Author: expectingalpha

Challenge Club (February 2013)

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Challenge Club – February 2013

It’s more than a mantra. When things get a little tough, battle-tested investors go shopping.

And they go shopping with a specific shopping list in hand — a quest to identify leadership companies selling at attractive prices.

The Challenge Club has more than a little cash on hand (10.9% of total assets) so we need some candidates.

Bring out your best.

Current dashboard: http://www.manifestinvesting.com/dashboards/public/challenge-club

Register to attend Saturday morning’s meeting/webcast at:

http://www.manifestinvesting.com/events/113-challenge-club-february-23-2013

AFLAC (AFL)

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“I would like to see AFLAC under your scope.” — Jack Ellison

Thanks, Jack. For those who don’t know Mr. Ellison — he’s one of the leaders of the award-winning GaAs investment club near Sacramento, California. Gallium Arsenide (GaAs) is a compound of the elements gallium and arsenic and the chemical is used in the production of semiconductor devices. The connection to and inspiration from Silicon Valley is pretty clear.

The GaAs investment club was the leading group in the Value Line/NAIC club portfolio contest back in 2001 and was honored at the 50th anniversary national convention in Detroit.

AFLAC Duck: Uhhhh … he said arsenic. I really wish he’d not do that.

MI: No worries. Besides, we thought the only thing you ever said is “AFLAC!”

AFLAC Duck: That’s my stage persona.

MI: We hope the healing process is going well and sorry to hear of your set back.

AFLAC Duck: Thanks. I needed some rest. Since I stopped that whole migration thing … it’s way, way over-rated, by the way … I’ve gotten a little pudgy. A little time here with the workout equipment in Physical Therapy is probably just what the doctor ordered. Hollywood can wait.

MI: You’re not concerned that a gecko or some furry critter will steal your spot?

AFLAC Duck: Always a concern. Who are we kidding? Wally Pipp thought it’d be OK to take a day off. If you see any critters around the offices in Columbus that remind you of Gehrig, let me know.

MI: Consider it done. And now for a closer look at a community favorite and paragon of stability over the decades. But at the same time, we could make a case for a couple of really big speed bumps over the last few years — and some turbulent challenges that we’d consider more temporary than terminal.

AFLAC Duck: Terminal is not such a good word either around here.

MI: Sorry. Get well soon.

Aflac, Inc. provides supplemental life and health insurance services. The company is a general business holding company and acts as a management company, overseeing the operations of its subsidiaries by providing management services and making capital available. Its principal business is supplemental health and life insurance, which is marketed and administered through its subsidiary, American Family Life Assurance of Columbus, which operates in the United States and as a branch in Japan. The company operates business through two segments Aflac Japan and Aflac U.S. The Aflac Japan segment provides child endowment and ways products and operates as a branch of Aflac and principal contributor to consolidated earnings of Aflac. The Aflac U.S. segment sells voluntary supplemental insurance products including, loss-of-income products and products designed to protect individuals from depletion of assets. AFLAC was founded by John Amos, Paul Amos and William Amos on November 17, 1955 and is headquartered in Columbus, GA. [Wall Street Journal]

Business Model Analysis

The top-line for financial sector companies like AFLAC is book value (BV). The bottom line is EPS, as always — and the relationship (difference) between the top-line and bottom-line for financial sector companies is return-on-equity (ROE) and we pay close attention to the profitability trend on display for ROE.

Projected Average P/E

The forecast for a future P/E ratio for AFLAC is little different from the rest of the banking and/or insurance industry. Will ROE return to historical levels or “labor” in the New Normal? As an investor in financial sector enterprises, this is a key assumption or judgment.

In the case of AFLAC, we’d probably argue for stabilization and statistically a median of 10x (plus or minus 2x) seems to be reasonable.

Equity Analysis Guide

Using the 11% book value growth rate, a ROE forecast of 13% and a projected average P/E of 10x — the projected annual return is 11.6%.

This compares to a Value Line low total return forecast of 11.5%.

With the median return (all stocks) at 7.1%, the 11.6% return forecast is fairly compelling — particularly when considering the 99th percentile quality ranking for AFLAC (AFL).

Groundhog VII: And They’re OFF!

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We’re hoping for a large measure of market-obliterating performance during the Groundhog VII — our stock selection contest for 2013 — but the start out of the gate is a little choppy (so far).

Yes, we know it’s early. Really, really early.

But so far, a relatively small number (16%) of participants have topped the Wilshire 5000 a few weeks into our version of a Groundhog-based Iditarod.

Starting block kudos to perennial group challenger, The Mutual Investment Group of Cheney and individual entrants Jerry Warner, Susan Lynch and Larry Dix. There’s a couple of rhinos (Warren Buffett and Whitney Tilson) on the leader board — and 2011 individual champion Nick Stratigos is lurking, as usual.

You can find the consensus favorites here: Heavy Hogs for 2013

And the full scoreboard here; Groundhog VII Scoreboard

Run, Punxsy Phil. Run.

Funds: Back to Even?

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Tincupresults20100331

One of my favorite news anchors gleefully read the card:

“Two-thirds of all mutual funds are at highs, reaching the levels not seen since the Great Recession.”

Equally accurate translation: “Over 60% of mutual funds have FINALLY reached the point where their 5-year returns are not negative.”

We’ve talked about this before. Most of us experienced “back to even” nearly three years ago.

 

Value Line Low Total Return Screen (2/22/2013)

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We can’t help but take a closer look at the “dent” put in the long-term forecast for Landauer (LDR) — a recent favorite and a stock that we’ve featured in a number of venues. Is there any cause for concern or muted expectations?

The return forecasts for all of the electric utilities in this update are pretty weak and to yield chasers out there … don’t forget to keep total return expectations in your framework. We’ll take closer look at the electric utility industry also.

It was also nice to see long-time community favorite II-VI (IIVI) get a boost this week.

Materially Stronger: Badger Meter (BMI), Cooper (COO), Cutera (CUTR), Idexx Labs (IDXX), Two Six II-VI (IIVI), Manitowac (MTW), Newport (NEWP), Oshkosh (OSK), Toyota Motors ( TM )

Materially Weaker: Excelon (EXC), First Energy (FE), Landauer (LDR), PPL (PPL)

Market Barometers

The Value Line low total return (VLLTR) forecast held steady at 7.3% this week.

 

Presidential Portfolios on Parade

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Presidential Portfolios on Parade

Happy President’s Day out there, everybody. Buy some furniture and boost the local economy. It’s part of our mantra. Invest in the Best, the leaders. So it makes sense to be presidential with our portfolios.

Have you ever wondered about the various published dashboards at Manifest Investing? Are you relatively unfamiliar with our demonstration portfolios?

Dashboard Diagnostics: February 19 at 8:30 ET

On Tuesday night, February 19, we’ll take a closer look at the various demonstrations starting with our flagship Tin Cup model portfolio. Launched in 1995, this model portfolio invests the maximum amount possible in a 401(k) simulation under the assumption that investing in individual stocks has been possible since inception. The selection methodology is consistent and based on a mechanical approach made possible by the Value Line Investment Survey (and subject to Manifest Investing interpretation.)

We describe Tin Cup as Schlossian — a perpetual tribute to Walter Schloss. Walter was a resident of Graham-and-Doddsville. Tin Cup is currently at $1,034,356 and has outperformed the general stock market 4-of-the-last-6 years. The relative return for this model portfolio, since inception, is approximately +7% (versus the Value Line Arithmetic Average).

Other portfolios that we’ll spend some time with include:

  • Solomon Select Tracking Portfolio: Monthly Stock Selection Performance
  • Hoard vs. Herd: Monthly Fund-Based Qualified Plan
  • Heavy Hogs 2013: Favorite selections by Groundhog VII entrants
  • Round Table Tracking Portfolio
  • BareNaked Million
  • Core Diem

Cicero: Quest For Knowledge

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https://i0.wp.com/upload.wikimedia.org/wikipedia/commons/4/40/Cicero_-_Musei_Capitolini.JPGSo what have we learned in 2,067 years?

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” — Cicero – 55 BC

Apparently not much.

Roman Candles & Cruise Missiles

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Roman Candles & Cruise Missiles

Sometimes it can be rewarding to “play with fire” so long as you know when to let go or disembark. Yes, the accompanying image is Slim Pickens in the role of Major T.J. “King” Kong in his rocket-riding glory in the movie Dr. Strangelove.

In this screen, we take a look at some companies with the highest year-over-year percentage changes in earnings, specifically the 3-year period from 2012-2014. So it’s obviously dominated by earnings forecasts. Disclaimer/Disclosure: The fiscal 2014 EPS estimates for a number of companies are still filing in. A few of the companies in the screen are based on 2-out-of-3 reporting periods. In other words, they could change significantly when the analyst consensus estimates for 2014 take shape.

The results were also limited to companies with quality ratings of excellent (greater than 65) and good (55-65) … stopping any company that isn’t in the top two quality quintiles at the door.

Earnings Momentum Leaders

This set of five companies is pretty compelling. Most of them have been part of recent conversations and nudges to explore a little more. That’s cool. In the case of Michael Kors (KORS), the company is a credible threat to Coach (COH) and we’ve talked about relatively empty stores vs. standing-room-only at Coach. This serves as a reminder that your own personal experience is just a small part of a bigger picture. When I see empty KORS outlets, I need to remind myself and deflect the emotions of doubt … or at least, keep all of the information in proper perspective. This flies in the face of Peter Lynch’s famous advice about panty hose and packed parking lots. But do you really think his research stopped there? Really?

Liquidity Services (LQDT) showed up in many of our Groundhog (stock selection contest) entries for 2013 and we can see why. That said, there has been some turbulence of late and a little deeper digging might prove to be prudent.

During our January Round Table, I featured Body Central (BODY) but attendees also heard mention of Francesca’s (FRAN) — a Houston based specialty retailer that merits a closer look.

Tangoe (TNGO) is also compelling. I know very little of the company. TNGO provides communication lifecycle management software and services primarily to large and medium-sized businesses. With all of our attention to the information-based (CTSH) and communication companies (CSCO) and my recently-fried modem, TNGO is also worth a closer look to see if the EPS gold rush of 2012, 2013 and 2014 is a flash in the pan or a compelling opportunity that often accompanies a company/product life cycle emergence.

Attendees from the Orlando MoneyShow came back uttering a single word and it wasn’t Dustin Hoffman’s “plastic.” It was Energy. Energy. Energy. For that reason, a closer look at recent favorite Schlumberger (SLB) and companies like ENSCO (ESV) seems particularly and potentially energizing, too.

We’ll close with our long-held suggestion that an understanding of trailing stop losses for momentum-based companies is generally a good idea. (Think Apple and 2012) Do your best to understand and decide whether to use them. I can think of several roman candles (Peoplesoft) during my investing career whether they either helped or offered salvation. And if you latch on to the next 2012 Netflix, it’s prudent to have an exit strategy while continuing to ride that cruise missile to avoid ending up like Slim at the end of Dr. Strangelove.

Cognizant Technology (CTSH)

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Cognizant Technology (CTSH) is the top-ranked stock based on a combination of fundamental and technical analysis (our Fusion ranking) for the stocks in this week’s update.

As we shared in the stock selection feature for August 2011, Cognizant Technology (CTSH) is anything but a stranger to the subscribers of Manifest Investing and our long-term investing community.

“Knowledge is power.” — Francis Bacon

Apparently, knowing what to do with information is a path to returns based on the leadership returns achieved by all of the information-based companies in our MANIFEST 40 (Oracle, Cognizant, Quality Systems, FactSet etc.)

Cognizant Technology has been selected five times for the Round Table and $100 invested in CTSH as a top-performing member of the MANIFEST 40 tracking portfolio is now worth $440 — absolute total return of 340% and an annualized relative return of +35.4% since December 2008, one of the top-performing entries in this long-term demonstration.

Business Model Analysis

Using the last couple of actual results for years, in combination with analyst consensus estimates for 2013-2014, the sales growth trend/forecast is 17%. If Value Line’s 3-5 year revenue forecast is feasible, the growth forecast could climb to 19%.

Equity Analysis Audit

We’ll use the lower sales growth forecast of 17%, the consensus on projected net margin at 14% and a projected average P/E of 20×.

The result is a return forecast (PAR) of approximately 15%.

Tracking Momentum & Sentiment

To me, S&P is a little tangled in a knot. They have a “Hold” on CTSH despite a fair value of $99.80 that would suggest CTSH is undervalued by 23.5%. I blame the traders and short-term time horizon herd. The same is true for Morningstar. CTSH has been in a trading range for over a year. But I think the reason for the swoons (speed bumps, breathers, etc. — call it anything you want) is pretty clear. The 2008-2009 Great Recession hammered business at CTSH. And the same is true now with Europe lagging and the impact/influence on CTSH is material.

But if you’re in this for the long term — and we are — you believe that recessionary conditions will abate. In fact, you believe that they’ll be back again some day and you’re not stunned or aggravated by this reality.

And when the next round of meaningful recessionary abatement gets underway, this information technology juggernaut will probably reassume the flight trajectory shown the 5-year trailing average (blue line) on the chart.

CTSH is good at what they do. CTSH has a robust field of opportunity and no debt. I think we’re happy it’s a contributor to our Solomon Select, MANIFEST 40 and Round Table tracking portfolios and we’re not ready to send it packing, yet.