What Have Clubs Bought & Sold?

The transactions displayed were recorded by investment clubs during the month of September 2017 as reported by bivio. bivio.com is a favorite record-keeping solution for investment club accounting and has an admirable record of exemplary customer service and cost-effectiveness for many years.

I’ve been an advocate of bivio as an invaluable club resource since I first met one of the co-founders Dr. Ion Yadigaroglu nearly twenty years ago. The leadership was subsequently assumed by Rob Nagler and a solid tradition of delivering a quality solution and outstanding service is currently led by Laurie Frederiksen. It’s been a while since we did a club Dashboard Diagnostics session and it’s probably time to remedy that. If you or your club would be interested in a live portfolio review using our dashboards, let me know.

As many of you know, I was responsible for the annual portfolio contest at Better Investing magazine several years ago. This afforded me the opportunity to witness success as I reviewed hundreds if not thousands of club portfolios. The best practices and outcomes observed became the genesis of Manifest Investing.

Trust Your Stock Study Results

The bull market has been on rampage for several years. In fact, the performance since 2009 now resembles and reminds many of us of the late-1990s, a period that we often regard as a golden age of investing. Do you remember? The analysis and methodology deployed by most investment clubs involves using the business models, trends and forecasts to build a long-term expectation for the companies that we study. Good stewardship mandates that we continually monitor all of the important influences and characteristics for the stocks that we own. This is the hallmark and foundation of the modern investment club movement.

Sometimes after a persistent bull market, investors can hoist the patience and discipline anchor. “This form of stock analysis does not work any more?” “P/E ratios no longer matter.” (That’s true, but only for special situations and circumstances.) Do you remember? “P/E ratios don’t matter for Cisco Systems (CSCO) … it’s by far the most strongly recommended stock on the stock market.” “Ignore that sell zone. This bandwagon is leaving the station.” We know with 20/20 hindsight and the soon-to-follow 92% drop over 1-2 years that some bandwagons are more cruel than others. We also know that CSCO was squarely in the sell zone of most of our stock studies at the time with a long-term return forecast in the negative double digits.

Do you remember?

We’re human. That’s why anchors matter.

bivio Clubs Activity Report: The Long & Short Term Perspective. (October 7, 2017) 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. bivio Clubs Net Buys vs. Sells: Number of reported purchases minus reported sales. The data is ranked (descending order) based on this criterion. 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. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target.

Home Depot (HD): Business Model Analysis. The assumptions for Home Depot for a sales growth forecast of 5-7%, net profitability of 8-9% and a projected average P/E of 18x generate a return forecast in the mid-single digits.

The Bottom Line of any Stock Study is the Return Forecast

Home Depot (HD) is not Cisco Systems (CSCO). Home Depot is an exceptional company that dramatically weathered an industry DEPRESSION and not only survived but thrived. It ranks among the most widely-followed companies by subscribers at Manifest Investing and trust me, we’re grateful. But most of us would consider it a “Strong Hold” — not a “Buy” — under current conditions and based on the accompanying business model analysis.

Following a long bull market, some club participants begin to question the return forecasts of some of their favorite holdings. Some live in fear of the next bear market and urge colleagues to stick to blue chips and it doesn’t matter what the price or return forecast looks like. Many, many average investors flee to defensive blue chips and this has been going on for a long time as talking heads and pundits have been telling us to run for the hills for YEARS. The result of this is that many of our foundational favorite stocks are no longer attractive purchase candidates. Yes, quality matters. Quality is what keeps us safe when the next correction or bear market finally does arrive. Because it will. Nobody can tell you when. But, PRICE MATTERS TOO. Because return forecasts matter. Buying stocks with relatively low return forecasts will compromise your long-term returns and results.

For some context, we track approximately 2400 stocks at Manifest Investing. The average return forecast for those stocks (based on the collective results of a pile of stock studies) is now 6-7%.

Many of the companies at the top of the activity list have fairly weak long-term forecasts. We publish versions of this long-term and short-term perspective profile so that we can compare some trusted second opinions. In this case, note the general level of the low total return forecasts according to Value Line. We also check the price-to-fair value (P/FV) from Morningstar and S&P. A value less than 100% is regarded as potentially “on sale.” A value greater than 100% suggests that a stock is at least, temporarily, overvalued. Or expensive. Scan the list from top to bottom.

The lower return forecasts and expectations are generally at the top of the chart while the opposite is true at the bottom.

Home Depot (HD) is an example of a company that typically will reach a stock price plateau. Some of those plateaus have historically extended for many years. In many cases over the years, the stock price stagnates during an extended run where the business fundamentals steadily improve. This was the case for Home Depot a few years ago. I have no idea what lies ahead for Home Depot, it’s just that I wouldn’t be the least bit surprised by a plateau.

Which brings us to General Electric (GE) … the most heavily sold stock during September 2017.

In a game of word association — group therapy for GE shareholders — one of the most common words might be “fatigue.” GE shareholders are exhausted. How long can doldrums last? For this reason, and perhaps some tax-related selling at this time of year, we understand why an investor might feel compelled to sell GE.

But … as you complete your business model analysis, be sure to account for the dramatic changes in the structure of the company over the last few years. The General Electric of 2017 no where near resembles the General Electric of 2014. The financial component has been divested, a number of less profitable business units have been shed and the company on our screens is a different animal. Much of what they have retained and intend to strategically exploit are world class leaders in their enterprises. Take power generation and jet engines. World class. GE has added the remnants of Combustion Engineering and a number of water technology innovators to the mix. Their emphasis on deploying technology in the realm of healthcare continues to expand. GE has new executive leadership. Long story short — you can’t use much of the data array older than a year or two as you build a representative understanding of what the future may hold for GE.

Long story even shorter — our colleague Hugh McManus has been accumulating General Electric (GE) for the last few months as a participant in our monthly webcast series known as the Round Table. If you’re “selling” your shares, Hugh and his fellow knights and damsels are “buying” them. Hugh has a track record as a very successful stock picker and is notorious (and respected) for his long-term perspective. GE will be our featured stock this month.

Prudent Shopping & Good Things, “Small” Packages

We use consensus-driven individual stock analyses and dashboards to manage portfolios. Dashboards can also be used as a home for industry studies and pounce piles. In this case, we created a public dashboard for the stocks listed in this bivio activity report. You can access that dashboard here: bivio Clubs Activity: September 2017

Clicking on the PAR (Projected Annual Return) column header will sort the return forecasts from highest to lowest.

But this also comes with a caveat. Lists like these are almost always large company biased. This is because it’s a national/global compilation and the larger, more liquid, companies are just generally more likely to appear when they’re all “rolled up.”

One of the most critical aspects of building a successful long-term performance is to discover and prudently own some high-quality faster-growing companies. During September and October every year, we turn over leaves and hunt down promising needles in haystacks — the types of companies (think Bio-Reference Labs, Neogen, Masimo, Mesa Labs, Simulations Plus, Universal Display and a number of others) that bolster long-term returns. The search for promising smaller companies should never end and we intensify our efforts during the fourth quarter each year to — in some cases — take advantage of tax-related selling and the January Effect.

1. Check the rigging on your anchor.

2. Build and maintain expectations (do your homework) and use the results to guide your efforts. It’s what sets us apart from a herd of confused, weaker-performing participants known as “average investors.”

Don’t let your friends be average investors. Invest With Your Friends. Thanks, bivio!

Favorite Screens: Launch Pad 2017

These Are A Few Of Our Favorite Screens

(30) Launch Pad Candidates (12/9/2016)

As 2016 winds to a close and we start thinking about the Groundhog 2017, it’s time to go shopping for the best opportunities in the coming year. As we recently featured and reminded, it can make sense to peruse the companies with the largest incremental step changes in earnings expectations for the coming year.

Yes, Virginia, we realize that virtually no one can portend stock prices and indices over such a short time frame — but as our contest participants have shown over the last several years, it can make sense to find stocks that look good for the long term that appear to be poised or perhaps about to experience some sort of catalyst. This was the Better Investing premise of featuring a long-term Stock to Study while also giving a nod to a shorter time horizon for the Undervalued feature.

This is also what we do with the weekly updates of the Fave Five and the Weekend Warrior tracking portfolio.

The accompanying figure demonstrates what we seek — companies with the biggest boost in expected earnings for 2017 versus 2016. As shown for Glaxo Smith Kline (GSK), their work in a number of key development areas could restore growth and profitability to this venerable pharmaceutical leader.

And if that doesn’t work out, there’s always AB InBev (BUD)

Screening Criteria

  • 2017 EPS/2016 EPS > +50.0%
  • Quality Ranking > 60 (Excellent or Good Quintiles)

For context, the median year-over-year (2017/2016) change in EPS is +11.8%.

The average 1-year total return forecast (ACE) is currently 8.1%.

Our median long term return forecast (MIPAR) is now 5.0%.

Launch pad screen 20161207

Gone RuleBreaker Shopping!


This month’s tracking portfolio, David Gardner’s Stock Advisors Rule Breakers, monitors the progress made over the last 14 years.

It’s a dashboard that the Plungers Investment Club would love. (At least for the non-core and adventure component of their holdings.) This month’s tracking portfolio, David Gardner’s Stock Advisors Rule Breakers, monitors the progress made over the last 14 years. We place $100 into each selection/decision and track the progress of that $100 investment over time.

Paths to Super Investor Returns?

The active positions in the RuleBreaker with the highest return forecasts are featured in the accompanying dashboard excerpt. Rule Breakers focuses primarily on underappreciated growth stocks with solid management and a sustainable business strategy. This time-tested approach works. In fact, the Motley Fool Rule Breakers have consistently been among the leaders of Hulbert Financial’s rankings of 5-year performance. The media has taken notice as well with the Wall Street Journal previously calling Rule Breakers manager David Gardner one of the best stock pickers on Earth.

Our cover story review this month documented a 15.1% absolute return over the trailing 14 years — excess relative return of +7.2% over the Wilshire 5000. These results were achieved with a few roller coaster stocks like Amazon, Apple, Priceline.com, Activision Blizzard and Netflix. All of these stocks will have their speed bump moments.

The consensus forecasts in the dashboards may or may not resemble the expectations built by David and the Rulebreaker team of analysts. Tracking portfolio companies that David would deem worthy of study right now include: Illumina (ILMN), Texas Roadhouse (TXRH), Activision Blizzard (ATVI), McCormick & Co. (MKC), Amazon.com (AMZN), Apple (AAPL), Gilead Sciences (GILD) and Disney (Walt) (DIS).

Restoration Hardware (RH) is down 59.4% since selection back on 3/20/15. Do the fundamentals support a closer look? A strengthening economy could provide some bolstering as home repairs mend. The generic pharmaceuticals have been solid and Mylan Labs (MYL) has been on the radar for years. We featured Boston Beer (SAM) recently in the Fave Five and long-time Rulebreaker favorites like Apple, Gilead Sciences, Priceline.com and Amazon have returned to the sweet spot with return forecasts likely to place them in the buy zone. PayPal (PYPL) was recently featured by Kim Butcher during a Round Table session and Starbucks (SBUX) can be a jolt. There’s much to study here. Break at will.

Stock Advisor Rule Breakers. Based on the flagship Motley Fool newsletter, $100 is invested into mentioned companies. The top 16 (by PAR) is shown here. The 14-year annualized rate of return is 15.1%. Source: http://www.fool.com, Stock Advisor

 

Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management for long term investors. Fool on!