Stocks

This Week’s Study Stocks (2/7/2014)

expectingalpha Stocks

Groundhogs, Start Your Engines!

All evidence to the contrary, there was apparently a football game yesterday? (Seriously … Congratulations to the Seattle Seahawks, Super Bowl XLVIII Champions.)

Speaking of Roman numbers… today we launch Groundhog Challenge VIII, our annual stock picking contest for individual investors and investment clubs. It’s not for the faint of heart. The Broad Assets club of St. Louis rang up a 110% total return for Groundhog VII, taking home group honors … and Andy Pagorek of Chicago picked five stocks that all beat the market, 5-for-5, with an overall total return of 77%.

We raise a glass — or a groundhog — and we press on.

This year’s selections can be found at: http://www.manifestinvesting.com/groundhog_scoreboard/2014

Participants select a minimum of five (5) stocks/funds with a maximum of (20). $1,000,000 is invested as of 2/2/2014 and the sage selections are allowed to simmer, undisturbed until 2/2/2015 when next year’s champions are crowned.

It can be interesting to scroll through the selections seeking study candidates … and we’ll do some of that in the forum this week. It’s part of launching a new approach to airing out more studies, etc. We’ll highlight items of interest and we hope that our like-minded investors will share observations, opportunities and threats about the stocks in the weekly updates as 2014 unfolds. You are all invited and welcome to share, inquire and inspire as we all try to make each other better long-term investors. The long-term results for the Groundhog Challenge don’t lie.

Dan Hess and I both were skeptical about the markets being vulnerable to a correction, even a fairly deep correction, a year ago. We both selected some hedges and cash equivalents. The result is that neither of us landed on the leader board. (Yes, that’s some serious sugar coating.) What I think we did learn was to condition and pay less attention to single/isolated momentum indicators like relative strength index. We may been more early than wrong … and Jim Stack shared reluctant expectations (higher vulnerability than even one year ago) with recent audiences.

It’s interesting to note that Dan has selected a number of energy stocks for his 2014 entry and selections.

Issue 12 is chock full of some of these companies like Schlumberger (SLB), National Oilwell Varco (NOV) and Transocean (RIG). And Dan is likely hoping that Value Line is right — most of these are near the top of a listing ranked by low total return forecast. And Morningstar is pretty energized about these stocks, too. But as we’ve pointed out in the past, S&P is less exuberant about these energy stocks — a little more selective, but the fair values at S&P are generally lower than Morningstar.

Dan also added a couple of emerging market exchange-traded funds … another area that we’ve featured in the fund column over the last few months. See the ETF Manifest we’ll be publishing with the February newsletter. I’ll probably go Groundhog shopping around the world also.

Companies of Interest

The companies in the Issue 12 update for the Value Line Investment Survey are as stratified as anything I’ve ever seen. The overall average low total return forecast is a paltry 3.0%. But there’s a John Wayne-sized blaze of opportunity at the top of the return forecast sort. These are on full display in the accompanying graphic.

At the same time, nearly half of the companies in this week’s batch have sub-zero long-term low total return forecasts.

Materially Stronger: Monsanto (MON), Scientific Games (SGMS), Gannett (GCI), World Wrestling Entertainment (WWE)

Materially Weaker: Forest Oil (FST), Harte-Hanks (HHS), Konami (KNM)

Morningstar Price-to-Fair Value Nudges

The average price-to-fair value for the companies in this week’s update according to Morningstar is 99%.

S&P Price-to-Fair Value Nudges

S&P is less optimistic about many of these companies … the overall (average) P/FV for the companies in this week’s update is 110%.

Market Barometers

The Value Line low total return forecast for the standard edition coverage is 3.0%, up from 2.7% last week.

State of the Round Table (January 2014)

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State of the Round Table Portfolio

We took a look at some of the stocks that have delivered a solid long-term performance for the tracking portfolio as well as sharing our favorite current stock ideas and some analysis. What is your favorite stock idea right now?

The state of the Round Table tracking portfolio is SOLID. The relative return (internal rate of return minus the Wilshire 5000 since inception, July 2010) is +3.6% with an out performance accuracy of 56%. The objective is 60% and for context, the “average” investor generally achieves a 30-40% accuracy based on observations of the Motley Fool CAPS program.

Keep in mind that the tracking portfolio has a permanent home at:

http://www.manifestinvesting.com/dashboards/public/round-table

Stock Studies:

  • Apple (AAPL)
  • Computer Programs & Systems (CPSI)
  • McDonalds (MCD)
  • Shoretel (SHOR)

Fundamental Screening Results

Technical Analysis & Second Opinions On Parade

Hugh’s Noodling for Deeper Value

The audience selected Computer Programs & Systems (CPSI) as their January choice.

Groundhog Challenge VIII (2014)

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Bring out your best.

Groundhog VII (2013 edition) comes to an end on February 2, 2014. we have seen a number of photo finishes over the years in our annual stock selection challenge.

This will not be one of those years.Last year’s group champion, The Broad Assets investment club of St. Louis has dusted the field — and barring calamity and collapse at a couple of their key positions during January — currently has a 111% total return for 2013. (That’s NOT a typo) In similar fashion, Andy Pagorek of Chicago is up 82% for the individual championship. More on them to follow in the February newsletter.

For now, it’s time to start your Groundhog shopping for 2014. $1,000,000 is evenly invested in 5-20 stocks (or funds) on 2/2/2014 and we stand back and watch the selections grow for the next 52 weeks until the 2/2/2015 finish line. Five selections is the minimum … and yes, dividends are reinvested. This is a total return contest.

Individuals and groups are encouraged to join the fray. Discuss it during your January club meeting and either post your 2014 entry in the MANIFEST forum under the Groundhog Challenge or submit selections to markr@manifestinvesting.com BEFORE February 2, 2014.

This Week at VL: VLLTR Opportunities

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The subtle, even stealthy, deterioration of fundamentals continues. There’s a fair amount of slippage in the long-term forecasts. As we’ve been saying, it will be interesting when the 2015 estimates begin rolling and Value Line ratchets their 3-5 year forecasts to the next year. Top 40 regulars Pepsi (PEP) and Coca-Cola (KO) continue to be compelling studies during these times of reduced long-term forecasts.

Materially Stronger: Apollo Group (APOL), Spartan Stores (SPTN)

Materially Weaker: SodaStream (SODA), ROVI (ROVI), Strayer Education (STRA), Canon (CAJ)

Saturday Sunrise … Tribute To A Ritual

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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.

Wall Street Walking: 2014 Challenge

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And that walk is anything but random.

It’s the kind of walk you take after rolling out of bed, rejuvenated while practicing prudent and effective sleep-at-night investing. This morning Eddy Elfenbein rolled out for the SEVENTH consecutive New Year’s Day after watching his 20 Buy List stocks outperform the S&P 500 over the trailing year. Seven years in a row. How many funds have outperformed the S&P 500 every single year over that time frame?

Nada. Zilch. Eddy is officially an outlier.

Here’s the Final Scoreboard for 2013:

Eddy’s Crossing Wall Street “Buy List for 2013”: checks in with an overall performance for 2013 of 38.4%. We’ll be digging deeper into the landscape over the next few days, but suffice to say … beating the S&P’s 31.5% for 2013 wasn’t a walk in the park.

You can find Eddy’s commentary on the 2013 achievers here.

Our entries fared well also … the Expecting Alpha 20 crossed the finish line at 35.3% and our Walking Main Street collection came close at 27.6%. Keep in mind that the universe for Walking Main Street is our MANIFEST 40 — choosing the (20) best positioned stocks for the year. They’re higher quality and widely-followed by our community of long-term investors … and a little susceptible to the flaky stock madness where the lower quality stocks outperformed the bluest of the blue chips in 2013. Eddy’s 20 and our Expecting Alpha 20 are at least sniffing around in a bigger pool of stocks … accessing some of those expanding and promising opportunities.

Out With The Old, In With The 2014 Selections

Eddy’s 2014 Buy List, as always — is a low turnover (no changes permitted during the calendar year) — collection of 20 stocks. They’re predominantly core stocks with a few special situations. Our tracking dashboard for Eddy’s 2014 Buy List is available here:

Crossing Wall Street: 2014 Buy List

We sleep pretty well too. We’ll add our (20) selections from the MANIFEST 40 and our Expecting Alpha 20 for 2014 soon.

December Round Table Review

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The Round Table has convened on monthly basis (generally near the end of every month with allowances for schedule adjustments) since July 2010.  The intent is for the participants to identify their single favorite investment opportunity.

Non-core selections are limited to a maximum of 25% of the total positions.

The goal is to build and maintain a tracking portfolio that achieves a long-term relative return of +5% (500 basis points higher) versus the Wilshire 5000.

As of 12/31/2013, 175 selections had been made and an annualized relative return of +3.6% achieved.

Our accuracy goal (% of selections outperforming the total stock market index) is 60-70%.

As of 12/31/2013, the outperformance accuracy is 57%.

The strong performance in 2013 (+10.8% average relative return for calendar year 2013) stemmed from powerful gains in companies like 3D Systems (DDD), Polaris (PII), Priceline (PCLN), McGraw-Hill (MHFI) and Southwest Airlines (LUV). Note the number of 2013 entries on this all-time performance leader board (based on relative return) since July 2010.

Company Presentations

While Hugh McManus shopped around and decided to “Pass” once again … not finding a deep value opportunity to his liking, there was no shortage of companies kicked around. In fact, “honorable mention” included the likes of Apple (AAPL), Bio-Reference Labs (BRLI), Cisco Systems (CSCO), Cognizant Technology (CTSH), Lilly (LLY), MSC Industrial (MSM), Novo Nordisk (NVO) and Target (TGT).

Cy Lynch presented long-time community favorite EMC Corp (EMC) citing strong growth characteristics and a strong “storage story” going forward. He also cited the 80% stake in VMware (VMW).

Most significant is the (1) return forecast at or near a multi-year high and the same is true with (2) the projected relative return. A company between 5-10% for projected relative return is in what we regard as the sweet spot.

The audience selected Fastenal (FAST) and SolarWinds (SWI) for inclusion in the Round Table tracking portfolio

On behalf of the Knights of the Round Table, our Guest Damsels and Guest Knights, we’d like to wish everybody a Healthy, Wealthy and Generous 2014. HAPPY NEW YEAR EVERYBODY!

The Otters of Wall Street?

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Sea otters hold hands when they sleep so they don’t drift away from each other. Photo Credit: @FactHive pic.twitter.com/V3jOjksQso

With all the talk revolving around Wall Street wolves and Leonardo DiCaprio, we can’t help but wonder if modern investment clubs — in the role of otters — represent the best of long-term investing. We’ll spend a few moments discussing the year in the rear-view mirror, the YEARS in the windshield and how we come together to prevent drifting and safe swimming, even when the tides roll and waters get choppy.

Our Knights of the Round Table (including our guest Damsels, Knights and audience selections) have outperformed the Wilshire by 3.6% since July-2010 as our 175 selections since inception have beat the market 57% of the time.

Join us Monday evening (12/30 8:30 PM ET) for the December 2013 Round Table as we explore, discover and CELEBRATE the performance results of the tracking portfolio. 2013 has been very good to us and we’ll spend a few moments acknowledging that while ringing in 2014. Party hats optional, but recommended!

Reserve your Webinar seat now at:

https://www2.gotomeeting.com/register/666657130

Performance Results

Companies Likely To Be Discussed

  • EMC Corp. (EMC)
  • Fastenal (FAST)
  • SolarWinds (SWI)

MANIFEST 40 (December 2013)

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The Stocks You Follow: December 2013 Update. 8 1/4 years. We’ve continuously monitored the 40 most-widely followed stocks by our community of subscribers at Manifest Investing for that long. We think it’s more than a fair assumption that many of these are in your real money portfolios … and for that, we’re optimistic and grateful. This managed “tracking collection” of your collective favorites has outperformed the Wilshire 5000 by +3.1% (relative rate of return, percentage points). The aggregate absolute return has been 9.0% during a period when the annualized total return for the general stock market has been 5.9%. With 8.25 years in the can, the average holding period is 5.7 years.

Peak Performance

Our MANIFEST 40 is a celebration of collective excellence in stock selection, strategy and disciplined patience.

With an average holding period of 5.7 years, the annualized relative return of the current tracking portfolio is approximately +3% versus the Wilshire 5000, approaching our long-term objective. With above average growth (8.5%) and a return forecast of 8.9% (vs. 5.3% for the general market) we see continuing solid performance ahead …

“We have always believed that the collective
decisions made by our community of
like-minded, long-term investors
are worth huddling over …
a place where ideas are born.”

A little over eight years. We established and have been tracking your most widely-followed stocks for more than eight years. Many of the original “40” are still on the list. There have been relative few kings-of-the-hill, including Bed Bath & Beyond (BBBY), Stryker (SYK) and current pole position and community favorite, Apple (AAPL).

Bottom Line(s)

The annualized rate of return for this tracking portfolio is 9.0%. The Wilshire 5000 has gained approximately 6.0% (annualized) since inception … so the relative return (alpha) of these community favorites is a stellar +3.0%.

The relative return of the ACTIVE, current 40 positions, in the tracking portfolio is also +3.1% annualized.

21-of-38 active entries have outperformed the Wilshire 5000 since selection for an accuracy rating of 55.3% compared to 62.5% in September 2013. 62.5% is well above “average” for selecting “winners” by the overall universe of investors and traders.

MANIFEST 40 (December 27, 2013). These are the most widely-followed stocks by subscribers at Manifest Investing. Current leader Apple (AAPL) was added to the list back on September 24, 2009 and steadily climbed the ranks while generating a relative return of +21.3% (annualized) over the trailing three years despite the swoon of 2013. Figures in parentheses are the ranking back on September 30, 2013.

Chargers

Qualcomm (QCOM) has, once again, continued to move up the charts, going from #16 to #12 over the last three months. QCOM had the greatest percentage gain in dashboard appearances. Other companies making strong showings of interest include recent Solomon Select feature Cognizant Technology (CTSH) and Portfolio Recovery (PRAA).

The results of $100 positions investing in any of the Top 40 companies can be viewed at any time at:

http://www.manifestinvesting.com/dashboards/public/manifest-40

Strongest Performers

The three top performers in the MANIFEST 40 since inception — based on annualized relative return — are Portfolio Recovery (+40.3%), Cognizant Technology (33.7%) and Buffalo Wild Wings (30.6%). $100 invested in Cognizant Technology (CTSH) on 12/15/2008 is now worth $572

Newcomers

We pay considerable attention to the chargers and new additions to the list. Apple was a new addition back on 9/24/2009 and $100 invested then is now worth $564 (relative return = +21.3%).The two newcomers are actually returning former residents: Intuitive Surgical (ISRG) and Gilead Sciences (GILD).

A Time For Howling?

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The explosive finish to 2013 continues as a work in progress and the surge makes Santa Claus rallies of the past look like flurries. With relatively few trading days left in 2013, the Value Line Arithmetic Average is now up 37.8%, the S&P has surged 31.8%, the Wilshire 5000 some 32.9% and the NASDAQ, a mere 38.1%. The flaky stocks are still in 4-wheel drive with after burners engaged. Yes, if you were anywhere near “fully invested,” a time to howl.

Speaking of howling, I did go to see The Wolf of Wall Street starring Leonardo DiCaprio this week. It’s vintage Martin Scorsese and tells the tale (through the eyes of the perpetrator) of boiler room brokerage firm Stratton Oakmont. If you’ve seen Boiler Room, it’s the same story but from the snarky angle of those responsible for the carnage. I’m not sure how the film managed to maintain an “R” rating while delivering a steady stream of naked bodies, drugs (quaaludes, specifically) more drugs and as someone suggested, the only purpose of the freely-flowing alcohol was to wash down the drugs. If the “F” word makes your skin crawl, imagine the expletive frequency of Boiler Room combined with GlenGarry Glen Ross. Now double it. You’ve been warned.

Taken in whole, it’s quite a statement on segments of humanity. Think Gordon Gecko. Greed. Now double it and triple the sleaze factor. I am pretty sure that I was contacted by Stratton Oakmont some twenty years ago. I’ve heard the “SCRIPT” personally. I was able to resist because of a grounding in fundamental analysis and an understanding of long-term expectations and stock market performance.

They call it dark humor. It’s been a long time since I’ve heard a motion picture audience laugh that much … even if much of the laughter was painfully muted and dipped in disgust. It’s telling that when reliving the auto crash sequence at the end of the movie, the hero/author/villain neglects to share that a head-on collision placed a young woman in intensive care where she nearly lost her life. And at least the Boiler Room version exposed the damage done to cold-call victims, innocent would-be investors turned penny stock speculators with pockets emptied before they figured out they were being financially molested. And maybe that’s the real car wreck.

Leonardo’s character, after committing hundreds of millions of dollars of fraud, was offered a securities industry ban and a fine of something like $100,000 at the time. Really? And he declined the offer, ultimately ending up with a 4-year prison sentence (served 22 months) and a larger fine — that is still largely uncollected. Really?

But what really tugs at my heart and soul are the massive legions, the raunchy queue of opportunists who lined up at Stratton Oakmont’s front door following an expose in Forbes that detailed the scumbaggery. I can only hope that we can blame embellishment and cinematography for the chest-beating zombie predators, a large room full of agents of doom, that is documented near the end of the movie as they cheer Leonardo’s decision to renege on his SEC deal and hastily get back on the phone to maul a few more people.

That’s a whole lotta wreckage.

Companies of Interest

The opportunities in Issue 6 are still very slim, with a Morningstar P/FV of 111% and S&P checking in at 109%. The post-Christmas sales are more likely to be found at Target versus Issue 6. Jacobs Engineering (JEC) checks in with one of the better return forecasts (10%) but the Value Line low total return forecast for JEC is 1-2%.

Materially Stronger: Kimball (KBALB), Packaging Corp (PKG), La-Z-Boy (LZB)

Materially Weaker: Central Garden & Pet (CENT), KB Home (KBH), Texas Industries (TXI)

Market Barometers

The Value Line low total return (VLLTR) forecast is 3.1%, down from 3.4%. We’re not sure whether these are uncharted waters, but at 3.1% — we’re certainly in waters that have not been navigated “recently.”