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!

MANIFEST 40 Update (9/30/2016)

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

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

The 40 stocks are something of a barometer because we know that these community favorites are not simply followed … most of them are also widely owned, with considerable diligence and vigilance.

The rate of return remains at 8.8% since inception (9/30/2005) vs. 5.8% for matching investments in the Wilshire 5000 for an excess/relative return of +3.0%. We believe that this portends success for many of our subscribers and investors.

MANIFEST 40: September 2016. Performance Results. These are the most widely followed stocks by Manifest Investing subscribers. Current leader Apple (AAPL) was added on 9/24/2009 and steadily climbed the ranks while generating a relative return of +19.1% (annualized). Figures in parentheses are the June 2016 rankings. Tracking dashboard: https://www.manifestinvesting.com/dashboards/public/manifest-40

Quality is still solid at 90 and the overall return forecast is 9.0%, pegged to slightly outperform the Wilshire 5000 or S&P 500. The average sales growth forecast is 6.6%. Again, we’d like to see an emphasis on discovering smaller, faster-growing companies — the focus of our Discovery Club efforts. We miss smaller, less discovered, companies poised to make difference, like Bio-Reference Labs (BRLI) did.

The top performers continue to be Apple (AAPL), Cognizant Technology (CTSH), Starbucks (SBUX), and Home Depot (HD). 57.5% of the decisions have outperformed the market.

Capturing Attention: Charger

CVS Health (CVS) advanced from #34 to #29. We’ve noted that CVS has been ubiquitous on screening results for a while and collectively, you’ve noticed. Fastenal and Microsoft swapped positions in the top 5 but there are no new entries to the 40 this quarter.

The results of $100 invested into any of these positions at the time of addition can be viewed at any time at: https://www.manifestinvesting.com/dashboards/public/manifest-40

We’ll continue to hope that a few promising faster growers will penetrate a future roll call.

Wall Street on Water … Ahead

This Week at MANIFEST (9/23/2016)

If you’ve ever wondered what a cruise ship class room looks like, here’s Christi Powell (Oklahoma City) aboard the Holland Cruise Lines Westerdam doling out another one of her exceptional classes on common sense financial matters. This voyage had two side-by-side class rooms, attended pretty much as you see here. As you can see, it’s like any other class room — except for the glaciers, whales, salmon and Alaskan fjords out the window.

Relatively small blocks of time (1 hour each) were carved out during the cruise to present a number of investing-related classes over a span of seven days. It was the first time Manifest Investing had attended and participated in one of these efforts and we came away impressed with the potential. The pace was unhurried and attendees had plenty of opportunities over dinners and while navigating the waters to discuss just about anything. We’ll probably explore collaborating with Better Investing and reaching out to some other communities for a Boston-to-Montreal version of this cruise next year. Stay tuned for more details and please send us a note (manifest@manifestinvesting.com) if you’d be interested in exploring more details about a future cruise… and we’ll add you to the “Maybe” Manifest. (grin)

There were many highlights and we’ll continue the roll out of the handbook chapters we issued to our ship mates in days ahead.

MANIFEST 40 Updates

  • 4. Fastenal (FAST)
  • 15. Procter & Gamble (PG)
  • 31. Home Depot (HD)
  • 35. Lowe’s (LOW)

Round Table Stocks: Chicago Bridge & Iron (CBI), Fastenal (FAST), Tractor Supply (TSCO)

Best Small Companies (None this week)

Results, Remarks & References

Companies of Interest: Value Line (9/23/2016)

The average Value Line low total return forecast for the companies in this week’s update batch is 5.0% vs. 5.0% for the Value Line 1700 ($VLE).

Materially Stronger: Ethan Allen (ETH), Bemis (BMS)

Materially Weaker: Sunpower (SPWR), Tractor Supply (TSCO), Tile Shop Holdings (TTS)

Discontinued: Cablevision (CVC), Elizabeth Arden (RDEN)

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 5.0%, unchanged from 5.0% 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 (9/23/2016)

The Long & Short. (September 23, 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 viawww.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.

Stock Selection & Portfolio Management September 24, 2016 at 9:00 AM ET Indianapolis, Indiana

Ken Kavula & Mark Robertson will be the featured presenters at this all-day educational workshop for long-term investors. Overview of Analysis (We’ll actually do a case study — walking through the analysis with exposure to our favorite resources and research.) Common Ground – How investment clubs take care of a portfolio. We’ll review portfolio design and discuss management considerations. What is effective stock “watching?” How can we best be vigilant for opportunities and threats to our holdings? Discovery – A demonstration of various screening resources with a look at some of our favorite resources. An Industry Study – Taking a discovery and putting it through its paces to ensure that we’re considering (or accumulating and retaining the best of the best) Let’s Talk Stocks – An interactive, audience-driven discussion of specific study ideas and case studies.

For more information: Go here.

September Round Table September 27, 2016 at 8:30 PM ET ONLINE

Stocks Featured: TBD

The Round Table tracking portfolio has beaten the market by 3-4 percentage points over the last five years. Consider joining Kim Butcher, Ken Kavula, Hugh McManus and Mark Robertson as they share their current favorite stock study ideas.

We will be continuing the discussion of the relative return-based selling guideline for portfolio management.

Registration: https://www.manifestinvesting.com/events/199-round-table-september-2016

Discovery Club

“Dump your hedge funds and explore their small-cap stock picks.”

Small cap is not necessarily small (faster-growing) companies but in general, we like the idea of a nice blend. So yes, we’re interested in hunting down some actionable ideas among the most successful investors on our radar screen — seeking companies that aren’t on too many radar screens, yet.

The discovery of smaller, promising and faster-growing companies has always been one of our favorite (and rewarding) activities. In that spirit, we’re expanding our efforts in this realm. This week, we redouble our efforts to discover some smaller, less discovered companies and add them to our coverage. The EXTENDED EDITION of the Value Line Investment Survey will be the first resource scanned and we’ll also take a look at some new positions or significant accumulations among our Best Small Company Funds starting with Brown Small Company.

But it doesn’t end with only the smaller companies, we’ll also be vigilant for opportunities flagged by reviewing the quarterly filings of idea generation resources like the Renaissance Technologies hedge fund.

This Week’s Sources and Suggestions

  • ITC Holdings (ITC) — Thanks, Marty Eckerle (Temporary Reinstatement)
  • Value Line Investment Survey

Coverage Initiated/Restored: CalAtlantic (CAA), Fonar Corp (FONR), ITC Holdings (ITC), State National (SNC)

Market Barometers (Continued)

By popular demand, it’s probably time to check in on our of favorite, albeit obscure, market barometers.

US New Highs-New Lows ($USHL)

The long-term trailing average for $USHL actually dipped below zero within the past year — and trepidation was a little more rampant. But as shown here, the storm seems to have passed.

 ushl 20160921

When Squirrels Get Hot Feet


In honor of that huge geographical electrical outage ten years ago this weekend, here’s a throw back to a Better Investing column I wrote at the time.

“Water, water, everywhere and not a drop to drink.”

Alex, our 13-year-old, and I were returning from a couple of days of camping and canoeing in northern Michigan. About 90 minutes from home, I decided to check in with my spouse. “All circuits are busy. Please try your call again later.” For me,“later” is approximately five seconds whenever I encounter that message. So I tried again. “All circuits are busy.” It became obvious that something was amiss because I continued to redial every 5 to 10 minutes for nearly two hours. “All circuits are busy.”

“All circuits are busy.”

We rolled into town to find all the traffic lights out of service, with the expected gridlock. A five-minute spin across town turned into a one-hour start-and-stop marathon. It was nearly 100 degrees outside. People really like their air conditioners when the temperature exceeds two digits. In fact, people were liking their air conditioners — a whole lot — from Indiana to Maine.

All Circuits Are Busy

As of a few days later, the cause is yet unknown. We do know that a power plant on the shores of Lake Erie tripped, much like the circuit breakers in your house — removing several hundred megawatts of electricity from the supply. In an instant, power was rerouted along an alternate conduit.

As it turned out, the telephone circuits weren’t the only ones that were real busy. The additional power did the same thing that your spouse or teenagers do to a home circuit when they plug a hair dryer, a CD player, the toaster oven and their cell phone recharger into the same outlet. It got hot. Birds and squirrels got hot feet and a really big circuit breaker did exactly what it was supposed to.

It said, “No.”

At the same time, a power plant on the shores of Lake Michigan decided to misbehave. Slumbering gremlins all over this electrical grid decided to hold a party and wreak some havoc. They wreaked well. The power plants in the eastern Midwest could no longer keep up.

An automatic appeal from the wires and power plants in Ohio and Michigan requested more power from plants in New York and Maine. Other wires got hot. The gremlins were ecstatic at the amount of trouble they had started. Factories, businesses and residences from Michigan to New York were plunged into darkness.

Hot Dogs!

I turned on the radio. I once had a job where the map of the North American Electric Reliability Council hung on my wall. The map displayed every wire and power plant in North America. I explained what was happening to Alex. He listened carefully as the man on the radio confirmed that we’d probably be without power for three or four days. How did Alex assess the situation? “Cool.”

Alex was probably the only one using that characterization at the time. We diverted our attention from the traffic jam and steered into the parking lot of our local Home Depot. A stack of batteries, three new flashlights, a couple of propane tanks, some charcoal and several hot dogs later (yes, Home Depot sells hot dogs, too,) I was beginning to understand “cool.”

The lower level of our home became an extended campout and the scene of a number of Axis and Allies board game battles. We barbequed nearly everything in the freezer and had a feast.

But we had water at the campsite in northern Michigan.

We learned that our local water supply is quite dependent on electricity, too. No matter how hard we turned the faucet,we had no water. Living without electricity is a challenge and can even be “cool” for a while. Living without water is not.

Please do try this at home. Throw the main breaker. Turn the valve and shut off the water supply to your home. See how long you can last. I believe you’ll pine for the water before the “juice.” You’ll probably be reminded to establish some jugs of water in your basement. We were.

Alex was despondent when the lights came back on. We promised each other that we’d leave the television off for one more day. When Internet service returned, I spent some time learning about infrastructure and water supplies. I refreshed my memory about electricity reserve margins and reliability. I’ve added a backup power supply for our local municipal water pumps to my list for Santa. We need to think about whether we have enough power plants and wires. Where will we get tomorrow’s water?

The development of electricity, water and waste water projects — at home and abroad — is vital for growth and probably represents opportunity for strategic investors.

Alex always defeats me at Axis and Allies when my infrastructure breaks down.