Be Careful Out There

This Week at MANIFEST (9/15/2017)

Tell me and I forget. Teach me and I remember. Involve me and I learn. — Ben Franklin

Be careful out there. — Phil Esterhaus, Hill Street Blues

“Historically, September is the worst month for U.S. stock market performance,” wrote Minerd. “Since 1929, the S&P Composite Index has averaged -1.1 percent for September, making it one of only three months with negative average returns over that time. The worst performing single month over this time period was September 1931, when the S&P composite fell 30 percent.” — Scott Minerd, Guggenheim Partners

Call it the Pre-January Effect if you’d like. It’s particularly relevant and pertinent for the smaller, faster-growing companies this time of year. With the January Effect, we benefit from reallocation and tax-related selling by investing in smaller companies that have been unduly punished during the fourth quarter with the hopes that repurchase and first quarter purchasing will restore many of the damaged prices.

The key word is “unduly.” And in the words of George Nicholson (via the 1984 NAIC Investors Manual) and Hill Street Blues Sergeant of the morning watch, Phil Esterhaus, “Be careful out there.”

Nicholson’s stark warning appears on page 98 of the 1984 Manual.

The guidance is offered in the context of his “Challenge”, a switching consideration that is intended to improve the overall portfolio by selling a holding and replacing it with a suitable, bolstering, substitute.

“When you begin this Challenge, the most important rule is requiring that the challenger (or replacement stock) is of equal or higher quality.” [His emphasis added, NOT mine.]

The accompany chart of screening results is from the Value Line Investment Analyzer. As shown, the listing is sorted by Projected 3-5 Year Total Return (Descending.) Needless to say, these return forecasts are red hot.

We draw your attention to the Financial Strength column where many of the companies are C, C+, etc. Remember, a “C” rating from Value Line is equivalent to an “F” from your school days. The ratings don’t get any lower than “C”. You have to reach for at least a “B++” to get above average.

We also note that many of these companies have stock prices less than $10. It’s one piece of the puzzle, but worthy of a yellow flag and caution.

And finally, check out the growth column. There’s not a whole lot of growth here. In the words of David L. Babson, growth conveys “grace” to long-term investors often healing wounds and compensating for buying a good stock at a price where you should have waited. So there’s not a lot of grace in this group … either.

Turnout Terraforming

As a reminder, the monthly Round Table webcasts will continue and not be disrupted by these new Tuesday sessions.

That said, we’ve heard from a number of you that you’d be interested in seeing us tackle some subjects, topics and methods independent of the Round Table sessions. So we will.

Tuesday seems to be a fairly optimum time to schedule additional sessions although we’ll likely have a few “Turnouts” on other days of the week.

We’d like to hear from you. (markr@manifestinvesting.com) What’s on your mind? What topics would you like to see covered? Here are some that have been suggested or considered so far:

  • Getting Risk Right (Cy Lynch)
  • Lessons From The Legends (Hugh McManus)
  • How Can We Calculate Relative Return?
  • Are Quality and Moats Related?
  • What Should Our Investment Club Meetings Look Like?

MANIFEST 40 Updates

  • 9. Cisco Systems (CSCO)
  • 11. Walgreen (WBA)
  • 12. Qualcomm (QCOM)
  • 26. CVS Health (CVS)
  • 28. LKQ (LKQ)

Round Table Stocks

  • Cisco Systems (CSCO)
  • CVS Health (CVS)
  • Gentex (GNTX)
  • LCI Industries (LCII)
  • LKQ (LKQ)
  • Qualcomm (QCOM)

Round Table Sessions (Video Archives)

Best Small Companies

  • 14. Gentherm (THRM)

Results, Remarks & References

Companies of Interest: Value Line (9/15/2017)

The average Value Line low total return forecast for the companies in this week’s update batch is 5.6% vs. 3.7% for the Value Line 1700 ($VLE).

Materially Stronger: Estee Lauder (EL), Modine Manufacturing (MOD)

Materially Weaker: Acacia Communications (ACIA), Synaptics (SYNA), Qualcomm (QCOM), Rite Aid (RAD), Harmonic (HLIT), BT Group (BT), Genuine Parts (GPC), Walgreen (WBA), CenturyLink (CTL), Commscope (COMM), Avon Products (AVP), Pharmerica (PMC), Infinera (INFN), ATN International (ATNI), Dish Network (DISH)

Discontinued: NeuStar (NSR), Reynolds American (RAI)

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 3.7%, an increase from 3.5% 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.

Update Batch: Stocks to Study (9/15/2017)

The average return forecast (PAR) for this week’s update batch is 9.0%.

The Long & Short. (September 15, 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. 1-Year S&P Outlook: 1-year total return forecast based on S&P 1-year price target.

Fave Five: Triple Play (4/14/2017)

Fave Five (4/14/2017)

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 8.8%.

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

  • Air Lease (AL)
  • FleetCor (FLT)
  • LKQ (LKQ)
  • Synaptics (SYNA)
  • Synchronoss Tech (SNCR)

The Long and Short of This Week’s Fave Five

The Long & Short. (April 14, 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 relative/excess return for the Fave Five tracking portfolio is +1.0% since inception. 49.5% of selections have outperformed the Wilshire 5000 since original selection.

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

Fave Five (4/7/2017)

Fave Five (4/7/2017)

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 8.4%.

The stocks from the Finviz Week (3/24/2017) have been doing exceptionally well (relative return = +7.5% already) and we’ll make sure to visit that screening method again — and likely at least once/month.

The Fave Five This Week

  • AmTrust Financial Services (AFSI)
  • LKQ (LKQ)
  • LuLuLemon (LULU)
  • Synaptics (SYNA)
  • Under Armour (UA)

The Long and Short of This Week’s Fave Five

The Long & Short. (April, 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 relative/excess return for the Fave Five tracking portfolio is +1.3% since inception. (The absolute rate of return is 17.0%.) 50.2% of selections have outperformed the Wilshire 5000 since original selection.

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

Fave Five: Gone Irish (3/17/2017)

Fave Five (3/14/2017)

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 7.1%.

The Fave Five This Week

  • Boston Beer (SAM)
  • Exxon Mobil (XOM)
  • LKQ Corp (LKQ)
  • Perrigo (PRGO)
  • Target (TGT)

Gone Shopping With Walter (Schloss) and Hugh

“When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years before the stock sold at 20 which shows that there is some vulnerability in it.” — Walter Schloss

“…the analyst interested in value is likely to place only minor emphasis upon the short term earnings outlook; whereas the analyst who endeavors to anticipate the price movements of the near future will make such outlook his major concern.” —
Ben Graham, Security Analysis

Hugh McManus has been a regular — and very successful stock selector — as a participant in our monthly Round Table series over the last eight years or so. Even in the months when he’s globe trotting and unable to join us, we’ll generally take a quick look for opportunities with a quick stock screen for high quality companies priced near their 52-week (or multi-year) lows. For more on this subject, see: Gone Fishing — Patiently and Disciplined Fishing

If a company is primed for long-term growth, buying it when the price is depressed is better than buying it when it’s at a 52-week high. If the stock price drops to a new low, there’s always bad news to explain the fall, which is one of those obvious truths. I had to learn whether I wanted to fixate on the bad news or focus on the low price of a good company. Most people seem to be transfixed by the news. I take it one step further and hope the bad news persists for a while — it’s where the psychiatrist would step in — as it allows me to buy more.

In 1997, or thereabouts, Ken “Mr. NAIC” Janke, commented that members of the organization were masterful at identifying quality companies, but not nearly as good at picking a low price. I had already adopted the practice of buying companies when they reached or were close to a 52-week low. It’s a rule not a law: for an idealized growth company, today’s close is the new 52-week low.

Ken Janke often spoke of the reality between the high and low prices during a given year for virtually all companies. The range is bigger than most people realize, as underscored by the accompanying chart via Saber Capital Management and John Huber.

Patience is genius in disguise.

The Discipline of Time Arbitrage. Time arbitrage is being willing to maintain a 3-5 year time horizon when most investors
and analysts are thinking about the next quarter. [This represents] a willingness to buy stocks that others are selling for short-term reasons. Many market participants want/need short-term results and so focus is on things like: Catalysts, short-term expectations, quarterly results …

Why Does This Work? Focusing on the long-term is difficult because:

  • Takes patience — There can be periods of under performance.
  • Most investors (clients) want results quarterly, or at least yearly, and so most money managers try to accommodate these short-term demands. (i.e. who cares what Apple looks like in 3 years, how many iphones are they going to sell this quarter??)
  • Short-term thinking (among investors, fund managers, and corporate management teams) is pervasive now, and the speed of technology and information probably intensifies this view.

All of these decisions being made for short-term reasons creates opportunity (and the biggest market inefficiency in my opinion) for those who can look out 2-3 years. Source: Saber Capital Management

StockSearch Results: Hugh’s Hunt For 52 Week Lows. Hugh maintains a short list of vetted stocks, most of which he has been a long term shareholder. He monitors for accumulation opportunities when one of his favorites approaches a 52-week low. For the screening results shown, we’ve limited the field to high-quality (excellent) stocks that are within 5% of their 52-week low, while demanding above average financial strength. [Source: www.manifestinvesting.com StockSearch, 3/17/2017.]

The Long and Short of This Week’s Fave Five

The Long & Short. (March 17, 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 relative/excess return for the Fave Five tracking portfolio is +0.8% since inception. (The absolute rate of return is 19.0%.) 48.5% of selections have outperformed the Wilshire 5000 since original selection.

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

Fave Five (1/20/2017)

Fave Five (1/20/2017)

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 7.7%.

This week we place a little extra emphasis on companies with a strong long-term outlook from S&P. (See S&P Price-to-Fair Value, P/FV)

For more information on joining our 11th annual Groundhog Challenge, launching 2/2/2017, as either a group or an individual investor, drop a note to markr@manifestinvesting.com.

The Fave Five This Week

  • Affiliated Managers (AMG)
  • LKQ Corp (LKQ)
  • Michael Kors (KORS)
  • Mylan Labs (MYL)
  • Perrigo (PRGO)

The Long and Short of This Week’s Fave Five

The Long & Short. (January 20, 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 relative/excess return for the Fave Five tracking portfolio is +3.0% since inception. 46.4% of selections have outperformed the Wilshire 5000 since original selection.

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

Fave Five (1/6/2017)

Fave Five (1/6/2017)

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 7.9%.

For more information on joining our 11th annual Groundhog Challenge, launching 2/2/2017, as either a group or an individual investor, drop a note to markr@manifestinvesting.com.

The Fave Five This Week

  • Cerner (CERN)
  • LKQ Corp (LKQ)
  • Silicon Motion Technology (SIMO)
  • Teva Pharma (TEVA)
  • Under Armour (UAA)

The Long and Short of This Week’s Fave Five

The Long & Short. (January 6, 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 relative/excess return for the Fave Five tracking portfolio is +3.4% since inception. 43.9% of selections have outperformed the Wilshire 5000 since original selection.

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

Fave Five (10/28/2016)

Fave Five (10/28/2016)

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.

So you’re looking at the stocks in the top 1% of all companies according to MANIFEST Rank (Return Forecast and Quality combination) that have the lowest price-to-fair value ratios (P/FV) according to S&P. The P/FV profile for the S&P Platinum Portfolio is shown here:

The Fave Five This Week

  • Abbvie (ABBV)
  • Celgene (CELG)
  • Deckers (DECK)
  • LKQ Corp (LKQ)
  • Stericycle (SRCL)

Context: The median S&P price to fair value ratio is 102%.

The Long and Short of This Week’s Fave Five

The Long & Short. (October 28, 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: 1-year total return forecast based on most recent price target issued by Goldman Sachs.

Weekend Warriors

The relative/excess return for the Weekend Warrior tracking portfolio is +8.7% since inception. 42.6% of selections have outperformed the Wilshire 5000 since original selection.

Tracking Dashboard: https://www.manifestinvesting.com/dashboards/public/weekend-warriors