Diligence (Weekly)

Diligence. This week’s update provides an up-close-and-personal look at our weekly process for seeking actionable investing opportunities to study.  Our subscribers benefit from this information starting every Monday morning with the roll call, the fundamental updates and the targeted opportunities for further study.  For more on Manifest Investing, go here.

“Diligence is the Mother of good luck.” — Benjamin Franklin

“The expectations of life depend upon diligence; the mechanic that would perfect his work must first sharpen his tools” — Confucius

This week we take a closer look at our weekly report — and specifically — how we think this information is best used by long-term investors.

In a nutshell, we’re checking in on a few key areas. If you’re a shareholder or stockwatcher, we provide a synopsis of the best opportunities in the current (this week’s) update batch from Value Line. We update 1/13th of all companies every week and the best return forecasts for the week are on display in the Companies of Interest: Value Line section.

In the case of Tidewater (TDW), the Value Line low total return forecast (annualized for the next 3-5 years) is 25%.

This was based on the stock price shown ($25.57) on the date of analysis (4/28/2015).

The price is now $29.25 — part of the explanation for the 19.5% on our weekly report. The other source of a difference is that we’re constantly (every day) adjusting the time horizon in addition to the price. That $60 long term low price forecast is a fixed date. In any event, every Monday morning brings a roll call of best opportunities according to Value Line.

Why the Value Line Low Total Return (VLLTR) forecast? Because our research has found this to be the most reliable (actual results vs. forecasts) for the collective of companies covered by Value Line.

And about that $60 entry. This is where we flag opportunities and threats. Any material change (~20-25%) in this long term low price forecast (up or down) is flagged as Materially Stronger (up) or Materially Weaker (down) as we do our Monday morning roll call. If you’re a shareholder or stock watcher for a company that shows up in either roll call, consider it a nudge to see why Value Line seems to have adjusted their expectations — UP or DOWN.

We’ve begun to include direct links to snapshots or thumbnails for some of the flagged companies during these weekly updates. This week, we’ve started with Transocean (RIG) and recent Round Table selection Dril-Quip (DRQ).

When You’re Sailing … Do You Really Care About The Wind?

I think the answer is yes, but it depends. It depends on WHO you are and things like risk tolerance, life expectancy time horizons, opportunistic return maximizing, etc.

For a capital preservationist, we’d like to avoid turbulence like we saw during the Great Recession. This is the reason we track primary market barometers like the overall average return forecast. This characteristic doesn’t tell us when corrections, recessions or bear markets will happen — but it does help to gauge “vulnerability.” Higher quality stocks with higher return forecasts are more recession resistant. Period. On the opposite end, following a recession and significant correction, we “dial up” our interest in more speculative opportunities and increase our dosage of emerging, faster-growing companies.

Our barometers on parade are intended to give a few perspectives on “vulnerability.” The $USHL indicator that we display occasionally is a very broad — and seemingly fairly reliable indicator of rhino behavior. This was inspired by The Big Picture and Barry Ritholtz. You can dig a little deeper on this one at An Attempt to Identify Market Tops ($USHL).

Most of us do very, very little asset allocation — and frankly, it ain’t easy and it’s what most of the investors and asset managers foul up, contributing to overall negative relative returns on average for the average rhino.

That said, Nicholson counseled that when it gets extremely challenging to find stocks to buy or accumulate, it is acceptable (and potentially incrementally rewarding) to build a war chest of cash equivalents to go shopping after the recession and stock price correction has blasted stocks back to elevated return forecasts.

Our Consensus Perspective

While the Monday morning roll call is limited to the Value Line update batch and our efforts to flag threats and opportunities, we reach out and check forecasts and judgments at places like Morningstar, Standard & Poor’s, Analyst Consensus Estimates (finance.yahoo.com) and Goldman Sachs. We audit and update these various resources to generate the Stocks to Study. This list is always sorted by MANIFEST Rank, our combination ranking of return forecast and quality … and we generally limit the field to the top decile or top 5 percentiles of the stocks in the 1/13th update batch.

Polaris Industries (PII) provides this week’s example of deeper digging in the snow … and beyond the snowmobiles for the company. Did you know that snowmobiles account for less than 10% of annual revenues?

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 5.6%.

Materially Stronger: Transocean (RIG), Air Products (APD), Hilton Worldwide (HLT), Penn Gaming (PENN), Scientific Games (SGMS), Cambrex (CMB)

Materially Weaker: Wynn Resorts (WYNN), Input Output (IO), National Oilwell Varco (NOV), Melco Crown (MPEL), Oasis Petroleum (OAS), Dril-Quip (DRQ), Oceaneering International (OII), FMC Techologies (FTI), Interpublic Group (IPG), Carbo Ceramics (CRR)

Standard Coverage Initiated: [G-III Apparel (GIII)]

Discontinued: Konami (KNM)

Market Barometers

Value Line Low Total Return (VLLTR) Forecast. The long-term low total return forecast for the 1700 companies featured in the Value Line Investment Survey is 3.6%, unchanged from 3.6% last week. For context, this indicator has ranged from low single digits (when stocks are generally overvalued) to approximately 20% when stocks are in the teeth of bear markets like 2008-2009.

$USHL: Watching Rhino Walk, Not Rhino Talk. If you believe supply-and-demand matters (and you should) then the collective actions of the herd have bearing. By monitoring the relationship of new highs vs. new lows, we get an early warning clarion that signaled as Halloween 2007 approached. Current $USHL is weakening as the Sell-In-May-And-Go-Away herd begins to hold sway. We’ll be vigilant for this broad sentiment indicator to break 100 on the long-term moving average and/or break into negative territory.

Stocks to Study (5/8/2015)

Seeing fairly significant increases in the 1-year analyst consensus estimate for companies like Baker Hughes (BHI) and Schlumberger (SLB).

  • Polaris (PII) — Highest MANIFEST Rank
  • Wynn Resorts (WYNN) — Highest Low Return Forecast (VL) with Quality Rank > 60
  • Wynn Resorts (WYNN) — Lowest P/FV (Morningstar)
  • SeaDrill (SDRL) — Lowest P/FV (S&P)
  • Harte Hanks (HHS) — Best 1-Yr Outlook (ACE)
  • FMC Technologies (FTI) — Best 1-Yr Outlook (S&P)
  • Wynn Resorts (WYNN) — Best 1-Yr Outlook (GS)

Stocks to study 20150508

Undervalued Stocks: Dirty Dozen

Many of you are familiar with the Stock to Study / Undervalued feature in every monthly issue of Better Investing.

During the years I served on the stock selection committee, there were times when we wondered about the basis for the undervalued selection — in some cases, it seemed like the runner up to the Stock to Study selection.

But the intent was to identify a stock with either (1) a near-term, 12-18 … perhaps even 24 month catalyst that could lead to outsized returns, or (2) a stock that had been beaten down so badly that the return forecast was elevated. In some cases, stocks that would struggle to qualify for the core constituents of our portfolio were included.

The Dirty Dozen will be a version of this. In this case, the field is limited to stocks with quality rankings above 50 (above average) and with the highest return potential based on the difference between current price and the analyst consensus target price. It should be obvious that the 1-year horizon is pretty squishy so we won’t be doing any calculations out to four decimal places. [Grin]

In this case, for this week, it’s fascinating and coincidental that a stock mentioned by the Manifest Investing door prize subscription at last weekend’s StockFest 2015 in Grand Blanc would be the featured stock, Rockwell Medical(RMTI). This promising and potentially emerging Wixom, Michigan company is possibly worthy of a spot on our speculative radars. Our prize winning investor holds a significant number of shares and is hoping the company emerges and makes like a roman candle — at least for a while.

The other important aspect of our Dirty Dozen is that it extends outside the update batch for the week. The universe is all companies (~2400) covered by Manifest Investing.