Year: 2015

Fun With Dashboards: M&A (Walgreens)

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Does Walgreen (WBA) Acquisition of Rite-Aid (RAD) Justify The Stock Price?

Merger & Acquisition Dashboard Analysis. The dollar values entered (104 and 31) reflect the annual revenues (2015E) for the two companies. Walgreen is three times the size of Rite-Aid. The key figures are (1) the return forecast (PAR) for Rite-Aid which suggests that WBA is not over paying for RAD. (2) It is normal and customary for a company to pay a price that delivers a sub-zero return forecast, or PAR (Projected Annual Return). In this case, 7-8% is a pretty good deal for WBA. (They’ll have considerable restructuring and store portfolio management to do in the wake of the deal) (3) The other consideration is the relatively weak quality ranking, financial strength and EPS stability of the long-suffering RAD. The combination here is simple weighted-average math. The more elusive answer is whether Walgreen can transfer culture and operating performance to the new assets.

We often are asked about merger & acquisition analysis. It really does boil down to the return forecast (at the offered price) as to whether the price is too high. Many, many transactions feature situations where the PAR for the acquired company is -10% or -5% and this is particularly true for technology sector mergers. And yes, Virginia, this overpaying in the guise of “synergies” is the root of the good will that ends on company financial statements.

Is Walgreen overvalued? At a PAR of 9-10%, “They” don’t think so. (Remember our return forecast is based on analyst consensus and sources like Value Line, Morningstar, S&P, etc.)

When you pick up the morning newspaper and read that the Rite-Aid stock price is trading at a 50% premium to yesterday’s close and that “the deal is clearly a favorable transaction” — ignore that. The only thing that matters is the long-term return forecast based on the new stock price. A comparison to yesterday’s stock price for anything is uninformative.

The management team at Walgreen is experienced and effective. It will be interesting to watch them make decisions, shedding stores and optimizing the portfolio — and preventing the combined company from falling to the average quality, financial strength and avoiding EPS disruptions as they tackle the challenge. We’ll check back in a couple of years from now to see how they’re doing.

50 Best Small Companies (2015)

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This Week at MANIFEST

It’s a busy week — starting with closing out our selections for the Manifest Investing Best Small Company list … to the rescheduled Round Table on Tuesday night … to spending some quality time with friends in Seattle at their annual conference for long-term investors.

A couple of weeks ago, we were advised by Forbes that there would be no 37th Annual List of Best Small Companies. So, after 36 years and the reality that this list has provided a number of actionable and rewarding situations over the last 20 years or so, we’re left to hope that it’s a one year hiatus. The Forbes list has always been a favorite and we’ve reminded investors to “trick or treat” around Halloween every year. “It was a sad day in the Kavula household.” — Ken Kavula.

So — while remaining relatively faithful to the Forbes methodology — we decided to generate our own. We’ll do a full narrative and feature this as our cover story for November, but for now, here are the highlights and the 50 Best Small Companies by Manifest Investing.

Methodology

Criteria:

  • SMALL Annual Revenues less than ONE BILLION
  • Sales growth >= 10%
  • Annual Revenues > $50 million
  • Stock Price > $5
  • BEST Ranked by Highest Quality (Percentile ranked composite of Financial Strength, EPS Stability and relative Sales Growth Forecast and Profitability)
  • No Asset-Based Business from Financial Sector

Published Dashboard for 50 Companies: https://www.manifestinvesting.com/dashboards/public/best-small-companies-2015

Manifest Investing 50 Best Small Companies (As Inspired by Forbes)

MANIFEST – Best Small Company Preview

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Screening Results (October 2015)

Best Small Company Preview

by Mark Robertson

One of the most powerful lessons we’ve learned from tracking the Forbes Best Small Company list every October is that QUALITY MATTERS. Over the long term, we want out-sized returns from our smaller, more speculative, and faster-growing companies and the best protection against the brutal downside of smaller companies is … quality.

Manifest Investing — Best Small Companies (2015)

Best Small Companies (10/8/2015). Screening results as we search for high-quality faster-growing small companies. The Forbes list will be out during October. Sorted by MANIFEST Rank (PAR & Quality) with minimum growth forecast of 12%. * – not covered in Value Line Investment Survey standard edition.

It will be interesting to see how many of the featured companies end up on the Forbes list. This is certainly a list of candidates that can bolster the overall average growth forecast of our portfolios with an average sales growth forecast of 16.3%. The average return forecast is 18.2%.

Value Line is quite a bit less exuberant with an average low total return forecast of 8.5%. Morningstar is a little more enthusiastic with an average price-to-fair value ratio (P/FV) of 85%. We take lower expectations for early stage companies with a grain of salt whenever Value Line or Morningstar are providing the analysis. S&P has an average P/FV of 82%.

The outlook for the year ahead from this group is optimistic with the ACE forecast at 24.2%, S&P at 25.3% and our Goldman Sachs benchmarking checking in at 17.6%. It’s all good.

Several of these companies have appeared on the Forbes and/or Fortune lists in the past — some actually discovered by us using those resources.

Which ones have you studied? Which ones do you own? Are any of the names new to you? Welcome to October and small company discovery. Oktoberfest is for good hunting.

This Weekend’s Dirty Dozen (10/9/2015)

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Some potential studies for this weekend …

Dirty Dozen

I’ve been looking back over some previous “Dirty Dozens” and the anecdotal results we’ve seen over the last several months and it appears to be compelling — at least anecdotally. The recent price bump in Copa Holdings (CPA) is a case in point among many as I was updating the various “cases.”

It probably makes sense to shop among the stocks with the most perception of upside (think rhino sentiment) while continuing to shop among the higher-quality companies.

In that spirit, here is a current Dirty Dozen that is formed by ranking the highest total return expectation based on analyst consensus expectations (ACE, Source:finance.yahoo.com).

September 2015 Round Table

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What: Round Table Discussion of Favorite Stock Study Ideas

When: Tuesday, September 29 at 8:30 PM ET

Where: Online. Register via https://www.manifestinvesting.com/events/178-round-table-september-2015

Who: Kim Butcher, Ken Kavula, Herb Lemcool, Hugh McManus and Mark Robertson

Why: Because we like to share ideas for successful investing. The selections made by Round Table participants have beaten the market over the last five years with a relative return of approximately +3.0%

Stocks Likely To Be Covered: Apple (AAPL), Illumina (ILMN), McGraw Hill Financial (MHFI)

The session (webcast) is FREE. Please invite your friends and family to attend.

If you’d like to be added to an email reminder list for this and all future (monthly) Round Tables, send a request to nkavula1@comcast.net

Cicadas and the Stock Market

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This Week at MANIFEST (9/18/2015)

“The cicadas pierce the air with their searing one-note calls; dust eddies across the roads; from the weedy patches at the verges, grasshoppers whir. The leaves of the maples hang from their branches like limp gloves; on the sidewalk my shadow crackles.” — Margaret Atwood

“Nothing in the cry of cicadas suggests they are about to die” — Matsuo Bashō

“There was an electric buzzing sound that was constantly on, acting as background music like a million cicadas in the forest. A constant white noise.” — Missy Lyons

Cicadas have been used as money, in folk medicine, to forecast the weather, to provide song (in China), and in folklore and myths around the world.

The cicada has represented insouciance since classical antiquity. Jean de La Fontaine began his collection of fables Les fables de La Fontaine with the story La Cigale et la Fourmi (The Cicada and the Ant) based on one of Aesop’s fables: in it the cicada spends the summer singing while the ant stores away food, and finds herself without food when the weather turns bitter.

In China, the phrase “to shed the golden cicada skin” is the poetic name of the tactic of using deception to escape danger. It became one of the 36 classic Chinese stratagems. In the Chinese classic novel Journey to the West (16th century), the protagonist Priest of Tang was named the Golden Cicada; in this context the multiple shedding of shell of the cicada symbolizes the many stages of transformation required of a person before all illusions have been broken and one reaches enlightenment. This is also referred to in Japanese mythical ninja lore, as the technique of utsusemi (i.e., literally cicada), where ninjas would trick opponents into attacking a decoy. More generally, the cicada symbolizes rebirth and immortality in Chinese tradition.

In Japan, the cicada is associated with the summer season. According to Lafcadio Hearn, the song of Meimuna opalifera, called “tsuku-tsuku boshi”, is said to indicate the end of summer, and it is called so because of its particular call.

In an Ancient Greek myth, Tithonus eventually turns into a cicada after being granted immortality, but not eternal youth, by Zeus. The Greeks also used a cicada sitting on a harp as emblematic of music. [Sources: https://en.wikipedia.org/wiki/Cicada]

15-17 Year Cycles In The Markets

From the dusty eddies of end-of-summer (or early autumn) corrections to the notions of noise and the reality of 13-17 year cycles, we find elements of investing in all things cicada. And we wish/hope that the flash crash cicadas will experience similar life cycles.

A number of academic studies have pegged market cycles at approximately 15-17 years. We’re not talking about economic cycles, but those secular trends that seem to last about that long. The bull market of 1982 through 2000 is one example. We just might be living through a cicada cycle from 2000-2002 to 2015-2017 until a real bull market returns. How can we say that? Haven’t we been in a bull market for several years?

Perhaps. Stock prices have recovered in recent years, staggering and muddling along to new highs — but there’s an uneasy feeling among many investors that much of it is artificial, bolstered by things like low interest rates, government seizure and ownership of equities and the quantitative easing of the last several years. As this has propagated, general profitability has been flat and hovering near recessionary levels for the better part of the last ten years. Demand has been quenched and productivity maximized.

We updated the VLLTR forecast chart to cover a period of approximately 16 years. This means that the blue trend line just might cover a full cycle and be “representative.” As we counsel, the blue trend is the real long term path and the spikes and troughs in the green bars (Wilshire 5000) spend time above and below the trend line — much like rising and falling tides in the turbulent oceans.

Investors should not be surprised by a migration back to that blue trend — most likely with some pendulum-like overshoot along the way — because regression to the trend is a little (maybe a lot) like gravity and it’s been historically fairly reliable.

If this is true, we’re likely to be presented with some outstanding long-term opportunities over the next few years as the opportunity cicadas awaken and sing.

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 5.8% — in line with the 5.9% for the Value Line 1700.

Materially Stronger: CVS Health (CVS), Dycom Industries (DY), T-Mobile (TMUS)

Materially Weaker: Bioscrip (BIOS), Dana Holding (DAN), America Movil (AMX), Arris Group (ARRS), Cablevision (CVC), Dish Network (DISH) … “Dishonorable Mention”: Qualcomm (QCOM)

Standard Coverage Initiated: Shake Shack (SHAK)

Discontinued: DirecTV (DTV), Catamaran (CTRX), Integrys Energy (TEG)

Chicago Investor Expo 2015

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Chicago Investor Expo 2015

8:00 a.m. to 4:30 p.m.
Saturday, September 12, 2015
College of DuPage
425 Fawell Blvd.
Glen Ellyn, IL

More than 25 educational sessions, along with corporate presentations, beginner track and meals. Wide range of investment education topics to appeal to investors at all experience levels.

Instructors include Mark Robertson and Ken Kavula with Dan Boyle, Doug Gerlach, Ray Giese, and Jim Crabill.

Cost: $65.00

Sponsored by Chicagoland and Chicago West Chapters of BetterInvesting

For more information and Registration: see http://www.chicagoinvestorexpo.org.

Market Mystery Solved!

expectingalpha Uncategorized

Breaking. The stock market is a teenage daughter.

expectingalpha's avatarExpecting 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…

View original post 212 more words

National Waffle Day

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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

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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 finance.yahoo.com with their 1-year price target and current yield — but we frequently audit the sample using benzinga.com and/or marketbeat.com and/or flashratings.com.

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.