Fave Five (6/30/2017) Triple Play

Fave Five (6/30/2017)

Our Fave Five essentially represents a listing of stocks with favorable short term total return forecasts (1 year, according to Analyst Consensus Estimates, or ACE) combined with strong long-term return forecasts and good/excellent quality rankings. The average 1-year ACE total return forecast is 9.7%.

This week we return to the triple play screening method for our five favorites. The triple play possibility occurs when you find a stock that is very depressed in price and also appears to be on the verge of substantially boosting its profit margins. The triple play effect is possible in that:

(1) The depressed price of the stock can return to normal levels;

(2) increased profit margins can produce increased EPS and a higher price;

(3) may also cause higher P/E ratios, or P/E expansion.

The Fave Five This Week

  • CVS Health (CVS)
  • Gentex (GNTX)
  • IMAX (IMAX)
  • Infosys Tech (INFY)
  • Monro Muffler (MNRO)

The Long and Short of This Week’s Fave Five

The Long & Short. (June 30, 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. 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. The data is ranked (descending order) based on this criterion. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target. 1-Yr GS: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

Fave Five Legacy (Tracking Portfolio)

The rate of return for the tracking portfolio is 15.2% since inception.

The relative/excess return for the Fave Five tracking portfolio is +0.2% since inception. 45.7% of selections have outperformed the Wilshire 5000 since original selection.

Tracking Dashboard: https://www.manifestinvesting.com/dashboards/public/fave-five

Morningstar Conference (2016)

Morningstar Investment Conference (2016)

“I see investing as the responsible act of the broad middle class, yet there’s still so many people we don’t touch today.” — Don Phillips, Morningstar

The annual shareholder meeting of Berkshire Hathaway has been called the Woodstock of capitalism, drawing tens of thousands of investors from all over the world.

I think the Morningstar Investment Conference might be “bigger” than the annual pilgrimage to Omaha.

Really? Yes, really. On a per capita basis, comparing the number of investors in Omaha versus the over 2000 advisors and practitioners in Chicago, the Morningstar Investment Conference, or #MICUS, might be a bigger “show.” Before you scoff, consider the population of registered advisors and representatives vs. how many attend. Morningstar puts on an effective event and while you’re scratching your head over the per capita comparison, don’t forget there’s an admission price for the Chicago program.

Make no mistake. Don Phillips and the Morningstar gang throw one heckuva party. We’re reminded about rampant fallacies with respect to passive vs. active investing, a growing discovery and emphasis on sustainability, the mistaken generalizations about advisors vs. registered reps, the new DOL fiduciary regulations and a litany of topics worthy of consideration and discussion.

  • “Supporting responsible investing is actually more closely related to behavior modification.” — Don Phillips
  • We’ve been fans of the Morningstar MOAT Fund for some time. Microsoft’s acquisition of LinkedIn (LNKD) provides quite a boost to the fund’s value in recent days. The merits of LinkedIn — and investment thesis — were covered by Morningstar’s Elizabeth Collins during an early panel session.
  • Best Ideas: Biogen (BIIB) and Williams-Sonoma (WSM). (Elizabeth Collins)
  • “Global growth over last four years has been slower … but it’s actually closer to long-term norms.” Prevalent themes: persistent strong U.S. dollar, U.S. treasury yields not justified and some scattered opportunities in emerging markets. (Michael Hasenstab, Franklin Templeton)
  • “Investors should not use a shot gun approach with respect to emerging markets. Use a rifle instead.” (Hasenstab)
  • Reminiscent of a couple of previous Morningstar conferences, Bill Bernstein served as this year’s “Grumpy Old Man” but he seems to agree with many of us on many issues. But he’s a delightful curmudgeon.
  • “The case for index and passive investing has been dramatically overstated.” (Phillips)
  • “Alternative funds are not an investment. They are a compensation scheme.” (Bernstein) [Told you …]
  • What hasn’t been overstated? The cleavage between high-cost and low-cost. (Phillips, Bernstein)
  • “I pride myself on not knowing what stocks are in my portfolios. I’m a Quant.” (Cliff Asness, AQR)
  • I respect and enjoy the work of Rob Arnott (Research Affiliates) and Cliff Asness (AQR). But watching them debate like sumo wrestlers trying to give each other a wedgie in a cage match on the head of a pin is not my favorite post-breakfast activity. I’m glad they believe in “Tin Cup”, grant permission for us to “sin a little” with asset allocation and speculation and I now have a greater appreciation for Smart/Strategic Beta and I’m thankful that at it’s core — we have been doing a lot of the factor-based opportunity stuff for a long time. But most of all, I’m grateful for the elegant simplicity of our methods. It’s a powerful reminder about Occam’s Razor.

(Continuing with our regularly scheduled programming and weekly update …)

MANIFEST 40 Updates

  • 9. Cisco Systems (CSCO)
  • 10. Qualcomm (QCOM)
  • 12. Walgreen Boots (WBA)
  • 37. CVS Health (CVS)
  • 40. LKQ Corp (LKQ)

Round Table Stocks: Cisco Systems (CSCO), CVS Health (CVS), Gentex (GNTX), Inteliquent (IQNT), ITC Holdings (ITC), LKQ Corp (LKQ), Neustar (NSR), Qualcomm (QCOM), Synaptics (SYNA)

Results, Remarks & References

Companies of Interest: Value Line (6/17/2016)

The average Value Line low total return forecast for the companies in this week’s update batch is 5.6% vs. 5.5% for the Value Line 1700 ($VLE).

Materially Stronger: Infinera (INFN), Drew Industries (DW)

Materially Weaker: American Movil (AMX), Synaptics (SYNA), Titan (TWI), Dish Network (DISH)

Discontinued: Time Warner Cable (TWC), Cleco (CNL), Fuel Systems Solutions (FSYS)

Coverage Initiated/Restored:

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 5.6%, unchanged from 5.6% 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.

Breaking.

Guggenheim has reinstated the S&P Small- and Mid-Cap equally-weighted funds: EWSC and EWMC

For a complete list of Guggenheim ETFs, see:

http://gi.guggenheiminvestments.com/products

Market Barometers (Continued)

In honor of this week’s Morningstar Investment Conference in Chicago, their weekly determination of stock prices in general vs. the “fair value” for the overall stock market.

Mstar market fair value 20160615

Stocks to Study (6/17/2016)

  • LKQ Corp (LKQ) — Highest MANIFEST Rank
  • Neustar (NSR) — Highest Low Return Forecast (VL)
  • Borg Warner (BWA) — Lowest P/FV (Morningstar)
  • Arris Group (ARRS) —Lowest P/FV (S&P)
  • China Auto Systems (CAAS) — Best 1-Yr Outlook (ACE)
  • Juniper Networks (JNPR) — Best 1-Yr Outlook (S&P)
  • Verifone Systems (PAY) — Best 1-Yr Outlook (GS)

The Long & Short of This Week’s Update Batch

The Long & Short. (June 17, 2016) 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. 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. The data is ranked (descending order) based on this criterion. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target. 1-Yr “GS” Outlook: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

Cicadas and the Stock Market

This Week at MANIFEST (9/18/2015)

“The cicadas pierce the air with their searing one-note calls; dust eddies across the roads; from the weedy patches at the verges, grasshoppers whir. The leaves of the maples hang from their branches like limp gloves; on the sidewalk my shadow crackles.” — Margaret Atwood

“Nothing in the cry of cicadas suggests they are about to die” — Matsuo Bashō

“There was an electric buzzing sound that was constantly on, acting as background music like a million cicadas in the forest. A constant white noise.” — Missy Lyons

Cicadas have been used as money, in folk medicine, to forecast the weather, to provide song (in China), and in folklore and myths around the world.

The cicada has represented insouciance since classical antiquity. Jean de La Fontaine began his collection of fables Les fables de La Fontaine with the story La Cigale et la Fourmi (The Cicada and the Ant) based on one of Aesop’s fables: in it the cicada spends the summer singing while the ant stores away food, and finds herself without food when the weather turns bitter.

In China, the phrase “to shed the golden cicada skin” is the poetic name of the tactic of using deception to escape danger. It became one of the 36 classic Chinese stratagems. In the Chinese classic novel Journey to the West (16th century), the protagonist Priest of Tang was named the Golden Cicada; in this context the multiple shedding of shell of the cicada symbolizes the many stages of transformation required of a person before all illusions have been broken and one reaches enlightenment. This is also referred to in Japanese mythical ninja lore, as the technique of utsusemi (i.e., literally cicada), where ninjas would trick opponents into attacking a decoy. More generally, the cicada symbolizes rebirth and immortality in Chinese tradition.

In Japan, the cicada is associated with the summer season. According to Lafcadio Hearn, the song of Meimuna opalifera, called “tsuku-tsuku boshi”, is said to indicate the end of summer, and it is called so because of its particular call.

In an Ancient Greek myth, Tithonus eventually turns into a cicada after being granted immortality, but not eternal youth, by Zeus. The Greeks also used a cicada sitting on a harp as emblematic of music. [Sources: https://en.wikipedia.org/wiki/Cicada]

15-17 Year Cycles In The Markets

From the dusty eddies of end-of-summer (or early autumn) corrections to the notions of noise and the reality of 13-17 year cycles, we find elements of investing in all things cicada. And we wish/hope that the flash crash cicadas will experience similar life cycles.

A number of academic studies have pegged market cycles at approximately 15-17 years. We’re not talking about economic cycles, but those secular trends that seem to last about that long. The bull market of 1982 through 2000 is one example. We just might be living through a cicada cycle from 2000-2002 to 2015-2017 until a real bull market returns. How can we say that? Haven’t we been in a bull market for several years?

Perhaps. Stock prices have recovered in recent years, staggering and muddling along to new highs — but there’s an uneasy feeling among many investors that much of it is artificial, bolstered by things like low interest rates, government seizure and ownership of equities and the quantitative easing of the last several years. As this has propagated, general profitability has been flat and hovering near recessionary levels for the better part of the last ten years. Demand has been quenched and productivity maximized.

We updated the VLLTR forecast chart to cover a period of approximately 16 years. This means that the blue trend line just might cover a full cycle and be “representative.” As we counsel, the blue trend is the real long term path and the spikes and troughs in the green bars (Wilshire 5000) spend time above and below the trend line — much like rising and falling tides in the turbulent oceans.

Investors should not be surprised by a migration back to that blue trend — most likely with some pendulum-like overshoot along the way — because regression to the trend is a little (maybe a lot) like gravity and it’s been historically fairly reliable.

If this is true, we’re likely to be presented with some outstanding long-term opportunities over the next few years as the opportunity cicadas awaken and sing.

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 5.8% — in line with the 5.9% for the Value Line 1700.

Materially Stronger: CVS Health (CVS), Dycom Industries (DY), T-Mobile (TMUS)

Materially Weaker: Bioscrip (BIOS), Dana Holding (DAN), America Movil (AMX), Arris Group (ARRS), Cablevision (CVC), Dish Network (DISH) … “Dishonorable Mention”: Qualcomm (QCOM)

Standard Coverage Initiated: Shake Shack (SHAK)

Discontinued: DirecTV (DTV), Catamaran (CTRX), Integrys Energy (TEG)

When Irish Cows Are Smiling

This Week at MANIFEST (3/20/2015)

“There is little value in the single cow.” — Irish Proverb

“Any man who owns a cow can always find a woman to milk her.” — Irish Saying

Happy St. Patrick’s Day, Daniella!

After spending last weekend in Chicago with some Badgers, Spartans, Buckeyes and various other varmints, I was reminded that Chicago starts St. Patrick’s Day early with a parade on Saturday. The streets were packed with throngs of green-clad celebrants and we watched as the Chicago River was dyed green in compliance. I’m not sure I understand the difference between an Irish proverb and an Irish saying … or what is the meaning behind the bovine suggestions here. But given a choice, I think every portfolio needs more than one cow to avoid the adverse effects of cow tipping.

Chicago also honors a famous cow with a play every March, “When Irish Cows Are Smiling.” Set in March 1872, five months since the Great Chicago Fire, the MOO-morial service, held at the Diggum, Deepe & Dye Funeral Parlour, pays tribute to Mrs. O’Leary’s cow, Daniella Joy, the infamous firebug.

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 3.9% — slightly higher than the 3.7% for the Value Line 1700.

Materially Stronger: Gentex (GNTX), Synaptics (SYNA), Drew Industries (DW)

Materially Weaker: Avon Products (AVP), Windstream (WIN), Titan International (TWI), Cincinnati Bell (CBB)

Standard Coverage Initiated: Balchem (BCPC)

Discontinued:

Market Barometer

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 3.7%, up slightly 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.

Stocks to Study (3/20/2015)

  • LKQ Corp (LKQ) – Highest MANIFEST Rank (100)
  • Neustar (NSR) – Highest Low Return Forecast (VL)
  • Express Scripts (ESRX) – Lowest P/FV (Morningstar)
  • Neustar (NSR) – Lowest P/FV (S&P)
  • Bioscrip (BIOS) – Best 1-Yr Outlook (ACE)
  • Neustar (NSR) – Best 1-Yr Outlook (S&P)

Breaking News: Rite-Aid (RAD) actually has a financial strength rating (2%). While Value Line maintains its “C” (0%) rating on Rite-Aid, Morningstar checks in with a “C” … and the effective interest rate is still steep at 6.8% but it is better than it was!

Value Line Low Total Return Screen (6/21/2013)

Companies of Interest

Both CVS (CVS) and Walgreen (WAG) have low total return forecasts of 8.5% during this week’s update. But this week’s nod/tribute is to those of you who have suggested that it was feasible that Rite-Aid (RAD) with its lowest-in-field quality ranking had a viable chance of recovering and cited a change in management that has steadily been working to improve conditions over the last few years. Although still a work in progress, profitability appears to have found thin black ink. Rite-Aid is now at $3.00 up from lows of $0.20 (+1400% since 2009) and some turnaround speculators have been rewarded.

The three companies with the highest fundamental and technical rankings are; Telefonica (TEF), Gentex (GNTX) and Qualcomm (QCOM).

Materially Stronger: Arris Group (ARRS), LKQ (LKQ), Rite Aid (RAD)

Materially Weaker: F5 Networks (FFIV), Nokia (NOK), Frontier (FTR), Cincinnati Bell (CBB), Telephone & Data Systems (TDS), U.S. Cellular (USM)

Market Barometers

The median Value Line low total return (VLLTR) forecast is now 6.2%, down from 6.3% last week.

In a normal distribution, the mean plus or minus one standard deviation covers 68.2% of the data. If you use two standard deviations, then you will cover approx. 95.5%, and three will earn you 99.7% coverage. The median low total return forecast since 1999 is 8.5% with a standard deviation of 3.5%. This means that approximately 70% of the time the low total return forecast will be between 5-12%. 96% of the time, the overall low total return forecast will be between a low of 1.5% and a high of 15.5%.

The excursions “north” of 20% (i.e. March 2009) lie outside the 99.5% probability range, because a three standard deviation swing to the upside would be 19%. This is one of the reasons that March 2009 was a back-up-the-truck, perhaps once in a lifetime buying opportunity.

VL Low Total Return Screen (12/21/2012)

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: None

Materially Weaker: Neutral Tandem (IQNT), NII Holdings (NIHD), Marvell Tech (MRVL), Adtran (ADTN), Rite Aid (RAD), Cisco Systems (CSCO), F5 Networks (FFIV), Regis (RGS)

Point-and-Figure (PnF) Trend Source: Stockcharts.com