January Effect in July?

This Week at MANIFEST (7/15/2016)

“Self-taught, are you?” Julian Castle asked Newt.
“Isn’t everybody?” Newt inquired.
“Very good answer.” ― Kurt Vonnegut, Cat’s Cradle

Winter is Coming.

Huh? “We’re melting over here and you want to talk about winter?”

Well, yes.

This week’s update batch is pretty “dormant.” We’ve been doing this for a long time and don’t remember the last time we had so few changes and/or materially stronger/weaker triggers. There’s only a couple in this week’s batch.

And yes, it’s the lazy hazy days of summer when Wall Street packs it in early on Fridays, heads for the Hamptons, and the trading volumes wane. So we pass the ice cream and our thoughts turn to January.

January?

The January Effect is a result of tax-loss selling which causes investors to sell their losing positions at the end of December. The January Effect is predicated on the idea that these stocks, which have been sold off to realize the tax losses, will be at a discount to their market value.

And the effect is most prominently manifested among the smaller, faster-growing companies.

This is a best practice that we’ve counseled in the past. Start earlier. Don’t wait. Sell earlier (because the institutions are probably doing this) and build your shopping lists well. Hunt down the opportunities during the fourth quarter and use your best judgment about assuming ownership as the year winds down … or early in January.

In that spirit, Manifest Investing will be working to add more small companies. Every week we see a persistent attrition and a loss of companies in the Value Line universe of 6000+ companies as M&A continues and fewer new companies take shape. We’ll be gearing up for our Best Small Company list to be published around Halloween and will be adding companies in earnest between now and October 1. Monitor the coverage list here in the weekly updates for opportunity and Ken Kavula has suggested that he will chime in on discoveries of promising faster growers as they come into focus.

We’re also going to mine the list of holdings at Renaissance Technologies (RenTec) using a variety of resource including www.insidermonkey.com. Why monitor the exploits of Jim Simons and his team??? (1) Check out this TED Talk: The Mathematician Who Cracked The Wall Street Code and (2) this excerpt of the hedge fund’s track record …

MANIFEST 40 Updates

  • 8. General Electric (GE)
  • 24. Danaher (DHI)

Round Table Stocks: ABB (ABB), MSC Industrial (MSM), Stifel Financial (SF)

Results, Remarks & References

Companies of Interest: Value Line (7/15/2016)

The average Value Line low total return forecast for the companies in this week’s update batch is 4.9% vs. 6.0% for the Value Line 1700 ($VLE).

Materially Stronger: AAON (AAON)

Materially Weaker: Stonemor (STON)

Discontinued: Constant Contact (CTCT)

Coverage Initiated/Restored: LGI Homes (LGIH), United-Guardian (UG), Nature’s Sunshine (NATR), WCI Communities (WCIC), Clearwater Paper (CLW), Huttig Building (HBP), Mastech (MHH), Citizen’s Holding (CIZN), United Bankshares (UBOH), Citizen’s Financial (CFG), Liberty Interactive (QVCA)

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 6.0%, down from 6.1% 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 (7/15/2016)

  • Akamai Technologies (AKAM) — Highest MANIFEST Rank
  • Investment Technology (ITG) — Highest Low Return Forecast (VL)
  • Stifel Financial (SF) — Lowest P/FV (Morningstar)
  • Morgan Stanley (MS) —Lowest P/FV (S&P)
  • LSB Industries (LXU) — Best 1-Yr Outlook (ACE)
  • Charles Schwab (SCHW) — Best 1-Yr Outlook (S&P)
  • Stifel Financial (SF) — Best 1-Yr Outlook (GS)

The Long & Short of This Week’s Update Batch

The Long & Short. (July 15, 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.

Discovery Club

From the article, “How To Beat The Market By 20 Percentage Points”, the author suggested:

“Dump your hedge funds and imitate 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.

Coverage Initiated/Restored: LGI Homes (LGIH), United-Guardian (UG), Nature’s Sunshine (NATR), WCI Communities (WCIC), Clearwater Paper (CLW), Huttig Building (HBP), Mastech (MHH), Citizen’s Holding (CIZN), United Bankshares (UBOH), Citizen’s Financial (CFG)

https://www.manifestinvesting.com/dashboards/public/discovery-club-20160715

This Week at MANIFEST (6/24/2016)

This Week at MANIFEST (6/24/2016)

“… it took me about 11 years to get a record deal, and I just had to work around and come to terms with the fact that what I was doing was going to be different, and I just had to wait until somebody was ready to jump on the bandwagon.” — Lee Ann Womack

What we do is different.

The modern investment club movement was a big tent … and a considerable bandwagon. Unfortunately, people’s capitalism and the stewardship of common stock OWNERSHIP has hit a bit of a speed bump, or worse. It’s pretty clear that some WD-40 is needed. The results achieved by the persistent are compelling. But too quiet.

What we do is different. We have no problem with things like discounted cash flow analysis — we believe that we’re chasing fewer variables and that SIMPLER is usually better when it comes to the realm of investing.

“Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom. In forty-four years of Wall Street experience and study I have never seen dependable calculations made about common-stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.” — Benjamin Graham, The Intelligent Investor

Amidst the chaos, turbulence and avalanche of information, we find it rewarding and seemingly more reliable to focus on growth, profitability and valuation in a different kind of model. As is often the case, an event like last week’s Morningstar Investment Conference serves to remind about the value of being simple … and different.

The audience gasped when Keith Lee of Brown Capital Management confessed that in 25 years of successful investing that he’s never owned a financial sector stock. In his own words, Brown is “sector benchmark agnostic.” Brown Small Company (BCSIX) has a 10-year relative return of +5.7%.

Keith Lee and Brown Capital Management are different.

MANIFEST 40 Updates

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

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

Results, Remarks & References

Companies of Interest: Value Line (6/24/2016)

The average Value Line low total return forecast for the companies in this week’s update batch is 4.8% vs. 5.6% for the Value Line 1700 ($VLE).

Normally we exclude (filter out) those companies with quality rankings less than 60. We left them in to make a point. When a bull market has been running for a while — and is perceived to be in jeopardy — investors and traders will flock to defensive stocks. The companies with high EPS stability and high quality will see their return forecasts driven down as they’re overbought if seen as sanctuaries. This week’s list and update batch is evidence of that.

There are a number of companies in the update batch that would be most welcome as core holdings in many of our portfolios including the likes of Bemis (BMS), Kimberly Clark (KMB), Sonoco (SON) … but the average MANIFEST Ranking for the Issue 6 companies is 44. In other words, the average company in this update is outranked by 56% of the companies in our database. The reason behind this is related to the flight to quality in many cases.

In most cases, it makes sense to wait for a Better Bandwagon.

Materially Stronger: Lumber Liquidators (LL), Martin Marietta (MLM), Tempur Sealy (TPX), Tile Shop (TTS) [Reminder: These step change upgrades do not necessarily imply a “buy” condition … in some cases, it’s a switch from “sell” to “weak hold.”]

Materially Weaker: Beazer Homes (BZH), Restoration Hardware (RH), Aegion (AEGN)

Discontinued: Jarden (JAH), Sun Edison (SUNE)

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.

Stocks to Study (6/24/2016)

  • Tractor Supply (TSCO) — Highest MANIFEST Rank
  • Sunpower (SPWR) — Highest Low Return Forecast (VL)
  • Restoration Hardware (RH) — Lowest P/FV (Morningstar)
  • Beazer Homes (BZH) —Lowest P/FV (S&P)
  • Sunpower (SPWR) — Best 1-Yr Outlook (ACE)
  • First Solar (FLSR) — Best 1-Yr Outlook (S&P)
  • Sunpower (SPWR) — Best 1-Yr Outlook (GS)

The Long & Short of This Week’s Update Batch

The Long & Short. (June 24, 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.

Fastenal (FAST)

This profile displays how we build return forecasts and aggregate “opinions” for Fastenal, our 4th most widely-followed company by Manifest Investing subscribers.  For most portfolios (because most buy/hold/sell decisions should be influenced by impact on total portfolio) would perceive Fastenal as a “solid hold” under the present conditions and set of assumptions.  Start your FREE TEST DRIVE at http://www.manifestinvesting.com today.

There’s a reason that Fastenal (FAST) is the 4th most widely-followed stock by our community of investors. And as the time series graphic that we refer to as a “Chronicle” suggests — we noted some accumulation back when the stock price approached $35 and the long-term return forecast neared 15%. In case you’re wondering, “Yes, we liked Fastenal a lot nine months ago.” See: This Week at MANIFEST (9/25/2015) [Test drive or subscription required]

The accompanying banner (above) provides a parade of long-term and short-term opinions on FAST, sort of like a panel of Olympic judges. No, Virginia, the judges do not always agree and there’s usually a Simon Cowell in the mix.

  • MANIFEST PAR: PAR stands for Projected Annual Return, our 5-year time horizon total return (annualized price appreciation and average dividend yield) forecast. At 9.6%, it’s fairly solid, should be considered by most to be a “strong hold” and provides context. The average stock checks in at about 6.4% right now — so Fastenal is slightly better than average.
  • Quality Ranking: Scored index based on financial strength, earnings stability/consistency, relative growth and relative profitability versus competitors/peers. All companies are scored and ranked. Fastenal ranks in the top quintile (>80) and we consider the top quintile to be EXCELLENT.
  • MANIFEST Ranking: We believe that return forecast and quality are the two most important characteristics of any investment. This “score” or index is an equally rated percentile ranking of both factors. At 92, we believe that 8% of the companies in our coverage universe (approximately 190 companies) are more compelling right now than Fastenal.
  • Value Line (VL) Low Total Return Forecast (VLLTR): Based on the 3-5 year forecast published by the Value Line Investment Survey (9% at the time of publication for Fastenal), the figure shown here (7.4%) is adjusted for change in stock price and time horizon. The median VLLTR for the Value Line 1700 Standard Edition is currently 5.6%.
  • Morningstar P/FV: The price-to-fair value, based on analysis by Morningstar. A fairly valued stock = 100%. A P/FV less than 100% is potentially “on sale.” The average Morningstar P/FV right now is 99%.
  • S&P P/FV: The P/FV, based on analysis by Standard & Poor’s. The average S&P P/FV is 100%. S&P is the “least impressed” of our “Olympic judges” when it comes to Fastenal, at the present.
  • 1-Yr ACE Outlook: The first of our one year horizon forecasts — used for an indication of “real sentiment.” ACE stands for Analyst Consensus Estimate. This 1-year total return forecast is based on an aggregate of covering analysts for the various companies. The average 1-Yr ACE forecast is currently 14.3%.
  • 1-Yr S&P Outlook: The one year total return forecast from S&P. The average S&P 1-year forecast is currently 7.0%.
  • 1-Yr GS Outlook: GS = Goldman Sachs, singled out as one of the most influential opinions (and sentiment drivers) in the world of investing. The average Goldman Sachs 1-year total return forecast is currently 7.3%. I’m surprised that Goldman does not cover Fastenal, hence the blank entry.

Business Model Analysis: 9-12% Return Forecast

Alpha Central: Alive and Well

It’s become something of an annual pilgrimage. The Mid-Michigan chapter of NAIC, the umbrella organization for investment clubs, started a stock picking challenge twelve years ago. Clubs and individuals submit their entries and the results are tracked over the course of one “Halloween” to the next. (The annual breakfast is always between Halloween and Thanksgiving.)

This year, a club that goes by the name of Street Smarts (Saginaw, Michigan) took home the top prize by turning $100,000 into $175,000 over the 12-month period. 75%. Yowza. Wowza.

They were joined by another (16) clubs with returns besting 30% — in other words, out performing the market by at least five percentage points. In contrast, only 12-of-28 failed to beat the market … and the average result was 29%. Their consensus selections essentially matched the market — but the track record is strong as the consensus portfolio has beat the market in 10-of-11 years.

Kudos. I attend a lot of these. I watched recently as similar groups in other parts of the country handed winner’s certificates to portfolios finishing closer to 30%. Eddy Elfenbein of www.crossingwallstreet.com is closing in on another victorious year — hopefully his 7th in a row — with a Buy List portfolio tracking at 34-35% YTD.

The leaders of our annual Groundhog Day-to-Groundhog Day Iditarod are no slouches, either. Our defending champion investment club, the Broad Assets (St. Louis) stand at +83% in the current contest. (Since 2/2/2013) We chronicled their exploits for 2012 here as they finished #1 with a +27.5% total return last year. The finish line for our contest (2/2/2014) is still on the horizon, but Broad Assets has a mammoth lead going into the home stretch.

2013 Groundhog Challenge Scoreboard

We’ll be taking entries for Groundhog 2014 during the last week of January. All individuals and groups (clubs) are invited to submit 5-20 investments.

The fact that 57% of the Mid-Michigan entrants beat the market is not unusual. 51.7% of participating Groundhogs have done the same over the trailing 8 years.

It’s how they/we do it that matters. The swinging-from-the-heels is actually kept to a minimum. The list of top performers include Apple (AAPL), Bio-Reference Labs (BRLI), Coach (COH), Cognizant Technology (CTSH), Google (GOOG), IPC Hospitalist (IPCM), Qualcomm (QCOM), ResMed (RMD) … you get the idea. Many of our community favorites represented by our 40 most-widely held companies are present and accounted for, along with a suitable dose of promising small- and medium-sized companies that keeps the overall growth forecast of the portfolio where it should be (12% or more).

Companies of Interest

Would you be surprised if I told you that Edwards Lifesciences (EW) is on the radar screen of these successful Mid-Michigan stock pickers? Because it is. You shouldn’t be surprised. The road to Alpha is paved with companies with superior return forecasts in combination with high quality rankings.

Materially Stronger: Johnson & Johnson (JNJ), McKesson (MCK)

Materially Weaker: Cutera (CUTR), Thoratec (THOR), Nissan Motor (NSANY), Caterpillar (CAT) 1, Astec Industries (ASTE), II-VI (IIVI), Rofin-Sinar (RSTI), Abaxis (ABAX)

1 Would not usually make this list, but dropped from $105 to $95.

Market Barometers

The median Value Line low total return forecast (VLLTR) is now 3.7%, down from 3.9% last week.