Fave Five (2/10/2017)

Fave Five (2/10/2017)

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 6.8%.

The Fave Five This Week

  • BT Group (BT)
  • Gildan Activewear (GIL)
  • Jazz Pharma (JAZZ)
  • QUALCOMM (QCOM)
  • Silicon Motion Technology (SIMO)

The Long and Short of This Week’s Fave Five

The Long & Short. (February 10, 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 +1.9% since inception. 50.2% of selections have outperformed the Wilshire 5000 since original selection.

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

Fave Five (2/3/2017)

Fave Five (2/3/2017)

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 8.0%.

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

  • Gildan Activewear (GIL)
  • Jazz Pharma (JAZZ)
  • QUALCOMM (QCOM)
  • Silicon Motion Technology (SIMO)
  • Transdigm Group (TDG)

The Long and Short of This Week’s Fave Five

The Long & Short. (February 3, 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

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.

MANIFEST 40 (3/31/2016)

Your Most Widely-Followed Stocks: An Update

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

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.

MANIFEST 40 (March 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 +20.3% (annualized) since then. Figures in parentheses are the ranking back in December 2015.

The rate of return is 9.0% since inception (9/30/2005). Bottom line? On an annualized basis, your community favorites have beaten the Wilshire 5000 by +3.6 percentage points — a relative, or excess, return that probably portends outsized success with our actual portfolios.

Quality (90) is solid and the overall return forecast (8.9%) is positioned to outperform the Wilshire 5000. At an average sales growth forecast of 6.8%, we’d to see some faster-growing companies adopted by our community.

Capturing Attention: Chargers

Gilead Sciences (GILD) moved from #25 to #22 as most of the list remained rather steady. Visa (V) is a new addition at #40. The results of $100 positions investing in any of the Top 40 companies can be viewed at any time via the public dashboard on the home page.

“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.”

Press On: Six Stocks for 2016

Press on.  2016, so far, hasn’t been much to cheer about.  But the long-term perspective hasn’t cratered and your 401(k) isn’t locked in the Titanic safe while a bunch of icebergs make like rocket-powered grenade launchers — no matter what those news anchors say.  Based on the things that matter to long-term investors, press on.  Here are some shopping ideas to rake across the fireplace coals while remaining focused on what matters.

What Do We Do Now?

Answer: “Same thing we do every day, Pinky.” — The Brain.

Bottom Line: It’s still OK to be optimistic about the future. Invest. Invest well. Be selective and discover industry leaders when they’re on sale. Simply put, the same thing we do every day. Invest regularly. Although growth rates have moderated, Armageddon isn’t here yet and continue to design and maintain portfolios with overall average sales growth rates of 10-12% if you have a long time horizon and risk tolerance. Turbulent times shouldn’t be a surprise. To most of us, they’re not. Do not be surprised when P/E ratios moderate and retreat a bit as Quantitative Easing (QE) dwindles, interest rates swell a bit and the huffing and puffing that has bolstered the market over the last couple of years (while profitability was challenged) subsides.

Value Line 1700 ($VLE): Long Term Performance

On January 1, 2000 the even-weighted index value of the 1700 stocks featured in the Value Line Investment Survey was 1025.80. Sixteen years later, $VLE reached a value of 4358.69.

This is an annualized total return of 9.5%. (S&P 500 advanced 3.9% during the same 16-year period)

The world ended at least twice during that sixteen year period. During the most recent excursion during the Great Recession, Warren Buffett shared that he hoped that he lived long enough to experience the next market break. Once again, he may be right. And present.

Value Line 1700. The arithmetic average (equal weighting) means that the index didn’t get extra credit for Amazon, Apple, Facebook, Google or Netflix during 2015. As such, $VLE was down -6.9% during 2015 as shown by the 12-month rate of change (ROC) portion of the graphic.

Why The Value Line 1700?

9.5%. It bears repeating.

That’s 5.6 percentage points (560 bps) better than the S&P 500 during the 16-year period.

We like to do much of our shopping here. 39-of-the-40 most widely-followed stocks by Manifest Investing subscribers hail from the 1700. Only PRA Group (PRAA) is a current exception — and may actually warrant some accumulative speculation at this time. More on that later.

We believe in all-of-the-above shopping and we know that it makes strategic sense to discover and own large, medium and smaller companies in order to nail down that balance between the slower growing blue-chip stalwarts and the promising upstarts. The Value Line 1700 provides a pretty good vista of qualifying opportunities. We do look forward to the day when some of the Best Small Companies For 2016 join the VL 1700 and ultimately, the MANIFEST 40.

The other reason is that we like to be Schlossian in our investing efforts. For those unfamiliar, check out the works of Buffett colleague and friend, Walter Schloss, and his reinforcement that any and all of us can do this — and experience successful long-term investing. Walter rarely shopped outside the VL 1700.

Value Line 1700 Industrials: Sales History & Forecast Trend

The long-term growth rate of the aggregated sales for the Value Line industrials is now approximately 6% — a condition “eerily” suggested in our June-2009 cover story, Grated Expectations

If we squint, we can see 2015 take a “dip” that actually rivals 2008-2009 a bit. This probably accounts for much of the angst prevalent among most of the talking heads.

Yes, Europe continues to struggle. China slows. Demand for petroleum is stunningly low at a time when production is peaking despite the curtailment of higher-cost production alternatives that have terraformed the energy landscape over the last few years. The American consumer is better but still slogging through molasses when it comes to disposable income and consumption. Political candidates tell us just about anything they think we want to hear to get elected.

But it ain’t Armageddon. It’s not different this time.

And this is why we invest.

Value Line 1700 Industrials: Profitability Trends

This image is probably the keystone in our long term perspective.

First, it’s a tribute to the optimism of the Value Line analysts. Their 3-5 year forecast for most companies is perpetually unprecedented. Someday we’ll have the dream of commercialized nuclear fusion, a cure for cancer and the common cold and they’ll be right with the long term profitability forecast. But for now, it’s our reminder to shave a little off the top while performing our own studies and checking in with the Value Line net margin (and ROE) forecasts.

Second, although 2015 was nothing to write home about, it’s not Armageddon either. The relatively low net margin results (still taking shape, by the way, as the 4Q2015 company confessions roll in) go a long way to explain that Goldilocks aura that many of us feel. Things are better. But they’re not what they should be — at least not yet.

That said, even discounting the 2019 elephant on this graph, the long term trend is favorable and American innovation and optimism is still alive and kicking. Imagine if we’d ever start to tackle/eliminate the corporate income tax malignancy that continues to give the rest of the world a head start and tilted playing field when it comes to manufacturing and delivering goods to We, The People. It’s on the list with fusion, cancer cures and we can dare to dream.

Value Line Industrials ($VLE): Valuation Trends

It’s beginning to appear that 2014-2015 was something of a peak when it comes to P/E ratios.

The surge was likely fueled by low inflation/low interest rates, shadowy accumulation of stocks and continued respect for the best companies who seem to prevail and persist in the face of steep challenges.

That … and probably a little exuberance thrown in for good measure. We noted that the Value Line low total return forecast did hover at multi-decade lows during this period and the same has been true for MIPAR (median return forecast for all companies covered at Manifest Investing.)

The P/E that matters most to us is the projected average P/E in our forecasts and the average for the 3-5 year forecast at Value Line seems headed more for 18x than 22×. It’ll be interesting to see the Value Line expectations when the data array ratchets one column soon, displaying one year further out.

MANIFEST 40: The Long and Short

Price Targets and Veracity

In the preceding chart, some (including me) have wondered about the utility of gauging one-year expectations alongside our traditional long-term forecasts. Intuitively, I’d like to think that pursuing a company with a solid long-term perspective (relatively high return forecast) in combination with sentiment-fueled 1-year expectations could be an effective combination.

Looking back at the MANIFEST 40 from one year ago — the average 1-year total return forecast was 6.6%. The actual return from our favorite 40 stocks turned out to be 4.7%. (Keep in mind that the “average stock” was down -7%.)

But — for any given stock — as shown in the accompanying chart, it’s really pretty much of a “crap shoot” for one year results. This is not a surprise. We know this as the perpetual dance of the rhinos as short term forecasting is almost always Dremaned.

There is, however, a glimmer of hope. And it comes in the same type of condition that we witness with overall performance of portfolios vs. individual stocks. When gauging performance in groups, accuracy gets better.

In this case, the top six stocks with the best 1-year return expectations back in January 2015 actually delivered a combined performance of 16.7%. See FAST, GE, GOOG, JNJ, MSFT, and TEVA in the chart below.

The stocks with the six weakest 1-year expectations were CSCO, COH, CTSH, PAYX, QSII and WMT. These six combined for a collective result of 0.9%.

How To Read This Chart. This chart displays the actual 1-year total returns for most of the MANIFEST 40 most widely-followed stocks versus their 1-year total return forecast from January 2015. For example, General Electric (GE) had a total return forecast of 20.8%. This is plotted on the x-axis. The point (20.8%, 27.5%) provides the comparison of the 1-year result (27.5%) plotted on the y-axis.

Results, Conclusions and the 2016 Outlook

First and foremost, we’re reminded that these (40) stocks collectively represent a top shelf collection of high-quality companies that rank among the most closely-followed stocks by our subscribers. To me, that means it’s a fertile ground for promising opportunities under the right conditions.

The average 1-year total return forecast for these (40) stocks is 23.5% (1/18/2016). It will be interesting to see if this persists or drifts as the rhinos attempt to focus on the challenges ahead for 2016.

If we’re looking for shopping opportunities, it’s OK to focus on the best long-term return forecasts, for example Apple (AAPL), Buffalo Wild Wings (BWLD), Cognizant Technology (CTSH) and Gilead Sciences (GILD).

Based on the cursory observations made here, I think I’d be inclined to take a closer look at the six companies with the highest 1-year total return forecasts. Yes, I admit that I don’t expect correlation between forecast and actual for any of these flying on their own — but collectively, it’s as compelling as our dashboard-centered foundations. Those six stocks would be:

  • PRA Group (PRAA) — granted, something of a speculation and wrought with “turbulence”
  • Apple (AAPL) — well, just because.
  • Schlumberger (SLB) — because fossil fuels aren’t going away any time soon, sorry …
  • Qualcomm (QCOM) — because the juggernaut may still have some cards up its sleeve
  • LKQ Corp (LKQ) — because new car sales could peak and there’s still a lot of marginally skilled drivers out there.
  • Gilead Sciences (GILD) — because they persist in building solutions and chemistry that improves lives.

The average 1-year total return forecast for these six selections is 48.4%

The six stocks I’d avoid, or subject to a Spanish Inquisition if suggested any time soon, would be: Coca-Cola (KO), Exxon Mobil (XOM), FactSet Research (FDS), Fastenal (FAST), Quality Systems (QSII) and Wal-Mart (WMT). — because among many other factors, the rhinos haven’t forgiven some of these yet. (But it’s probably a temporary condition for most of them.)

With the maturity that embraces simplicity, Press On!

Hot Links & Fractured Fairy Tales

Hot Links & Fractured Fairy Tales

I’m often asked about the utility of Twitter and similar “newsfeed” type services. I have to admit that I was extremely skeptical about 140 character blasts and an endless stream back when I first started exploring but I rapidly discovered that Twitter can be a path to discovering and sharing information.

Favorite “Follows” by @ManifestInvest

At Twitter you “follow” people that you’d like to hear from. For me, this includes a number of friends, and it also includes investing-related thought leaders and information providers. I also subscribe to (follow) sources like the various Fed research departments (Minneapolis & St. Louis rock) and companies that I follow. Some of my favorites:

  • @ritholtz — http://www.ritholtz.com/blog/
  • @eddyelfenbein — http://www.crossingwallstreet.com
  • @StovallSPCAPIQ — Sam Stovall (Standard & Poor’s)
  • @BobBrinker
  • @SelenaMaranjian — writer for www.fool.com (also Brothers Gardner via @TomGardnerFool & @DavidGFool)
  • @lecreative — Amy Buttell, colleague and Better Investing alum, writes on “all things financial.”
  • @TMFHousel — not just another Fool
  • @NateSilver538
  • @ReformedBroker — Joshua Brown

As an example, let’s take a look at a recent reading list shared by Josh. I generally find 2-3 things to scan whether it’s Eddy, Barry or Josh laying out the smorgasbord.

Here’s the link: http://thereformedbroker.com/2015/11/17/hot-links-fairy-tales/

What I’m reading this morning:

  • US dollar screams to a 7 year high (Bloomberg)
  • Stocks: Top 10 High-Conviction and New-Money Purchases (Morningstar)
  • Soros lightens up his bet against the S&P 500 (MoneyBeat)
    …and he joins Icahn in a bet on PayPal (Business Insider) — [… one for Kim Butcher and Round Table followers]
  • Alphabet, Amazon Lead A.I. Charge as Machines Take Over, Says UBS (Barron’s)
  • CEO of Alerian Index admits that MLPs are sensitive to oil prices. So much for the “toll collector” fairy tale (ETF.com)
  • Investment banks’ revenue set to decline again in 2015 (Reuters) — probably explains down draft in stock prices of asset managers
  • Home Depot continues to crush it. Another flawless quarter. (Business Insider)
  • Cliff Asness: Good investing is not about genius, it’s about fortitude (Business Insider)
  • Retailers hate those new credit card chips (New York Times)
  • Children born today will most likely live on average to their late 80’s (Upshot) — … one of our favorite themes

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)