As 2013 winds to a close … and the Value Line Arithmetic Average soars some 34.2% over the trailing 12-months, we can be thankful that most of us benchmark against the S&P 500 (30.0%) or the Wilshire 5000 (31.1%).
30% seems like a lot … and it is.
But it’s still stock price recovery mode from the damage incurred during the Great Recession and I won’t be surprised to see/hear pundits like Jeff Gundlach out with remarks resembling “if the stock price advance in 2012 was unwarranted … 2013 redefined unworthy.” We’ll be taking a closer look at the internals of the surge (including the hint/nudge that when the Value Line average tops the others, there’s a pretty good chance the flaky stocks are churning — and they are/were.) We’ll also do the year-end close out with a look at the clarions and barometers next week.
But for now, the profitability forecasts for year-end 2013 (nearly actuals at this date) and the 2014 expectations are not all-that-great … and they continue to weaken.
What’s not weakening are P/E forecasts … and they’re getting frothy.
And that’s where the foundation for any house-of-cards is usually found. In the face of rising interest rates (supply-and-demand competition for stocks) that foundation could well be sinking sand.
Companies of Interest
Materially Stronger: Arris (ARRS), NuSkin (NUS)
Materially Weaker: Commercial Vehicle Group (CVGI), Fuel Systems (FSYS), Titan International (TWI), Bioscrip (BIOS), Alaska Communication Systems (ALSK)
Market Barometers
The median Value Line low total return forecast is 3.4%, unchanged from a week ago.
I’m not sure whether it’s a hunting season thing … or merely an excuse that many men use to take a break from shaving, but Movember is in full swing in many places. Beard Mania was celebrated BIG in Boston during their recent World Series conquest with many of the Red Sox players sporting facial hair that would have made bearded Civil War combatants proud. The appearance, including some modest twerking with Carrie Underwood, by Duck Dynasty with Willie Robertson and his fam on the Country Music Awards further popularized canning the razor blades and donning the bandana …
But the shaving continues when it comes to the fundamental analysis of our update batch. We continue (with a few notable exceptions cited below) to see that stealthy reduction of long-term forecasts combining with erosion of 2013 and 2014 consensus estimates on both the top and bottom lines.
And to the U.S. veterans who have served, and their incredible contributions to freedom, whether you decide to sport a moustache, beard or both — we say a simple THANKYOU! from the bottom of our hearts. Simply put, YOUROCK.
Companies of Interest
There’s a smidge more companies on the “Stronger” line this week, but still nothing to write home about. Microsoft (MSFT) finally received a fundamental upgrade and Priceline’s price surge over the last several months (+61.8% over the trailing 12 months) also merited a closer look and a modest boost. But the trimming continues to far outweigh any boosting as the rhinos seem to refuse to Movember with the rest of a stubbly and grubby nation.
… and with returns on the average stock up +28.7% over the trailing 12-months, a lot of people are pretty effective investors again. The stocks in this week’s update batch are up +44.7% (!) themselves so it’s been a pretty good year in some corners of energy and entertainment. Schlumberger (SLB) ranks among the worthy study candidates on a fairly short list after some turbo-charged performance. The stocks check in with a nearly overbought (RSI = 68) condition and that momentum can’t last forever. Current price pressure matches the overall average at +21.9% so if there was any “catching up” to be done (for this week’s update batch), it’s probably been done.
Companies of Interest
We’re not kidding about that year-over-year surge in this week’s stocks — and it’s a reminder of WHY WE DO THIS. Take a look at highlighted stocks from a year ago … all of these have delivered a smile or two since then.
I wish I could say that the stealth deterioration of fundamentals has stopped or is slowing — but I can’t.
Because it hasn’t.
We continue to see degradation of 2013 and 2014 forecasts while the rhinos teeter about doing Twitter cart wheels.
Materially Stronger: Air Products (APD), Helix Energy Solutions (HLX)
The median Value Line low total return forecast is 3.9%, down from 4.0% last week.
Events & Coming Attractions
For those of you in Chicagoland, Ken Kavula and I will be in town for a full day session on Saturday exploring sources of ideas, disruptive stuff and more:
There’s still room at the inn and we’ll do “standing room” if we have to … for more information:
The subtle deterioration of fundamentals continues unabated and the number of companies considered “materially weaker” outnumber the “materially stronger” entries again this week. This means that the long-term forecasts continue to show more downside pressure.
This week includes the shopping (retail) stocks and the sale opportunities continue to be fairly thin and far between.
Companies of Interest
Materially Stronger: Zale (ZLC), GameStop (GME)
Materially Weaker: Body Central (BODY), Coach (COH) 1, Ascena (ASNA), Bed Bath & Beyond (BBBY), Wal-Mart (WMT) 2, American Eagle (AEO), Nordstrom (JWN), Penney J.C. (JCP), Aeropostale (ARO)
1 Coach (COH) 3-5 year low price forecast reduced from $75 to $65. 2 Wal-Mart reduced from $100 to $95. (FYI)
Market Barometers
The median Value Line low total return forecast (VLLTR) is 4.0%, up slightly from last week’s 3.9%.
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 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!
It’s a question that revolves around that prolonged flat spot in the return forecast from 2004-2007. (See accompanying Value Line Low Total Return forecast graphic below) The return forecast in the second half of 2002 was in the 10-14% and proceeded to subside down to approximately 4% in mid-2004. From those return forecast lows in March and December 2004, the overall market proceeded to gain at an annualized rate of 14% between Halloween 2004 and Halloween 2007.
And then the wheels came off.
Here’s something that is specifically different, this time around. The year/year change in earnings was pretty robust in 2004-2006 … and the recession comes clear in 2008-2009 as earnings contracted significantly. The 2010 recovery was also pretty robust.
But we’re not seeing that now.
From the perspective of profitability, this recovery is pretty weak according to the forecasts for 2013 and 2014. And yes, we do keep in mind that the year-ahead forecasts are almost universally optimistic at the beginning of the year, generally waning as we turn each page of the calendar and the actual results come home to roost.
At yesterday’s Big Picture Conference, Stephanie Pomboy of MacroMavens pointed out that it’s even worse than it appears. She observed that “60% of earnings improvements over the last few years have been propped up by easing and low interest rates. A big portion of earnings improvements over the last few years have been reduced interest costs.” Pomboy believes that a sudden removal of the punch bowl could have dire effects on the overall market.
As we continue the weekly updates, we once again note that “NONE” makes another appearance with respect to “Materially Stronger” companies in the current batch. With a nod to the reality that some erosion of expectations is historically natural as the year goes by, those 2014E year-end estimates are still nothing to write home about — and the atrophy hasn’t started there, yet.
Compare the profitability trend for 2004-2007 to what’s happening now … and one of the conclusions I reach is that the current 4.2% for VLLTR is different this time, versus the flavor seen in 2004. The probability of that same type of market advance from 2014-2017 does not seem likely, without an underlying strengthening shift in fundamentals.
Continue the quest for highest-quality, superior return stocks … and I’m having trouble arguing with Value Line’s recent uptick in the recommended asset allocation for cash equivalents in portfolios with a capital preservation focus.
The median Value Line low total return (VLLTR) forecast is 4.2%, unchanged from the last week (despite the drop in the stock market which should generally cause the VLLTR to increase.)
For the first time in recent memory, there are no “materially weaker” companies in this week’s roll call. But before launching into celebration and exuberance, there’s not many “materially stronger” companies on the list … and the downward adjustments, albeit lower in magnitude … still manage to deliver a slightly lower overall return forecast for the group. There were slight reductions in the long-term forecasts for a number of home builders, including the likes of Pulte (PHM) and D.R. Horton (DHI).
The issue 6 update is usually a little more stable — as the outlook and fundamental characteristics of steady, reliable companies like Procter & Gamble (PG), Kimberly Clark (KMB) and Colgate-Palmolive (CL) are always less volatile.
In the words of 2012 Groundhog Champion, Bernie Meister, “it’s about time that these research agencies upped their outlook on Lumber Liquidators.”
At the same time, the average price-to-fair-value ratio at S&P for the companies in this week’s update batch is 110%. So if you’re going to shop among them, shop well.
The median Value Line low total return forecast (VLLTR) sagged slightly to 4.3%, down from 4.4% last week — and continuing to hover near historical lows.
The Wilshire 5000 continues its march to new highs. Remember … the relative strength index (RSI) is signaling potentially overbought at RSI>70 — but can stay in this condition for a very long time. Momentum is still solid with the average stock up 22% over the last nine months. Continue to shop for high-quality with sufficient returns as protection versus the next correction, recession and/or bear market.
Materially Stronger: Google (GOOG), Symantec (SYMC), Pandora (P), Fiserv (FISV)
Materially Weaker: United Online (UNTD), Microsoft (MSFT)1, Paychex (PAYX)2, Principal Financial Group (PFG)
1 – smaller reduction in expectations from $45 to $40 on the long-term forecast. 2 – smaller reduction in expectations from $50 to $45 on the long-term forecast.
Market Barometers
The median Value Line low total return forecast (VLLTR) is now 4.3%, down from 4.4% last week.
You could sub-title this one, ROC and Roll. Yes, stock prices are widely overbought (RSI>70) but the challenge is that they can stay this way for a very, very long time.
Yes, we think it’s prudent to selectively sell and trim lower-quality stocks from portfolios as conditions merit — but so long as the momentum persists, this still doesn’t feel like a run for the hills moment. I might trim carefully, but I’d not significantly raise cash until the rate of change (ROC) approaches and crosses over zero.
If that ROC crossover combines with a sub-zero swoon for the $USHL indicator (with return forecasts still at historical lows), I’d go into “capital preservation mode” on all personal accounts.
Both CVS (CVS) and Walgreen (WAG) have low total return forecasts of 8.5% during this week’s update. But this week’s nod/tribute is to those of you who have suggested that it was feasible that Rite-Aid (RAD) with its lowest-in-field quality ranking had a viable chance of recovering and cited a change in management that has steadily been working to improve conditions over the last few years. Although still a work in progress, profitability appears to have found thin black ink. Rite-Aid is now at $3.00 up from lows of $0.20 (+1400% since 2009) and some turnaround speculators have been rewarded.
The three companies with the highest fundamental and technical rankings are; Telefonica (TEF), Gentex (GNTX) and Qualcomm (QCOM).
Materially Stronger: Arris Group (ARRS), LKQ (LKQ), Rite Aid (RAD)
Materially Weaker: F5 Networks (FFIV), Nokia (NOK), Frontier (FTR), Cincinnati Bell (CBB), Telephone & Data Systems (TDS), U.S. Cellular (USM)
Market Barometers
The median Value Line low total return (VLLTR) forecast is now 6.2%, down from 6.3% last week.
In a normal distribution, the mean plus or minus one standard deviation covers 68.2% of the data. If you use two standard deviations, then you will cover approx. 95.5%, and three will earn you 99.7% coverage. The median low total return forecast since 1999 is 8.5% with a standard deviation of 3.5%. This means that approximately 70% of the time the low total return forecast will be between 5-12%. 96% of the time, the overall low total return forecast will be between a low of 1.5% and a high of 15.5%.
The excursions “north” of 20% (i.e. March 2009) lie outside the 99.5% probability range, because a three standard deviation swing to the upside would be 19%. This is one of the reasons that March 2009 was a back-up-the-truck, perhaps once in a lifetime buying opportunity.
All things considered (e.g. return forecast, quality, sentiment, momentum)Total (TOT) still ranks as a favorite among this group of study candidates. S&P agrees, checking in with a fair value of $51.40 and a “buy” rating. Stockcharts.com yields a “bullish” point-and-figure rating with +42.4% price pressure. There is modest potential for P/E expansion and neutral with respect to margin enhancement.
Materially Stronger: American Vanguard (AVD), Conoco Phillips (COP), Ferro (FOE)
Materially Weaker: Walter Energy (WLT), Suncor Energy (SU), Kronos Worldwide (KRO), SBA Communications (SBAC), Viasat (VSAT)
Market Barometers
The median Value Line low total return forecast (VLLTR) is now 6.4%, down from 6.5% last week.
Expecting Alpha 