Investing

Saturday Sunrise … Tribute To A Ritual

expectingalpha Investing, Stocks , , ,

 

I’ve written in the past about Saturday mornings and a ritual that included a reflective walk to Starbucks to consume some caffeine and the newest issue of Barron’s for the week. It was early in my discovery of long-term investing … an exploration that led to the formation of a family and friends investment club back in Wheaton, Illinois in the early 1990s.

The destinations experienced since those days are nothing short of remarkable. Our children were fortunate that they were born before they could be named Cisco or Oracle. (We haven’t ruled out Chipotle for our first grandchild, yet.)

It was those early morning jaunts where I began to discover the nuts and bolts of investing. And frankly, like many who take the leap of faith, it became clear that there was a whole lot of available information. There was a whole lot of “experts” who seemed to spew advice and tips with little or no effort to gauge the effectiveness of their talking head sessions.

Into this cloud of confusion and chaos, enter one George Nicholson, Jr. CFA and this campaign we’ve come to regard as the modern investment club movement. Mr. Nicholson is thought of by many as the grandfather of the investment club “grand experiment” … evolving from Detroit in 1941 to a national/global learning experience. We learn that long-term investing is possible and that the odds of success can be dramatically increased by patiently focusing on a few key pieces of information. Add the discipline of developing and sticking to a routine — the core attribute of investment clubs — and it can be like going to battle versus Rommel with Patton in your pocket.

“You magnificent bastard. I read your book!”

And the book demands an emphasis and understanding of:

  • Growth (Long-term trend)
  • Profitability (Net Margins & Return-On-Equity)
  • Valuation (P/E Ratios and where necessary, things like Price-to-Cash Flow)

So every week we update 1/13th of all the stocks we cover at Manifest Investing. That update includes a vigilant check on three basic components … growth characteristics, profitability trends and P/E considerations including life cycle and company quality.

Every week is a snapshot … and you’re invited to take this walk with us. Every week, we’ll take a look at some specific companies. We’re more likely to pay more attention to the most widely-followed companies that command the attention and intention of our community of like-minded long-term investors. Because it makes sense to do so. At the same time, we’re vigilant for promising opportunity and future leaders.

I was updating some macro market barometers recently and was reminded — fairly powerfully — of one of the major tenets of the philosophy we embrace and implement. I am referring to the urgency of all-of-the-above investing … maintaining a sufficient balance of small, medium and larger companies with an overall growth forecast that is suitably high enough. We seek a blend with an overall average growth forecast of 10-12%. As an investor, you CAN’T do this without blending in some promising smaller companies along the way.

Here’s the barometer. I’ll start with the bottom line. This is barometer that tracks the long-term trends of New Highs vs. New Lows is part of our aggregate barometer that can be used to guide asset allocation. Current status? Many stocks are overvalued or overbought … a condition that can persist for years. But this indicator suggests, “Keep doing what you’re doing. Accumulate high-quality stocks when their return forecasts are sufficient. Based on some of the other barometers, it makes sense to ratchet overall quality higher and for those practicing asset allocation, it could make sense to shop diligently and patiently and it’s OK for proceeds-of-any-sales to reside in cash equivalents until your shopping bears fruit and opportunity.”

Can You Spot The Difference? And another look … same chart. What’s different?

The top chart provides a comparison in the background with the S&P 500 (SPX) … a collection of large companies. The bottom chart provides a similar comparison using the Value Line Arithmetic Average ($VLE) index … an equally weighted construction of small, medium and large companies.

This all-of-the-above blend delivers more growth — a characteristic that Nicholson and David L. Babson regarded as a self-correcting mechanism, and opportunity for long-term investors.

The 20-year annualized return for the S&P 500 (VFINX) is 9.1%.

The 20-year annualized return for the Value Line 1700 ($VLE) is 12.0%.

The difference, from a long-term perspective, is MASSIVE.

Companies of Interest

Materially Stronger: TBD

Materially Weaker: TBD

Morningstar Price-to-Fair Value Screen.

S&P Price-to-Fair Value Screen.

Market Barometers

The median Value Line low total return forecast is 2.7%, down from 2.8% last week. This indicator has ranged from low single digits to approximately 20%. The relatively low levels suggest/urge more caution and selectivity — particularly with respect to quality. Lower quality stocks are generally punished the most during corrections and recessions.

We repeat that stocks, sectors and markets can remain overbought (RSI > 70) for extended periods. But price momentum (ROC) still persists.

Morningstar: Market Fair Value. What does it mean? Is the market cheap or expensive? The chart above tells the story based on Morningstar’s fair value estimates for individual stock. The graph shows the ratio price to fair value for the median stock in the selected coverage universe over time.

Same chart as the Introduction. Bottom line: the important aspect is the 12-month trailing trend near long-term highs. Low interest rates, QE, sideline cash, and retirement plan injections are probably supporting demand for stocks.

Starting Gate Harbinger?

expectingalpha Investing ,

 

Starting Gate Harbinger? Does market performance early in the calendar year portend anything about expectations for the full year? Not so much … 2014 checks in at -0.09% through 1/10/2014, a path to high single digit returns for this year?

There’s some discussion that the market trends during the early part of January can be an indication of what to expect from the rest of the year.

Here’s a look at a plot of the market performance from January 1st through the 10th versus the year-end results from 1991-2013. There’s a lot of scatter and the most that can be said is that there does appear to be a “general tendency.”

2014? On 1/10/2014, we were at -0.09% … suggesting high single digits for the year according to this. But we’ve seen anywhere from -20% to +30%.

Pick good stocks when they’re on sale. Rinse. Repeat.

Alpha Central: Alive and Well

expectingalpha Investing , , ,

It’s become something of an annual pilgrimage. The Mid-Michigan chapter of NAIC, the umbrella organization for investment clubs, started a stock picking challenge twelve years ago. Clubs and individuals submit their entries and the results are tracked over the course of one “Halloween” to the next. (The annual breakfast is always between Halloween and Thanksgiving.)

This year, a club that goes by the name of Street Smarts (Saginaw, Michigan) took home the top prize by turning $100,000 into $175,000 over the 12-month period. 75%. Yowza. Wowza.

They were joined by another (16) clubs with returns besting 30% — in other words, out performing the market by at least five percentage points. In contrast, only 12-of-28 failed to beat the market … and the average result was 29%. Their consensus selections essentially matched the market — but the track record is strong as the consensus portfolio has beat the market in 10-of-11 years.

Kudos. I attend a lot of these. I watched recently as similar groups in other parts of the country handed winner’s certificates to portfolios finishing closer to 30%. Eddy Elfenbein of www.crossingwallstreet.com is closing in on another victorious year — hopefully his 7th in a row — with a Buy List portfolio tracking at 34-35% YTD.

The leaders of our annual Groundhog Day-to-Groundhog Day Iditarod are no slouches, either. Our defending champion investment club, the Broad Assets (St. Louis) stand at +83% in the current contest. (Since 2/2/2013) We chronicled their exploits for 2012 here as they finished #1 with a +27.5% total return last year. The finish line for our contest (2/2/2014) is still on the horizon, but Broad Assets has a mammoth lead going into the home stretch.

2013 Groundhog Challenge Scoreboard

We’ll be taking entries for Groundhog 2014 during the last week of January. All individuals and groups (clubs) are invited to submit 5-20 investments.

The fact that 57% of the Mid-Michigan entrants beat the market is not unusual. 51.7% of participating Groundhogs have done the same over the trailing 8 years.

It’s how they/we do it that matters. The swinging-from-the-heels is actually kept to a minimum. The list of top performers include Apple (AAPL), Bio-Reference Labs (BRLI), Coach (COH), Cognizant Technology (CTSH), Google (GOOG), IPC Hospitalist (IPCM), Qualcomm (QCOM), ResMed (RMD) … you get the idea. Many of our community favorites represented by our 40 most-widely held companies are present and accounted for, along with a suitable dose of promising small- and medium-sized companies that keeps the overall growth forecast of the portfolio where it should be (12% or more).

Companies of Interest

Would you be surprised if I told you that Edwards Lifesciences (EW) is on the radar screen of these successful Mid-Michigan stock pickers? Because it is. You shouldn’t be surprised. The road to Alpha is paved with companies with superior return forecasts in combination with high quality rankings.

Materially Stronger: Johnson & Johnson (JNJ), McKesson (MCK)

Materially Weaker: Cutera (CUTR), Thoratec (THOR), Nissan Motor (NSANY), Caterpillar (CAT) 1, Astec Industries (ASTE), II-VI (IIVI), Rofin-Sinar (RSTI), Abaxis (ABAX)

1 Would not usually make this list, but dropped from $105 to $95.

Market Barometers

The median Value Line low total return forecast (VLLTR) is now 3.7%, down from 3.9% last week.

Value Line Low Total Return Screen (5/24/2013)

expectingalpha Investing , , , , ,

Companies of Interest

Screening Criteria: (1) Included in the update universe for this week’s release by Value Line, (2) Return forecast at least 5% (percentage points) greater than the average return forecast and (3) MANIFEST quality rank (percentile) at least 60, i.e. all “Excellent” and “Good” companies in top two quintiles eligible.

Materially Stronger: Amerisource (ABC), Bruker (BRKR), Meridian Bioscience (VIVO), Navistar (NAV), Illumina (ILMN), Analogic (ALOG), Medical Action Industries (MDCI)

Materially Weaker: Cutera (CUTR)

Market Barometers

The Value Line low total return forecast is 6.5%, down from 6.7% last week.

Performance Snapshot (4/30/2013)

expectingalpha Investing

A quick look at some stock selection vehicles, including newsletters, model and tracking portfolios.

Kudos to the Better Investing Stock to Study selection team for the performance delivered since July-2010. Over that same time frame, our Round Table and the Investor Advisory Service have been a little mired, but we consider that a temporary condition all around.

The returns for the MANIFEST 40 collection of our most widely-followed stocks continues to be strong … and we do seem to study and shop in the same tributaries.

Performance snapshot 20130507

April Round Table: Our Quest for Excellence

expectingalpha Investing ,
Photo Credit: One lucky guy via Compfight cc

Gather Round … Steeling Away (Continued)

“As iron sharpens iron, so one person sharpens another.” — Proverbs 27:17

Ken Kavula and I spent the weekend in Pittsburgh with a couple of groups of disciplined long-term investors. It seems natural to think of extending beyond iron … and instead, think about steel on steel — and the process of sharpening other like-minded investors.

Some of the earliest model clubs were formed in Pittsburgh a couple of decades ago. In fact, one of them received a 20-year certificate this past weekend. And we note the considerable learning and sharing promulgated by a group of people, including but FAR from limited to: Herb Barnett, Pat Donnelly, Theresa Greissinger, Terry Lyons, Larry Robinson, 2011 Groundhog Champion Nick Stratigos and a wide variety of other volunteers and contributors.

We’ve followed the Pittsburgh groups of investors for quite some time — and on this weekend did some quick benchmarking. One club had a +5.5% relative return over 20 years — absolutely exceptional and another checked in at +1.0%. Still another checked in at +0.8% … all in all, some 60-80% of the clubs involved this weekend have generated positive relative returns. Placed in the context of negative 1-2% relative returns for an institutional investing universe and the NEGATIVE 5.6%/year (over 20 years) for “average investors” documented by DALBAR — we’re talking about some exceptional people and some highly differentiated performance.

How do we do it?

1. Imagine. Build an expectation of what the companies you study and own will look like in five years.

2. Invest in the Best. Comprehend quality. Recognize that quality is an insurance policy during corrections, bear markets and recessions … and a bedrock of consistency for long-term results.

3. Be Prudent. Diversify. Be certain to design and maintain a portfolio with the right mix of small, medium and large companies with an overall growth forecast that is sufficient. What is sufficient? A weighted average of 10-12%.

We’ll gather for the April Round Table on Tuesday, April 30 at 8:30 ET. On wings of steel and a relentless quest to not only be a better investor … but to improve the experience of our friends and colleagues on this journey, we look forward to sharing some of our best ideas with all who gather.

It’s FREE and it’s literally come one, come all. Register at: http://www.manifestinvesting.com/events/117-round-table-april-30-2013

That Long-Term Return Forecast (3/31/2013)

expectingalpha Investing , ,

Just a refresher on the forecast vs. actual results for the Value Line Low Total Return Forecast (VLLTR) … a close cousin of Mark Hulbert’s VLMAP … and taking Mr. Hulbert up on his suggestion to benchmark versus the Wilshire 5000 (VTSMX).

As shown here, even the Value Line LOW total return forecast has been fairly consistently 3-4 percentage points higher than actual results.

And to reinforce, we consistently see alignment between VLLTR for individual companies and their projected annual return (PAR) at Manifest Investing. Why is this the case? We believe that the inclusion of analyst research from the likes of Morningstar and Standard & Poor’s moderately tempers the overall analysis. (We obviously include Value Line in the analysis of every company, too.) Time after time, we see slightly lower growth, profitability or projected P/E forecasts when we aggregate and combine — and find that collectively, this combined result aligns more closely with VLLTR and actual total return results over the last several years.

For the bigger picture, here’s the Wilshire 5000 actual results vs. the VLLTR forecasts (quarterly back to 1999):

Finding The Best 4-Year Forecast Method

expectingalpha Investing , ,

Mark Hulbert and I compare notes again on using Value Line for long-term forecasting for individual stocks and markets.  As Hulbert points out, the Value Line Median Appreciation Projection (VLMAP) has a pretty solid track record.

We agree — and side with the likes of Walter Schloss and pure discipline itself — when we use our own version of VLMAP, specifically an emphasis on the median Value Line low total return forecast (VLLTR) … a parameter that includes dividends, extending beyond long-term price appreciation and aligns even more favorably when we compare Forecast vs. Actual with the past couple of decades in the rear-view mirror.

http://www.marketwatch.com/story/finding-the-best-four-year-market-forecaster-2013-04-19

Gold: Tarnishment In Progress?

expectingalpha Investing
Photo Credit: World Bank Photo Collection via Compfight cc

Maybe it’s the unshakable image of Peter Schiff on Fox Business pulling a Hersheys-like gold bar out of his wallet — and demonstrating that much like a chocolate bar — you can break off smaller $50 pieces! Maybe it’s visions of bitcoins, tulips or beanie babies dancing in my head?

Whatever is dancing, although we generally reserve these long-term RSI breaks and disruption zone charts for stocks, Gold (GLD) … this one’s for you.

I can’t shake the image of how UNPROTECTIVE Midas was during the 2008 meltdown. Sure, it held up fairly well for a scant few months following Halloween 2007 — but it gave up the ghost a scant few months thereafter, rendering this asset allocation recipe pretty unreliable when it was needed most. (To be fair, Midas was far from alone in disappointing by asset class.)

So my question is, “What makes you believe that Midas would be any more protective during the next market meltdown?”