Author: expectingalpha

10. Mesa Labs (MLAB)

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The third company in our annual stock selection countdown is a relative newcomer to most of us — but a company that we’ve featured on multiple occasions.

Taxes on investments are (1) going up if Republicans and Democrats decide to agree on something or (2) if they continue to disagree across the board and over the cliff. In other words, taxes will increase on dividends and capital gains. One of the effects that we’ve been seeing for a while now is the traditional January Effect. The selection of Mesa Labs (MLAB) gives us a chance to reinforce a message that is always a good idea this time of year — and this year even more so.

We recently discovered MLAB through the annual publication of the Forbes Best Small Companies a couple of weeks before Halloween. It’s one of our favorite troves and you can read more about it here

It’s not unusual for the smaller companies to be more deeply impacted by tax-related selling during the final quarter of the year … leading to an event-driven opportunity to sell (when appropriate) all the while waiting to pounce on the ON SALE NOW opportunities created by the price swoons.

And quality matters. If we’ve learned nothing from watching the performance of these faster-growing companies over the last decade, it’s that we want to be vigilant for the leaders. We recognize them by steady, consistent growth and profitability patterns and balance sheets (financial strength) that are often a cut above their agile emerging peers. Last year’s favorite, SolarWinds (SWI) is up 130% over the last twelve months. We like that.

Mesa Labs (MLAB) was also featured as a recent monthly stock selection for December 2012

We also know that balancing the overall growth forecast FOR ANY PORTFOLIO is a really good idea … and after the selections of CVS and JW-A, MLAB provides a healthy boost in this regard.

Christmas Countdown Dashboard: http://www.manifestinvesting.com/dashboards/public/christmas-countdown-2013

John Wiley & Sons (JW-A)

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Christmas Countdown (2013)

The second selection in our annual countdown is something of a surprise, John Wiley & Sons (JW-A).

During times when we seem closer to Fahrenheit 451 than not … in days when some of our favorite bookstores (e.g. Border’s) are shuttering … and when the mainstream media decries the conversion from print media to all things tablet de digital — there may be some contrarian method to the madness of a bookish selection.

We were skeptical when JW-A turned up in our Top Tenth of The Top Percentile screens that power the Core Diem demonstration portfolio over the last couple of days — but after a close look and noting the recent price reduction, we’re thinking open arms … much like a good book and a fireplace.

 

Business Description

John Wiley & Sons, Inc. (JW-A) engages in the publishing of print and electronic products, providing content and digital solutions to customers worldwide.

The company operates through three segments: Scientific, Technical, Medical & Scholarly, Professional/Trade and Global Education. The Scientific, Technical, Medical & Scholarly segment provides content and content-enabled digital services for the scientific, technical, medical and scholarly communities worldwide, including academic, corporate, government and public libraries; researchers; scientists; clinicians; engineers and technologists; scholarly and professional societies; and students and professors. Its products include journals, books, major reference works, databases, clinical decision support tools and laboratory manuals and workflow tools. The Professional/Trade segment acquires, develops and publishes books, workflow solutions, certification and training services and other information services in the subject areas of business, technology, architecture, cooking, psychology, professional education, travel, health, consumer reference and general interest.

It products are developed for worldwide distribution through multiple channels, including major chains and online booksellers, independent bookstores, libraries, colleges and universities, warehouse clubs, corporations, direct marketing and websites. The Global Education segment publishes educational content for two and four-year colleges and universities, for-profit career colleges, advanced placement classes, as well as secondary schools in Australia. It delivers its content, tools and resources to students, faculty and institutions principally through college bookstores and online distributors, with customers having access to content in multi-media formats as well as the traditional textbook. John Wiley & Sons was founded in 1807 and is headquartered in Hoboken, NJ

Business Model Analysis

When you’ve been printing books for over 200 years, you probably know a thing or two about where, when and how to sell them.

The last several years (and a couple years of analyst consensus forecasts) build a steady trend in the 3-4% growth range. If Value Line is right about the 3-5 year forecast, the figure favors the 4% end of that range.

The narrowing of the gap between the top and bottom lines is our first hint of expanding profitability. Apparently after 200 years — they’re also figuring out ways to discover new means of optimization.

The Value Line low total return forecast (LTR) shown here is 15% but that was based on a stock price of $43.20 (11/9/2012). With the price now at $37.40, the adjusted LTR is closer to 20.6%.

Profitability Analysis

The overall profitability trend borders on astonishing considering the economic/competitive environment and market that Wiley wakes up to every day. In this closer look, we see the pressures on net margin results during the Great Recession (2008-2009) and the continued optimism of Value Line in their 3-5 year forecast.

All in all, the trend is pretty powerful and could drive higher P/E ratios going forward. Fahreinheit 451, indeed.

Dave Ramsey: American Funds (AIVSX)

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Via Twitter [on 5/17/2012], Dave Ramsey posed the following:

“I own a mutual fund with a 11.98% average return since 1934, 13.4% average over the last three years. Is your investment adviser too STUPID to find this?”

It’s not about STUPID. And this is a really good fund. The specific fund is American Funds ICA (AIVSX) and has — as Dave cited — been in operation since 1934, delivering solid results.

Be careful with averages. It’s better to measure performance of the fund using annualized returns — and going back over the last three years (thru 5/17/2012) — the annualized return for AIVSX is 12.8%. That sounds pretty good and it is — but the return on the S&P 500 (VFINX) over the same three years is 16.6%. So, AIVSX has lagged the S&P 500 by -3.8%/year for the trailing three year period.

We know better than to pass judgment on the basis of 1-year or 3-year periods and so does Dave. In fact, AIVSX outperformed the general stock market benchmark during 30 of its first 50 years of operation. An “outperformance accuracy of 60%” is exemplary. The won-loss record now stands at 43-35 (55.1%) over 78 years and performance has lagged for the last 28 years, denting the long-term record with a performance accuracy of 13-15 (46.4%) over more recent history.

We can look back at 78 years but many of us have a hard time wrapping our brains around that span. So we’ll take a closer look at three decades. Over the trailing 30-years, AIVSX has delivered an annualized return of 10.8% during a period when the S&P 500 advanced 9.9%. A relative return of +0.9%/year may not seem like much but the difference is significant. As the following graphics show, this relative return has been slipping in recent years but was bolstered by strong performance at the turn of the century.

Aivsx yr rets 20120517

Here’s a look at relative return (since 12/31/1982):

Aivsx rr 20120517

Small Differences in Returns/Expenses … Huge Leaps for the Long Term

As Dave often points out, constraining expenses and small differences in annualized returns can make a huge difference in long term results. As a case in point, 10.8% may not seem like that big of a difference vs. 9.9% over thirty years.

But $1000 grown at 10.8% over 30 years reaches a value of $21,687. That same $1000 invested in the S&P 500 (VFINX) and growing at 9.9% attains a value of $16,980. Most of us here like $21,687 better than $16,980.

Small incremental advantages can make massive differences from the long-term perspective. As another case in point, the investment club known as the Mutual Club of Detroit delivered 13.4% from 1941-2001. If 13.4% were achieved over the 30-year period cited, the $1000 grows to $42,354.

Make no mistake. AIVSX is a solid fund offering. Funds with a relative return of 0.9% are actually pretty rare.

An expense ratio of 0.61% and portfolio turnover of 28% place AIVSX in rare company among the alternatives. Our analysis of the holdings suggests a portfolio capable of generating 11.8% projected returns with an overall excellent quality rating. But that 5.75% front-end load is confiscatory and knocks 0.2%/year off the performance over those three decades — and we’ve shown that small differences matter. Perhaps Dave could use his considerable influence to persuade the industry to reduce those transaction costs … after all, this isn’t the 1980s and these types of loads have not tracked reductions seen in almost all areas of investment services.

No-load would be good too. There are a number of attractive alternatives to AIVSX these days as the team works on improving overall results. Funds like Fidelity Blue Chip Growth (FBGRX) with a return forecast of 14.5%, even better quality (vs. AIVSX) and Vanguard U.S. Growth (VWUSX) with its return forecast of 13.6% … and you’ll find that the holdings in these portfolios are not dramatically different than AIVSX.

AIVSX is in good standing at +0.9% over 30 years — but they’re not alone.

Aivsx perf map 20120517

CVS Caremark (CVS)

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The first stock in our annual countdown is CVS Caremark (CVS).

The company is no stranger to long-term investors — currently ranked 37th in the most widely-followed MANIFEST 40.

CVS Caremark Corp. is a pharmacy health care provider in the U.S. with integrated offerings across the entire spectrum of pharmacy care. The company operates in the following segments: Pharmacy Services, Retail Pharmacy and Corporate. The Pharmacy Services segment provides a full range of pharmacy benefit management services to its clients consisting primarily of employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the U.S. The Retail Pharmacy segment includes retail drugstores, its online retail pharmacy website, CVS.com, onsite pharmacy stores and its retail health care clinics. Its retail drugstores are located in various states, including Puerto Rico and the District of Columbia operating primarily under the CVS/pharmacy name. The CVS/pharmacy stores sell prescription drugs and a wide assortment of nationally advertised brand name and private label merchandise. The Front store categories include over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods. The Corporate segment provides management and administrative services to support the overall operations of the company. CVS Caremark was founded in 1963 and is headquartered in Woonsocket, RI.

Business Model Analysis

Based on a sales growth forecast of approximately 8%, a net margin forecast of 3.8% and a projected average P/E ratio of 15.0x — the projected annual return is approximately 15%.

The quality rating is 80.6 (Excellent, top quintile) based on a financial strength rating of 86 (A+), earnings stability in 94th percentile and favorable growth and profitability forecasts versus the Pharmacy Services group.

As shown in the accompanying figure, the low total return forecast for CVS is 13%. [Source: Value Line Investment Survey, 9/21/2012]

Christmas Countdown (2013)

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It’s hard to believe that 2012 is winding down. And with the Wilshire 5000 (VTI) up approximately 15% YTD, it’s time to take a look back at the selections we made during the 2012 Christmas Countdown. Bottom line: The nine selections have a positive relative return of +4.2% and an out performance accuracy of 67%. Santa, we’ll take that.

With a positive relative return of +2.2% for the 2011 selections (and an out performance accuracy of 58.3%) we’ll knock on wood — celebrate the positive outcomes — and start the hunt for stocking stuffers for this year’s countdown.

Christmas Countdown (2013)

Dashboard: 2013 Countdown Stocks

Release The Hounds (Tortoise & Hare Too)

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Over the last couple of months, we’ve introduced a couple of new demonstration portfolios. We believe the concepts represented are at the core (pun intended) of decades of successful long-term investing.

Core Diem

The first demonstration is squarely centered on the core of our method — selecting the best-of-the-best highest-quality companies when their stock price sets up a favorable/superior return forecast. We select three stocks every day for this portfolio from the top one-tenth of the top percentile of all stocks covered at Manifest Investing. The selection criteria is our MANIFEST rank: a combination of quality rating and projected annual return. The amount invested every day depends on the median projected return for all stocks on the day of selection.

We’ve been quite surprised that the same six stocks have been taking turns since mid-October. Eventually another stock will join the party — and we’ll build out the portfolio to a Top Twenty and manage it from there. This morning we accumulated Coach (COH), Cognizant Technology (CTSH) and Solar Winds (SWI). For now, this is what Core Diem looked like:

Balanced Budget

The second demonstration portfolio — likely the HARE in the opinion of most investors — will utilize the balanced investing concepts centered on preservation of capital and an allowance for non-core (general market securities) investing. The allocation is heavily influenced by the standing recommendation of The Value Line Investment Survey. (See accompanying image) With the median return forecast at 8.8% versus a long-term average of 8.5%, we’ll keep cash equivalents and non-core components near the 35% mid-point — our BUDGET.

The balance will be formed by a common stock component — but not just any old mix.

We’ve often been asked why we don’t simply invest in the Value Line 1700 all-of-the-above collection of individual stocks based on the following image. In a nutshell, a blend of smaller (faster-growing), medium-sized workhorses, and larger (slower-growing blue chip stalwarts) is an impeccably good idea.

The S&P 500 large company entrant — investing equally in the whole 500 — has outperformed the S&P 500 cap-weighted index by 2% per year over the last nine years! This advantage extends and manifests in both of the other groups also, producing the stellar performance of this all-of-the-above blend (^VAY):

How about you? Are you afflicted by a lost decade or two? We think seven decades of avoiding lost decades is worthy of considerable attention and implementation.

We’re toying with the notion that the Guggenheim equally-weighted series is just what the doctor ordered.

Out of the gate, here’s what the Balanced Budget Demonstration Portfolio looks like:

Ladies, Gentlemen, Hounds, Hare and Tortoise, Start your engines!

VL Low Total Return Screen (12/14/2012)

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Why do we pay attention to the Value Line weekly updates? Because a number of highly successful long-term investors cite Value Line as one of their favorite trusted resources.

“I don’t know of any other system that’s as good… The snapshot it presents is an enormously efficient way for us to garner information about various businesses… I have yet to see a better way, including fooling around on the internet, that gives me the information as quickly.” — Warren Buffett, Berkshire Hathaway, 1998 Annual Meeting speaking about The Value Line Investment Survey.

“[Value Line is]…the next best thing to having your own private securities analyst.”
—Peter Lynch, One Up On Wall Street

In our case, we’ve found the low total return forecasts for all companies to be among the most compelling opinions/forecasts while we either (1) search for opportunities or (2) practice effective stewardship when it comes to staying vigilant about our current holdings.

Materially Stronger: Worthington Industries (WOR), Myriad Genetics (MYGN), Mueller Industries (MLI), Coventry Health (CVH)

Materially Weaker: AK Steel (AKS), U.S. Steel (X), Cliffs Natural Resources (CLF), Quality Systems (QSII), Steel Dynamics (STLD), WebMd (WBMD), Schnitzer Steel (SCHN), Humana (HUM), Lifepoint Hospitals (LPNT), Transdigm (TDG)

Bullish Sentiment (Positive Price Pressure): Health Management Associates (HMA), Nucor (NUE)

Mesa Labs (MLAB)

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Solomon Select: December 2012

Mesa Labs (MLAB)

We think BI is an area of promise. No, we’re not talking about Better Investing or the publication Business Insider (although we like both of them) … this has to do with Biological Indicators. A year ago we watched as Bio-Reference Labs (BRLI) took a massive stock price hit as the short sellers seemed intent on driving a viable business into oblivion. During our diligence on the situation, we learned about the power and potential of body fluid analysis for diagnosis and prevention. With two sisters who serve as nurses, I’m also acutely aware of the need to verify sterile treatment.

Mesa Laboratories, Inc. develops, manufactures and markets, high-quality process validation and monitoring instruments as well as dialysis calibration and verification meters, standard solutions and accessories that are relied upon by businesses worldwide. From Fortune 500 companies, to high tech start-ups, Mesa Lab’s products are used to assure product quality, control manufacturing processes, and to solve problems in niche markets in industrial, pharmaceutical, medical and food processing applications. Mesa Lab’s products are characterized by technical excellence and superior industry reputations.

Growth, Profitability, Valuation

Our sales growth forecast for MLAB is 18.5%. We’re using 20% for the projected net margin. The median P/E for the period 2004-2011 is 15×. We’re using 16x for the projected average P/E.

Mesa Labs has delivered steady growth (allowing for a speed bump during the 2008-2009 recession) and a growth rate in the upper teens seems feasible.

Margins seem to be plateauing in the high teens — but a 17.5% forecast would be reasonable. Industry margins are 10% — so any study of MLAB has to gauge the sustainability of the higher profit margins.

The P/E ratio has been extremely consistent for a small company and could conceivably increase if growth rates and profitability levels are maintained as the company is “discovered.” A P/E ratio of 16-18x seems defensible.

At a stock price of $47.37, the projected annual return is approximately 16%. The quality rating is 88 (EXCELLENT) and the VL financial strength rating is B++.

Mesa Labs reminds me fondly of Neogen (NEOG). The business is similar and we discovered it using the Forbes Best Small Company listing for 2012. It’s a Royce (small company gurus) favorite and like Royce, we think Mesa Labs has the potential to continue to deliver.

Standing By The Phone

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Every year in early May, there’s no room at the inns of Omaha.  In fact, there’s probably no vacancy for 500 miles.  When Berkshire Hathaway holds its annual meeting and Graham-and-Doddsville festival, talk turns to succession.  Who’s in line to take over for Warren (and Charlie) when it comes to the Berkshire asset pile?  So I’ve routinely made it a point to stay close to the phone — just in case they dial me up.  I may have gone undrafted for yet another year, but at least this conversation with our son made me smile.

My commitment and focus on making sure that Warren and Charlie knew that I was “standing by” the phone waiting for their succession phone call clouded my judgment and left me vulnerable.

“Uh, Dad. You’re aware that you don’t have to stand by any longer. Your cell phone means that you can go golfing and that phone call from Omaha will still reach you.”

(Uncomfortable silence) “Whoa. You’re right. I guess one day we’ll no longer have that land line.”

“Yeah. We’d hope so. Because even that has a wireless handset.”

(Gulp) “Settle down or I’ll talk about party lines again.”

“No, Dad don’t go there. It’s too horrible.”

“Do you really expect us to believe that the phone calls on Green Acres and Petticoat Junction and that operator named Sarah resembled reality?”

“Well, when Oliver Douglass climbed the phone pole … that was comedy.”

“What’s comedy is that we still have a land line.”

“Watch it. We pay for your cell phone. That can change.”

“Sorry, Dad. At least that old-fashioned phone (shown here) had a hand-held microphone.”

“Uh … that was actually held to your ear. You talked into the thing at the top.”

“You have GOT TO BE KIDDING, right? I feel like we’re walking among dinosaurs. I’m going to go sit in the car and turn on the air conditioner and think about what it’d be like to not have it.”

“Sit in your Buick LeSabre. It won’t take quite as much imagination.”

“Good point. Good thing the windows still roll down.”

Phone-A-Friend

This week, we continue to build out our perspective on long-term performance relative to the stock market over, in some cases, decades. As a refresher, we’re assuming first name basis with Peter (Lynch), Warren (Buffett & Berkshire), Walter (Schloss) and honoring their long-term achievements. We let Ken Heebner keep his last name because it’s cool … we like to “Heebner” our portfolios.

As expected, the random sampling of rhino funds (red, institutional portfolios) continue to fill in — with the majority now landing close to zero or below, signaling failure to beat the S&P 500 over the periods shown. (“Bill” is Legg Mason Value — famous for his 15-year outperformance winning streak from 1991-2005)

Speaking of winning streaks and “phoning friends” we continue to watch for people (and rhinos) who seem to know what they’re doing. In this case, we cite Eddy Elfenbein (http://www.crossingwallstreet.com) and his current 5-year winning streak of outperforming the market. Another noteworthy source of reliable ideas is Jim Jubak and http://jubakpicks.com and the level of out performance shown here. Both Eddy and Jim are hovering at lofty levels and should be regarded as a source of worthy ideas for future stock studies.

The Challenge Club is no slouch either. Join us [for the monthly webcasts] as we continue this quest/discovery of market out performance that started back in 1999.

Performance excellence 20120514