Fave Five (6/8/2018): Deep Discounts

Fave Five (6/8/2018)

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 median 1-year ACE total return forecast is 12.0%.

Three weeks ago we went “bottom fishing.” This week, we’ll do the same thing but stop before hitting bottom. In this case, as we stacked up the companies with the highest 52-week total return expectations (ACE) and required a minimum MANIFEST Rank of 80, audits on a number of the leaders crushed them. Stocks that we’ve previously featured tanked and the 5-7 highest ranked stocks failed to make the list on further scrutiny.

The Long and Short of This Week’s Fave Five

Long & Short Term Perspectives. (June 8, 2018) 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. 52-Week Position: Position on scale between 52-week low price and 52-week target price. 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.

Fave Five Legacy (Tracking Portfolio)

The relative/excess return for the Fave Five tracking portfolio is +2.8% since inception.

The absolute annualized rate of return is 18.2%.

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

Great Pumpkin Realities

Photo Credit: wash52121 via Compfight cc

One of the reasons that we do this is that sometimes we discover a really great pumpkin.

There are no guarantees … and the Great Pumpkin doesn’t seem to come every year. But our relentless emphasis on the quest for high-quality companies with promise that seem to offering superior long-term returns is never dull. And it can be rewarding. As a case in point, we’ve featured United Electronics (UEIC) a couple of times over the few years of quarterly updates. It’s a stock that Ken Kavula frequently mentioned with respect to his investment club, his Groundhog (stock picking contest portfolio), educational sessions … and he mentioned it often during 2008 and early 2009 at price levels of $12-15.

Earlier this year, with UEIC at $18.82 … we suggested that while locating the remote for the Super Bowl that we also study and consider the company. See: Seen The Remote?. UEIC is up 104.6% since January. We mentioned it again at $16.85 during the 4/23/2012 weekly update batch.

They don’t always work out that way. And we’re interested in the pumpkin patch versus isolated incidents, successful and not-so-successful. What does it all add up to? In future updates, we’ll start tracking some of the long-term results achieved by the companies in this weekly presentation of quarterly updates. Leaning on the positive relative returns of your most widely-followed MANIFEST 40, Solomon Select, Tin Cup and other demonstrations like the BareNaked Million, we think we’re going to like this pie.

(By the way, the BareNaked Million — $1,000,000 invested in a relatively passive portfolio back in December 2006 — topped $2,000,000 last week.) Huzzah!

Companies of Interest

The pumpkin pickins are actually a little slim. The average Value Line low total return forecast for the Issue 10 group is 3.9% — matching the Value Line universe of approximately 1700 stocks. But there are some worthy growth and return studies in the patch.

Calavo Growers (CVGW) was among the Forbes Best Small Companies for 2013. The quality ranking and return forecast merit a closer look. Synchronoss Technology is back (again) and we’ll take a closer look at this company this week. Strayer Education (STRA) just might be an opportunity to explore painful lessons learned by long-term investors (specifically, me) if I can muster the courage to talk about it.

Materially Stronger: Activision Blizzard (ATVI), Treehouse Foods (THS), Bridgepoint Education (BPI)

Materially Weaker: RealD (RLD), Corinthian Colleges (COCO), The Pantry (PTRY)

Market Barometers

The median Value Line low total return forecast (VLLTR) is 3.9%, down from 4.0% last week.

This is a multi-year low for this indicator … at least the lowest level on the accompanying chart, so we’ll take a look at a more extensive parade of market barometers this week.

We start Market Barometer roll call with our median return projection (MIPAR). This parameter is a “first cousin” of VLLTR, but includes a wider berth of stocks — some 2400 in total and will generally include a few more smaller companies. The long-term return forecast is now 5.6%, still slightly above the historical lows reached back around Halloween 2007.

Checking in on the overall trends of the Wilshire 5000 (VTSMX), we find it relatively overbought (RSI = 77.9) with the caveat that markets (and individual stocks) can remain relatively overbought for a long, long time. We also note that the 12-month change for VTSMX is now 28.2%! The pins-and-needles are a whole lot easier to take when momentum is solid. Again we suggest that the momentum indicator (ROC) back in the 2004-2007 time frame provided “cover” during a period when the market was frothy for an extended period. There’s a substantial dose of “covering momentum” under current conditions. If that breeches 0% — as it did circa Halloween 2007, we’ll sound the alarm for DefCon 2 (at least.)

We use the overall New Highs vs. New Lows ($USHL) long-term trend as another confirming indicator. Again, check out the sub-zero trend back at Halloween 2007 and compare versus current healthy levels.

Morningstar provides a price-to-fair value (P/FV) ratio on their universe of covered stocks. For more, see: http://www.morningstar.com/market-valuation/market-fair-value-graph.aspx This is even more reinforcement. Note the 114% P/FV ratio back in the middle of that long period of overbought stocks. Stocks (and markets) can get significantly overbought during periods when they’re generally overbought for extended periods.

Sam Stovall of Standard & Poors recently suggested that a case could be made for an overall market price-to-fair value of 1742.92/1820 or 96%.

Investors in capital preservation mode should take note that the Value Line recommended asset allocation to cash/cash equivalents is relatively high at 40% — holding at levels suggested since July 2013, a sign that Value Line analysts believe the market is vulnerable to a significant correction.

If there’s a chance that the Transports (yes, channeling some Dow Theory) could be an early warning system … there’s no sign of a current alarm:

Taking a look at some specific Transports, the overall average is still pretty close to the median market return with relatively few signs of weakness. The return forecast on FedEx (FDX) is a little weak (PAR = 1.7%, RSI = 75.7% and 12-month ROC = 39%) consistent with an overheated trailing 12-months. We’ll be watching for incremental strengthening in fundamentals for FDX with the next update.

There’s been no shortage of articles shoveling dirt on the consumer in recent days and weeks. With an RSI of 84 (overbought) it’s easy to see why. Many of these stocks are probably vulnerable (temporarily overbought) and it’s a self-esteem opportunity for some pundit, talking head or financial journalist when one of them — or a couple of them — take a 20% smackdown. But it’s the long-term that matters, and there’s considerable momentum here in the face of some widespread de-leveraging by American consumers.

Bottom Line

The market and many individual stocks are overbought, in some cases temporarily overbought … and the fundamentals continue to weaken slightly while stock prices trudge ahead. Based on the momentum trends shown in some of our favorite indicators, we’ll be unsurprised by corrections. The stocks and market are vulnerable to some speed bumps. And we’ll be watching for any breakdown in the $USHL indicator. For now, seek the highest-quality stocks in the pumpkin patch and avoid settling for lackluster return forecasts. Those in capital preservation mode might consider selling lower-quality stocks with return forecasts less than MIPAR for sources of funds and elevate your cash equivalent component. For the young and adventuresome, or those well beyond “critical mass”, shop in earnest and let us know if you discover any Great Pumpkin opportunities!

Seen the Remote? Universal Electronics (UEIC)

The countdown to the Super Bowl is underway.

Do you know where your remote/clicker is?

Founded 1986, Universal Electronics (UEIC) is the global leader in wireless control technology for the connected home. UEIC designs, develops, and delivers innovative solutions that enable consumers to control entertainment devices, digital media, and home systems. The company’s broad portfolio of patented technologies and database of infrared control software have been adopted by many Fortune 500 companies in the consumer electronics, subscription broadcast, and computing industries. UEIC sells and licenses wireless control products through distributors and retailers under the One For All® brand name.

Sales Growth Forecast

A sales growth forecast of 10-12% seems reasonable and achievable for this still relatively smaller and faster-growing company.

Profitability Analysis

Valuation & Return Forecast

Value Line has a projected average P/E of 20x for their 3-5 year forecast. Based on a consensus that includes S&P, we’re using a P/E forecast of 18×.

Using the three main milestone judgments for UEIC, we arrive at a return forecast (projected annual return) of 16%.

The historical range for the return forecast (and quality rating) is shown in the company chronicle:

Universal Electronics (UEIC) was featured in our weekly memo nine months ago (4/23/2012) at a price of $16.85. From that message:

The highest ranked companies (by virtue of the combination characteristic of MANIFEST Rank that merges the return forecast with quality) are: Synchronoss Tech (SNCR), ITT Educational (ESI), Sysco (SYY), the company formerly known as Macrovision – ROVI (ROVI) and Universal Electronics (UEIC).

When it comes to the hierarchy of needs, we “get” the Sam Adams and peanut butter (popcorn too) part along with the caffeine … but the educational stuff seems to conflict with the video games for many of us, that is — unless your Facebook Friends list numbers in the hundreds and you’ve ventured in Doom or other Worlds of Warcraft, perhaps gaming with John Madden.

We’re relieved to see worlds collide with Universal Electronics because they are involved in what has become one of the most powerful needs (and means for couch potato domination of your living room) … the remote. Most of the young people in your life would have a whole lot of trouble imagining the pre-historic savagery of having to walk to the tube to change the channel. Try this at home and watch/hear the “unimaginable horrors” that our young people will share. “Right, Dad. Now you’re probably going to try to tell me that cars didn’t always have air conditioners!”

As for me, I’m grateful that our children are available to program the remote — saving me from the agony of reading the instruction manual and one of those challenging educational services opportunities as our young people bring those indispensable handheld devices to life.

UEIC has gained 13.5% over the last nine months while the Wilshire 5000 has advanced 11.3% for a relative return of +2.2%.

Value Line Low Total Return Screen (1/25/2013)

Speaking of inflections, check out the number of weaker long-term price forecasts (listed below) versus those that have strengthened. This trend has been in place for some time.

Much rides on the 4Q2012 earnings reports, particularly this week.

We’ll also start to get a look at a few of the 2014 annual forecasts as they come out of the blocks.  Much rides.

There’s a plethora of study and investment candidates this week. We’re a little reluctant to look at any of these with a return forecast greater than 22.5% (simply from a statistics perspective) but there are plenty of those blue chip stalwarts that are currently getting kicked around. Might the Lost Decade be found?

Universal Electronics (UEIC) and Pepsi (PEP) are among those that trigger attention — and we’ll take a look at least one of these this week.

Materially Stronger: Bridgepoint Education (BPI)

Materially Weaker: Dolby Labs (DLB), Activision Blizzard (ATVI), Treehouse Foods (THS), Village Super Market (VLGEA), Apollo Group (APOL), DTS (DTSI), Career Education (CECO), Avid Technology (AVID), Diamond Foods (DMND), ITT Educational Services (ESI), Synutra (SYUT), Zynga (ZNGA)

Note: After continuing the update (incorporating and factoring in forecast changes and the opinions of S&P and Morningstar, etc.) degradation of fundamentals in Strayer Education (STRA), Synutra (SYUT) and Nutrisystem (NTRI) would have resulted in their removal from the Companies of Interest list. In other words, their quality rating dipped below 55 (Good) and they would no longer qualify for this screen.