Fave Five (10/28/2016)

Fave Five (10/28/2016)

Our Fave Five essentially represents a listing of stocks with favorable short term total return forecasts (1 year, according to Analyst Consensus Estimates, or ACE) combined with strong long-term return forecasts and good/excellent quality rankings.

So you’re looking at the stocks in the top 1% of all companies according to MANIFEST Rank (Return Forecast and Quality combination) that have the lowest price-to-fair value ratios (P/FV) according to S&P. The P/FV profile for the S&P Platinum Portfolio is shown here:

The Fave Five This Week

  • Abbvie (ABBV)
  • Celgene (CELG)
  • Deckers (DECK)
  • LKQ Corp (LKQ)
  • Stericycle (SRCL)

Context: The median S&P price to fair value ratio is 102%.

The Long and Short of This Week’s Fave Five

The Long & Short. (October 28, 2016) Projected Annual Return (PAR): Long term return forecast based on fundamental analysis and five year time horizon. Quality Ranking: Percentile ranking of composite that includes financial strength, earnings stability and relative growth & profitability. VL Low Total Return (VLLTR): Low total return forecast based on 3-5 year price targets via Value Line Investment Survey. Morningstar P/FV: Ratio of current price to fundamentally-based fair value via www.morningstar.com S&P P/FV: Current price-to-fair value ratio via Standard & Poor’s. 1-Year ACE Outlook: Total return forecast based on analyst consensus estimates for 1-year target price combined with current yield. The data is ranked (descending order) based on this criterion. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target. 1-Yr GS: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

Weekend Warriors

The relative/excess return for the Weekend Warrior tracking portfolio is +8.7% since inception. 42.6% of selections have outperformed the Wilshire 5000 since original selection.

Tracking Dashboard: https://www.manifestinvesting.com/dashboards/public/weekend-warriors

Relatively Better Selling?


During the October Round Table, we discussed our exploration into the possibility of building an excess/relative return based trigger to limit losses and preserve capital.  We repeat. This is intended to be incremental and additive to the time-honored selling guidelines reviewed here and this is a work-in-progress.  We’re continuing to review whether the trigger point should be variable (a function of inherent characteristics) and whether the 1-year vigilance period is appropriate.  This reprint is a recent cover story from Manifest Investing that provides a thumb nail of the concept/project.

“The ability to select stocks, manage them over time and know when to sell them is incredibly difficult, even for professional fund managers.” — Barry Ritholtz

When to Sell: The Challenge of Reason We don’t want to give the impression that any of the time-honored selling disciplines change with the exploration/concept described here. We still believe that the reasons for selling are short and simple: (1) You need the money, (2) Signs of quality degradation and (3) You can make the portfolio better. That said, we’ll explore this capital preservation and rate of return potential enhancement and decide if it’s a worthy improvement in our arsenal.

During the April Round Table, we struck a community collective nerve. We reminded that we’ve deployed a new selling discipline in a few different places that is based on the notion of an alert, or a flag, based on relative return. Based on the case studies with the embryonic Fave Five Weekend Warriors and Round Table tracking portfolios the concept is compelling. The approach is incremental. Nothing about our traditional selling disciplines is disrupted. This month, we explore the impact of this concept on the Solomon Select monthly features over the last 11-12 years. will be intended to side step excursions and preserve capital.

“The ability to select stocks, manage them over time and know when to sell them is incredibly difficult, even for professional fund managers.” — Barry Ritholtz

I’d go a step further than Barry and say that “especially” might be more acurate (than “even”) for rhinos and average investors. It might even be more challenging when it comes to companies doing share repurchases. But that’s a story for another day.

We’re here for the returns. Anything that offers the potential of an incrementally higher performance is something that grabs our attention. We’ve long been troubled by selections that have underperformed, rapidly losing 60-80% of the purchase price — in some cases within a few months of the original decision. It seems like the damage is often done in 90 days or less. So we decided to subject the monthly decisions made for the Solomon Select feature to this concept. Many stocks have been “sold” when the stock price soared and the return forecast dropped below the market average. Victory laps are always fun. Those stocks have been celebrated and “dismissed” from the tracking portfolio over the years. But what about the other extreme? It’s a question that has haunted many of us — for a long time.

 

Total Assets vs. “Small” Incremental Returns. The audience at the Better Investing national convention treasured this reminder about small advantages and huge gains in incremental results. We do, too.

 

Investing $100 each and every month into the Wilshire 5000 since the inception of Manifest Investing would deliver a passive rate of return of 9.6%.

So far, using the original three selling criteria, the tracking portfolio rate of return is 11.1% — a relative rate of return vs. the total stock market of +1.5%.

Implementing at relative return “stop”/alert concept explored here increases the rate of return since inception to 13.3% —2.2% higher!

The accompanying figure courtesy of Walter Schloss and his track record is a powerful reminder about the vast gains possible over the long term from a “percentage point or two.” And yes, Virginia, it’s exponential.

+2.2%?

Yes, +2.2%. Matching the market at 10% over the period shown for Walter Schloss netted $4114 from the original $100. Beating the market by 2%, or 12% absolute, turned that $100 into $8308. Tacking on a mere +2.2%, or an additional two percentage points swells that $8308 to $16,569. It’s the answer to “When is 2% actually worth 100%?”

Think about it. +2% matters.

Iconix Brands (ICON): Time Out! Poster child for a concept. $1000 invested in ICON for the Round Table tracking portfolio had sunk to $800 against a flat total stock market. “Selling” preserved the $800 which would have plummeted to $330 within a few months.

“Time Out” Based on Relative Return

The concept is simple. It’s inspired by one of the steadfast rules on selling stocks made popular by Investor’s Business Daily and William O’Neil. Their discipline is to sell any holding that drops 7-8% from the original selection point. In our view, this would lead to excessive turnover if we attempted to apply the discipline to our style of investing. But the preservation of capital concept has merit and the general approach of “stopping” to check for assumption errors, etc. seems worthy.

But we’d want to avoid selling a stock that drops 8% when the total stock markets drops, for example, 10%. Hence, our focus and emphasis on relative return. We want to single out stocks that have under performed the overall market on an individual, and comparison, basis.

We’ve discussed this at a few Round Table webcasts and most notably during the selection of Iconix Brands (ICON) during April 2009. We now see the ICON case as something of a “poster child” for the concept. The original $1000 invested in ICON as part of the Round Table tracking portfolio on 4/30/2015 had dwindled to $800 by 8/3/2015. The Wilshire 5000 had actually gained 0.1% over the same period. As shown in the accompanying figure, ICON continued its swoon. This finance.yahoo.com chart is constructed by comparing the price of the stock with VTSMX with the selection date as the start date and displayed on the far left. The relative return is the difference between the blue and red lines over time.

As shown, the swoon did not stop at $800 and the original $1000 invested was worth only $256 by 11/6/2015. Was a “time out” clearly in order after dropping the original 20%?

Solomon Select Suggestion

So we asked a question. Actually, a few questions.

(1) Are there any cases of a stock “bottoming” and getting toggled out of the portfolio where the selection had gone on to deliver market-beating returns?

(2) Is 20% the right number?

One of the earliest Solomon Select features was Oracle (ORCL) back in May 2005. As shown, ORCL trailed the overall stock market by approximately 15% in early 2006. Setting the limit closer to 15% would have stopped out this strong performer — +7.2% annualized relative return for 11 years. We were not able to find another case where a “premature” time out would have ultimately prevented a strong long term performance.

(3) Would 20% result in a high turnover rate?

We found that (24) of the 134 transactions made over the last eleven years for the Solomon Select feature actually triggered the 20% condition. The names read like a roll call of disappointment: American Capital Strategies, Atwood Oceanics, Capella Education, Coach, Dolby Labs, Garmin, Landauer, Nokia, Quality Systems, Strayer Education, Urban Outfitters …

(In all fairness, companies like Coach and Urban Outfitters also have SUCCESSFUL close outs within the Solomon Select tracking portfolio — a condition that we’d probably reasonably expect from this relatively volatile sector.)

So we’re generally looking at a couple of instances per year — a notion shared by one Round Table webcast participant who wondered if this wouldn’t simply flag companies on the wrong end of the Rule-of-Five … and reduce losses, pain and suffering? Bottom line: We don’t know if 20% is the number — it may be variable and perhaps a function of quality, for example — but a target setting in this range would not seem to produce excessive turnover.

(4) What is the typical holding period for these triggered transactions?

With one exception (Qualcomm at 3.3 years), the 20% limit triggered in less than 18 months with an average holding period of approximately 9 months. That would be easy to remember! Nearly 50% of the cases triggered in less than six months.

(5) Do the tools exist to do this?

Not exactly. An investor could use spreadsheets but we’re not aware of an existing commercial source for tracking this condition. Would we add it to Manifest Investing? Possibly. If our explorations continue to show this potential, we’ll consider adding this type of performance tracking as a portfolio management tool.

Our Like-Minded Community Heard From

We think the concept is both intriguing and compelling. Our community of investors apparently agrees as we’ve received an unusually large amount of correspondence on the subject. Most of it rhymes with this:

“I think you guys could really be on to something here. In the same way that Stock Selection Guide based studies can be messed up by a plummeting stock price – with Upside-Downside ratios run amok – and a company that is struggling actually can appear ‘more attractive’ on a Guide … I think this concept holds merit for gauging and challenging those stocks with PARs greater than the sweet spot.”

“This could be a game changer. I’ve been looking for a concept like this for a very long time.”

In short, I think the potential is promising. Probably at least as compelling as embedding the analyst estimates in our business model analyses. It’s not a violation of “buy low and sell high” because we’re here for the returns and it’s the bigger picture, the cumulative results that matter. We’ll continue to test other portfolios and implement standing procedures that may become disciplines and best practices over time.

Nordstrom (JWN)

This is a sample stock analysis, the type of feature that we regularly share with subscribers at http://www.manifestinvesting.com  Stocks selected during our FREE/public monthly webcasts known as our Round Table have outperformed the market (Wilshire 5000) for over 5 years.  FREE test drives and trial subscriptions available. If you’d like to be added to a reminder list for future monthly Round Tables, send a request to nkavula1@comcast.net.

 

Here’s a quick look at Nordstrom (JWN). It’s a quality company, but the sagging profitability is a concern. These return forecasts should make it clear why it was “sold” from the Round Table tracking portfolio after only five months — but after it had delivered gains greater than 40%.

Note the return forecast (PAR) in the chronicle and the erosion of quality. This is also an example of a company going from forecast excess returns (pink shaded area, projected relative return) to sub-zero where the stock is projected to lag the market over the long term.

Jwn eagle 20161025

This Week at MANIFEST (10/28/2016)

“Americans eat approximately 100 Acres of pizza every day. That’s about 350 slices per second.” Source: Pizza Fun Facts via Pizza.com

October is National Pizza Month. This observance began in October 1984, and was created by Gerry Durnell, the publisher of Pizza Today magazine. Some people observe National pizza month by consuming various types of pizzas or pizza slices, or going to various pizzerias. During the month, some pizzerias give away free pizzas or pizza slices to customers or offer reduced-price promotions. Some businesses run fundraising drives, donating proceeds of pizza sales to benefit various organizations or charities.

The acres of pizza mention took me back to a keynote speech by Ken “Mr. NAIC” Janke that he delivered to an audience of long-term investors in Chicago back in March 1996. It was entitled, The Janke Dozen and 75 Acres of Pizza (Per Day) and I saved his commentary under “Investment Club Lessons.”

At the time, our first grader did his part. Alex contributed to the national average for pizza consumption as often as we allowed him to. The staples of his diet were pizza, chicken sandwiches, pizza, macaroni & cheese, and pizza. Ken shared a number of observations including the statistic that Americans then consumed 75 acres of pizza per day. Twenty years later, we’ve apparently achieved the next digit, topping 100 acres.

Janke made another comment, in passing, that caught my attention. He pondered, thinking out loud, about the legacy of these investment education events and the various companies that he met over the years. “I became aware of some wonderful companies and investment opportunities. In fact, I suspect that a mutual fund built from the presenters and sponsoring companies would have done quite well in the long term scheme of things.”

He spent a few moments talking about the fact that the stock market had gone down a fairly significant amount on the preceding day. His point? The investment value of the four presenting companies at the event had actually gone up. He touched on one of his favorite subjects… the long-term perspective and “When to Buy Stocks.” The consistent response? “Now. Today. No, not just any stock, but solid reliable firms with solid business models, exceptional quality and good prices.”

Ken then proceeded to describe some of the companies that he found “interesting” as study candidates. The attending presenting companies (American Business Products, Libbey, Synovus and General Electric) were included by default. Ken described powerful business opportunities and excellence in management at Intel. Research and development at companies like 3M was something he always found valuable and desirable. ConAgra has positioned themselves well in their market and their management seemed to anticipate opportunity. (Think ethanol, ultimately.) Disney. Powerful franchise and solid brand recognition world wide. Their recent purchase of ABC television was an example of a well-considered delivery strategy. Motorola is a leadership company that faced some tough short-term challenges. Johnson & Johnson and Abbott Labs have good products, a good track record and good people. Hannaford Brothers, an east coast food supermarket chain, was featured in Better Investing magazine and delivered solid returns until ultimately acquired.

The S&P 500 increased by 16.6 percent in the subsequent five years. Over the same time frame, 8% of equity mutual fund managers managed to stay ahead of the market. How did the “Janke Dozen” perform? The twelve stocks gained some 35 percent.

Ken openly admitted that he had no idea how much pizza Americans would eat in the future. He did know that our analysis, patience, discipline and time-honored approach to investing would often lead us to rewarding opportunities.

Make it so. Engage the possibilities. Pass the deep dish. Shop well.

MANIFEST 40 Updates

  • 20. Coach (COH)
  • 38. Wal-Mart (WMT)
  • 40. Costco Wholesale (COST)

Round Table Stocks

  • Coach (COH)
  • Costco Wholesale (COST)
  • Dollar Tree Stores (DLTR)
  • Fossil (FOSL)
  • Hibbett Sporting Goods (HIBB)
  • Michael Kors (KORS)
  • Nordstrom J.W. (JWN)
  • Pricesmart (PSMT)
  • Ulta Salons (ULTA)
  • Vera Bradley (VRA)

Best Small Companies

  • 9. Monro Muffler (MNRO)
  • 20. Francesca’s (FRAN)
  • 22. IMAX (IMAX)
  • 27. TUMI Holdings (TUMI)
  • 39. Five Below (FIVE)

Results, Remarks & References

Companies of Interest: Value Line (10/28/2016)

The average Value Line low total return forecast for the companies in this week’s update batch is 7.8% vs. 4.5% for the Value Line 1700 ($VLE).

Materially Stronger: DSW (DSW), Iconix Brands (ICON), Ulta Salon (ULTA)

Materially Weaker: Express (EXPR), GNC Holdings (GNC), Fred’s (FRED), Rent-A-Center (RCII), Vitamin Shoppe (VSI), Perry Ellis (PERY), Monro Muffler (MNRO)

Discontinued: Mattress Firm (MFRM), Tumi Holdings (TUMI)

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.

Stocks to Study (10/28/2016)

The Long & Short. (October 28, 2016) Projected Annual Return (PAR): Long term return forecast based on fundamental analysis and five year time horizon. Quality Ranking: Percentile ranking of composite that includes financial strength, earnings stability and relative growth & profitability. VL Low Total Return (VLLTR): Low total return forecast based on 3-5 year price targets via Value Line Investment Survey. Morningstar P/FV: Ratio of current price to fundamentally-based fair value via www.morningstar.com S&P P/FV: Current price-to-fair value ratio via Standard & Poor’s. 1-Year ACE Outlook: Total return forecast based on analyst consensus estimates for 1-year target price combined with current yield. The data is ranked (descending order) based on this criterion. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target. 1-Yr “GS” Outlook: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

October Round Table October 25, 2016 at 8:30 PM ET ONLINE

Stocks Featured: TBD

The Round Table tracking portfolio has beaten the market by 3-4 percentage points over the last five years. Consider joining Ken Kavula, Hugh McManus and Mark Robertson as they share their current favorite stock study ideas.

We will be continuing the discussion of the relative return-based selling guideline for portfolio management.

Registration: https://www.manifestinvesting.com/events/201-round-table-october-2016

Investing: 2017 & Beyond October 29, 2016 at 9 AM ET Cincinnati, Ohio

  • Overview of Analysis (We’ll actually do a case study — walking through the analysis with exposure to our favorite resources and research.)
  • “Common Ground” – How investment clubs take care of a portfolio. We’ll review portfolio design and discuss management considerations. What is effective stock “watching?” How can we best be vigilant for opportunities and threats to our holdings?
  • “Discovery” – A demonstration of various screening resources with a look at some of our favorite resources.
  • “An Industry Study” – Taking a discovery and putting it through its paces to ensure that we’re considering (or accumulating and retaining the best of the best)
  • Let’s Talk Stocks – An interactive, audience-driven discussion of specific study ideas and case studies.

But not necessarily in that order … and we’ll likely add an emphasis on the 50 Best Small Company list.

Registration: https://www.manifestinvesting.com/events/202-cincinnati-investing-2017-and-beyond

Coca-Cola (KO) Shakeup

The Perspective from Value Line

by Ian Gendler, Value Line

In this week’s newsletter, we are shining the spotlight on Coca-Cola (KO), a Dow-30 component and the world’s largest beverage company. The Georgia-based corporation produces and markets over 500 nonalcoholic beverage brands through a network of company-owned and independent bottlers/distributors, wholesalers, and retailers. It employs approximately 123,000 individuals and has a market capitalization that exceeds $175 billion.

Earnings at Coca-Cola remain under pressure. The biggest headwinds are foreign currency translation and structural changes (discussed below), which are likely to reduce pretax profits by 8%-9% and 4%, respectively, this year, The former has been particularly pronounced in Latin America, where the company generates about 20% of its operating profits. Absent these factors, the beverage giant’s performance would look more encouraging, with pretax profits likely advancing at a mid-single-digit rate in 2016.

The company continues to slim down. Coca-Cola is putting more of its bottling operations, including all of these in North America, in the hands of independent partners. This refranchising effect, which is slated to wrap up by the end of 2017, will cause sales to shrink, but Coke should emerge as a higher-margin, less capital-intensive business. What’s more, incremental savings from productivity initiatives, as well as a continued emphasis on pricing and mix, ought to support profitability.

All told, conservative investors will likely want to take a closer look here. These shares have endured a rough stretch, declining about 7% since the release of June-period financial results, but still possess a number of appealing attributes. On that note, the issue is ranked favorably for both Timeliness™ and Safety™, and offers a dividend yield that is more than 100 basis points above the Value Line median.

Ian Gendler — Value Line

Attached file: KO_VL_20161021.pdf

The Perspective From Morningstar

We plan to maintain our $44 fair value estimate for wide-moat Coca-Cola following challenging second-quarter results. Organic revenue growth of 3% was similar to first-quarter results, but the mix was much different as positive price realization and mix impact offset beverage volume growth that fell to 0% year over year. Continued emerging-market challenges, particularly in large countries such as China, look to drive the company’s top-line results short of our full-year 3.5% outlook. As such, we no longer expect recent global marketing efforts to overcome these macro challenges in the near term, and we plan to lower our full-year projection, likely in line with management’s updated forecasts for 3% organic gains.

Nonetheless, we still believe that Coke can grow its revenue about 5% annually over the long term, driven by renewed emerging market growth rates (as rising incomes lead to increasing per capita nonalcoholic beverage consumption) and continued rational pricing between the company and its competitors in developed economies.

The Perspective From S&P

S&P is the most bearish, long term, with respect to Coca-Cola, with a fair value of $26.20 as shown here.

FINANCIAL TRENDS. From 2010 to 2015, net operating revenues increased at a compound annual growth rate (CAGR) of 4.8% and normalized net income rose at a 0.0% CAGR. In light of this growth, we believe that 2% to 4% annual volume growth, with cost cutting and business mix driven 4% to 6% operating income growth, will help support EPS growth in the mid- to upper-single digits over the next several years.

Fave Five (10/21/2016)

Fave Five (10/21/2016)

Our Fave Five essentially represents a listing of stocks with favorable short term total return forecasts (1 year, according to Analyst Consensus Estimates, or ACE) combined with strong long-term return forecasts and good/excellent quality rankings.

So you’re looking at the stocks in the top 1% of all companies according to MANIFEST Rank (Return Forecast and Quality combination) that have the highest 1-year total return forecasts according to the analyst consensus estimates. (ACE)

The Fave Five This Week

  • Air Lease (AL)
  • Celgene (CELG)
  • Cognizant Technology (CTSH)
  • Novo Nordisk (NVO)
  • Universal Display (OLED)

Context: The median 1-year return forecast (ACE) is 10.6%.

The Long and Short of This Week’s Fave Five

The Long & Short. (October 21, 2016) Projected Annual Return (PAR): Long term return forecast based on fundamental analysis and five year time horizon. Quality Ranking: Percentile ranking of composite that includes financial strength, earnings stability and relative growth & profitability. VL Low Total Return (VLLTR): Low total return forecast based on 3-5 year price targets via Value Line Investment Survey. Morningstar P/FV: Ratio of current price to fundamentally-based fair value via www.morningstar.com S&P P/FV: Current price-to-fair value ratio via Standard & Poor’s. 1-Year ACE Outlook: Total return forecast based on analyst consensus estimates for 1-year target price combined with current yield. The data is ranked (descending order) based on this criterion. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target. 1-Yr GS: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

Weekend Warriors

The relative/excess return for the Weekend Warrior tracking portfolio is +12.9% since inception. 42.6% of selections have outperformed the Wilshire 5000 since original selection.

Tracking Dashboard: https://www.manifestinvesting.com/dashboards/public/weekend-warriors

Of Grandmothers & Garage Sales

Expecting Alpha

[From February 2003, Better Investing] One of my favorite goldies — this one hits really, really close to home… about pockets of priceless opportunities …

As our extended family gathered over Thanksgiving to be with Grandma Vi, memories were rekindled. My wife’s grandmother is the matriarch of that side of our family. Her wisdom and serenity provide an exemplary ambition for all of us. Grandparents play a special role in our lives and the moments that our children have spent in Grand company are, as the commercial says, “Priceless.”

Grandma Vi lives for a good game of cards. Of course, she defines a good game of rummy as one that she wins.

My memories are many. But at the same time, they’re too few. I can always use more of those essential reminders that better shape days ahead. Tom Brokaw writes of Greater Generations,and Grandma Vi is among those he…

View original post 657 more words