra Energy (NEE), Natus Medical (BABY)

Materially Weaker: Navistar (NAV), ResMed (RMD), Gorman-Rupp (GRC), UltraTech (UTEK), Manitowoc (MTW)

Standard Coverage Initiated: Zimmer Biomet (ZBH)

Discontinued: Zimmer Holdings (ZMH)

Market Barometers

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 4.5%, unchanged from 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.

Companies of Interest: Morningstar

Morningstar computes a discounted cash flow-based current fair value (FV) for stocks. As shown here, the population is slightly lower as only 57-of-125 of the Value Line issue 1 population is covered.

The price-to-fair value (P/FV) is simply a comparison of the current price to the current fair value. A value of 100% would be a “fair” price at this time. A value greater than 100% suggests that a stock is potentially overvalued — or priced at a “premium” — and a value less than 100% suggests a potential discount. The graphic has been “flipped” to align with the return forecast charts — basically mapping the less attractive stocks on the left and the more attractive stocks on the right.

This week’s P/FV leader is Tata Motors (TTM) with honorable mention to General Motors (GM), Ford (F) and Fiat Chrysler (FCA).

Companies of Interest: Standard & Poor’s (S&P)

Standard & Poor’s gives us two flavors of perspective:

  • A current fair value based on long-term discounted cash flow analysis that basically suggests what a “good” price for a given stock is today. The calculation is similar to the Morningstar analysis. The current price is compared to the “fair value” to form a P/FV ratio. 100% would be fair value. Less than 100% suggests a discounted price and a potential undervalued opportunity. Greater than 100% suggests that a stock is potentially overpriced.
  • The second perspective is based on a shorter time horizon (1 year or next 52 weeks) and gives another outlook for the covered stocks. For us, S&P provides a bridge between the long term analyses (Value Line, Morningstar and S&P) and the short term 1-year outlook generated by S&P, analyst consensus (ACE) and Goldman Sachs.

This week’s update batch delivers an interesting perspective on the potential of Toyota Motors ( TM ), Honda (HMC) and Nissan (NSANY) from the point of view of the S&P analysts. It’s an interesting bunching of these global automakers to the right hand side (consider buying) of the graphic.

The Outlook For The Coming Year

I’m not sure how useful this piece of information is to an investor versus a trader. It might prove useful in deploying conservative option strategies. But my instinct is that it could serve as one of the tiebreaking factors when comparing a few candidates for purchase. Given two stocks with equal return forecasts over the 5-year time horizon, I might be compelled to select the stock with the better 1-year outlook.

It’s interesting that the stocks on the far right are General Motors (GM) and Cummins (CMI) because both have been regarded as potentially “sluggish” for the coming year based on economic influences. Many of the capital-intensive equipment companies have been punished of late — and the global recession continues to hinder the near-term outlook for many of them.

Companies of Interest: Analyst Consensus Estimates (ACE)

According to the analyst consensus, the stocks with the best outlook for the coming year from this week’s update batch are: Tata Motors (TTM), Checkpoint Software (CKP), Geospace Tech (GEOS) and Navistar (NAV).

The average 1-year total return forecast is 15.1% — but we know the analyst consensus to be (1) volatile and (2) optimistic.

The ACE outlook consistently ranks as the highest among the research entities that we follow.

Our favorite source for analyst estimates is probably with their 1-year price target and current yield — but we frequently audit the sample using and/or and/or

Companies of Interest: Goldman Sachs

Why Goldman Sachs? There are number of high visibility research firms from Bank of America (Merrill Lynch) to Morgan Stanley and other firms like Raymond James. But Goldman Sachs is the most influential based on empirical observations over a number of decades.

It’s best to own one of their “new favorites” before they add it to their conviction buy list or substantially raise their price target because you’re virtually guaranteed a boost in return. In fact, one of my colleagues used to use the Goldman Sachs buy and sell list to do just the opposite. He’d watch for exit opportunities after watching the price move up after a buy upgrade and look for shopping opportunities a few days after a sell recommendation.

Sometimes we get a broad update courtesy of articles like this one: Goldman Sachs: Buy and Avoid List (March 2015)

Stocks to Study (8/21/2015)

  • Illumina (ILMN) — Highest MANIFEST Rank
  • Geospace Tech (GEOS) — Highest Low Return Forecast (VL)
  • Tata Motors (TTM) — Lowest P/FV (Morningstar)
  • Nissan Motors (NSANY) — Lowest P/FV (S&P)
  • Tata Motors (TTM) — Best 1-Yr Outlook (ACE)
  • Cummins (CMI) — Best 1-Yr Outlook (S&P)
  • Ford (F) — Best 1-Yr Outlook (GS)

Note: The price targets from Goldman Sachs are from public releases and represent a partial sample. The price target is logged as of the most recent public analyst report. Although every effort is made to keep this information as current as possible, some of the ratings may not reflect more recent research and updates.

Of Lost Decades …

This Week at MANIFEST (8/7/2015)

“Stock market corrections, although painful at the time, are actually a very healthy part of the whole mechanism, because there are always speculative excesses that develop, particularly during the long bull market.” — Ron Chernow

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch

“After 1929, so many people had been traumatized by the stock market crash that there was a lost generation.” — Ron Chernow

The first ten years of this century are referred to as a Lost Decade.

For those who were concentrated in investments in the S&P 500, it clearly was a “lost decade” as the combined stock prices of the S&P 500 actually ended the 10-year period in nearly the same place they started. There were exceptions, but the carnage was deep. We’ve reminisced before about the October 2001 warnings from Ralph Acampora that index fund investors were “about to get killed.”

There are days when I wonder if we aren’t on the verge of another “lost generation.” Interest in common stock investing has waned to long-term lows and the long-term damage/cost/lost opportunity is likely to be palpable.

I like William Devane. A lot. But as a paid spokesperson for one of those gold companies he’s a disservice. “How many of you were compensated or bailed out by the government after the last crash?”

Answer: None. (1) We didn’t expect to be. No one should. (2) We didn’t need it. Check out the image of Tin Cup and the getting-back-to-even moment that happened for many of us before Jim Cramer started talking and writing about it.

Lost Generation? Think about 1941 and the 12 years of aftermath. It was into this void of investing and the schrapnel of rampant speculation that George Nicholson helped to launch the modern investment club movement in Detroit. Because it’s about EDUCATION … and deployed understanding as a real key to the stock market — as suggested by Peter Lynch — is discovered patience and discipline.