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Executive Summary December 4, 2015

The Economy

Despite a downturn in the manufacturing sector, the US economy continues to look strong, boosted by solid job growth and a red-hot service sector.

The private sector added 217,000 jobs in November, according to payroll processor ADP, the most since June. The Labor Department is scheduled to release its November jobs report today. October's government data showed the economy added 271,000 jobs, the highest monthly total of the year, so we'll see if the November report indicates that the labor market momentum is continuing.

Elsewhere, we are continuing to see a divergence between the manufacturing and service sectors. The service sector, on the one hand, appears to be in great shape. It expanded in November for the 70th straight month, according to the Institute for Supply Management. The rate of expansion wasn't as great as it was in October, but it was still very strong. The same can be said of both new order growth and employment growth.

But the manufacturing sector contracted in November for the first time in 36 months, according to ISM. New orders also declined, though employment conditions improved. Prices of raw materials fell for the 13th straight month and are now at a very low level. The commodity deflation, weakness in Europe and China, and the strong dollar are all putting downward pressure on US manufacturers.

After a big decline in September, new home sales bounced back strong in October, rising almost 11%, according to the Census Bureau. That put them about 8% above where they were a year ago. Affordability may have been a factor, as median sales prices dropped 8.5%. They are about 6% below last year's level.

Personal income rose 0.4% in October, meanwhile, according to the Commerce Department, a very solid increase.. Real disposable personal income rose 0.4%, while real personal consumption expenditures increased 0.1% . Amid all of this, the personal savings rate was a very strong 5.6%, up from 5.3% in September.

The Commerce Department also said that gross domestic product rose at a pace of 2.1% in the third quarter, a nice upward revision from previous estimates of 1.5%. The revised figure was the result of private inventory investment declining less significantly than initial estimates indicated.

The economy's continued strength in the face of manufacturing weakness is likely in part due to low gas prices, which continue to fall. A gallon of regular unleaded on average cost $2.04 on December 2, down from $2.19 a month earlier, according to AAA. That's more than 26% below where it was a year ago.

Overseas, the European Central Bank disappointed many investors with its announcement of its most recent stimulus efforts. The ECB said it was cutting its deposit interest rate to -0.3% (from -0.2%) and extending its purchases of government bonds through March 2017. Investors wanted more, however, and stocks initially tumbled in both Europe and the US, while the euro surged against the dollar. By mid-day, US stocks had rebounded significantly, however.

Since our last newsletter, the S&P 500 returned -1.5%, while the Hot List returned -3.6%. So far in 2015, the portfolio has returned -8.5% vs. -0.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 196.1% vs. the S&P's 104.9% gain.

Portfolio Update: Good Chicken, Bad Eggs

Since our last newsletter, five of the Hot List's holdings have been in the black, and five have been the red, with seven of the stocks moving up or down by just 1% or 2% or so. But of the three other holdings, two were sizable losers, causing the portfolio to lose ground over the past fortnight. (Performance data as of mid-day trading on December 3.)

One of the big losers was Cal-Maine Foods (CALM), which fell more than 12%. The Mississippi-based egg producer seems to be getting hit by falling egg prices. Chicken populations took a hit in the avian flu problems that occurred last summer, causing a big surge in egg prices. Now that the chicken populations are rebounding, prices are declining, and egg producers like Cal-Maine are feeling the effects.

Another Mississippi-based food company -- Sanderson Farms (SAFM) -- helped offset some of those losses, however, rising about 7.5% since our last newsletter. Shares of the poultry producer seemed to be impacted by an Environmental Protection Agency decision to require higher bio-ethanol volumes in fuels, though the nature of the effect was a bit ambiguous. Shares fell significantly in the first two days after the announcement, which the National Chicken Council said will increase feed prices and negatively impact poultry producers. But Thursday shares surged upward by nearly 7%. The rebound may have been the result of value-minded investors jumping on a good buying opportunity, or a case of investors realizing they overreacted to the EPA decision. Whatever the case, it was a good two weeks for Sanderson shares.

But that brings us to our second big loser, Banco Macro (BMA), which tumbled 12.4%. The Argentine bank's shares fell after the country's national elections. Investors actually appear to be viewing the elections as a positive for Argentina's economy, with the bond market strengthening significantly. But that means a stronger currency, which could lead to some short- to mid-term weakness in stocks, according to some strategists.

After the past couple weeks, the Hot List is now significantly behind the S&P 500 year-to-date. As we head into the home stretch of 2015, the portfolio will hopefully pick up some steam and gain back some of the ground that it has lost. We'll see where we stand in two weeks, at which time we will rebalance the portfolio.

Editor-in-Chief: John Reese

Guru Spotlight: Zweig's Timing Tricks

If you have been a Hot List reader for just about any length of time, you know that I have often written about the perils of market timing. "A very, very dangerous game" is how I've described it, and it's true -- most people who try to time their participation in stocks end up doing far worse than those who avoid the temptation to jump in and out of equities.

But it's important to understand that when I talk about market timing in this context, I'm referring to the emotion-driven, speculative buying and selling that most investors do when they are trying jump in and out of the market. There are, however, some data-driven, proven market-timing systems. And if employed in the right fashion, they can work.

One great example is the timing system developed by the late, great Martin Zweig, one of the gurus upon whom I base my strategies. Zweig used a rigorous fundamental stock-picking strategy, which is the basis for my Zweig-inspired Guru Strategy. But he also developed a number of timing tools that he used to determine how invested he would be in the market at any given time. These tools ran the gamut from momentum factors to debt levels to Federal Reserve policy rates. It is important to note that all of his indicators were quantitative -- Zweig based his timing decisions on cold, hard data, not his own opinions about where stocks might be headed. He realized that, like all investors, he, too, was susceptible to the emotions and biases that can derail a portfolio, so he stuck to the numbers.

What factors went into Zweig's timing system? Interest rates were a big one, and he coined the now ubiquitous phrase "Don't fight the Fed." Here's a sampling of how interest rates and other factors shaped his timing approach:

The Discount Rate: An increase in either the discount rate or reserve requirements is bearish, Zweig said, while decreases are bullish. Rising interest rates are generally negative for stock prices, whereas falling interest rates generally help stock prices. Zweig said the discount rate is a lagging interest rate indicator with some psychological importance. When the Fed changes the discount rate, it's because it has already moved in the same direction with the federal funds rate. The discount rate helps confirm the Fed's current policy.

Installment Debt: If installment debt rises rapidly, consumers are borrowing a lot, which, in turn, can put upward pressure on interest rates. And, Zweig said, in an economic upturn this signifies we're in the latter stages of the upturn, which is negative for stocks. A downturn in the installment debt rate is positive, because that's seen as indicating less pressure on interest rates resulting from less borrowing. This usually happens when the economy is soft and perhaps bottoming out.

Wrote Zweig: "A buy signal is given when the year-to-year change in installment debt has been falling and drops to under 9 percent. A sell signal comes when the year-to-year change has been rising and hits 9 percent or more. That's it."

The Prime Rate: The prime rate is the rate banks charge their best customers, such as major corporations. The rates banks charge on other types of loans are based on this prime rate. Zweig advised buying if there's an initial cut in the prime rate when the prime's peak was less than 8 percent (meaning it never topped 8 percent because of the cut). If the prime's peak reaches 8 percent or higher, for a buy signal you need either two cuts in the prime or a full 1 percent cut. Any initial hike in the prime if the prime's low is 8 percent or above is a sell signal. If the prime's low is less than 8 percent, you get a sell signal with the second of two hikes or a full 1 percent jump in the rate.

"Super" Strategy

Zweig used the above three indicators -- the prime rate, the Fed's discount rate and reserve requirements, and installment debt -- to develop what he called his Monetary Model. He also had another model that measured market momentum, based on the Value Line Geometric Index, which he used to stay in sync with the trend of the stock market. A favorite Zweig motto was: "The trend is your friend." This overall market trend may shift only a few times a year.

Zweig combined his momentum indicator with his Monetary Model to create what he called his "Super Model". Over a two-decade span in which stocks struggled mightily, a portfolio that used the Super Model's timing signals would have produced exceptional returns. Take a look:

Martin Zweig's "Super Model" Returns
Screen Shot 2015-12-03 at 10.16.46 PM

Source: "Martin Zweig's Winning On Wall Street" (Warner Books)

Zweig's timing system has particular relevance right now, given how consumed many investors seem to be with the Federal Reserve's expected interest rate hikes. But it is worth noting that, despite all of the gloom and doom surrounding the interest rate talk, we don't appear to be anywhere near a "sell" signal using Zweig's Super Model. The website InvestStrat.com keeps a running tab on these indicators, and currently it shows that even if the Fed were to raise rates right now, we would still be in "buy" territory.

What sort of interest rate hikes would it take to trigger a sell signal? The Fed would have to raise the discount rate 3 times, with less than 3 months between each of the increases. At the same time, there would need to be two reductions in the prime rate -- at 3.25%, it is currently well below the level (8%) at which Zweig would consider a single, minor rate hike a bearish sign.

Of course, as brilliant of a strategist as Zweig was, his timing model is no sure thing -- in the stock market, nothing is. It also takes some effort to follow, which is part of the reason why I stick to his fundamental criteria for picking stocks. But given how successful he was, his timing system is certainly worth a long, hard look if you feel a market-timing approach is right for you.

News about Validea Hot List Stocks

Tesoro Corporation (TSO): On Nov 23, Tesoro announced that its affiliate, Tesoro Alaska Company, will buy several Alaska-based wholesale marketing and logistics assets from Wichita-based Flint Hills Resources, Zack's Equity Research reported. The assets include all of Flint Hills' wholesale fuel marketing contracts in Alaska, a 580,000 barrels in-service storage capacity terminal in Anchorage, an airport terminal in Fairbanks, and a multi-year terminalling agreement at Flint Hills' North Pole terminal. The transaction is expected to close within two months, subject to necessary approvals. Financial terms of the deal have not been disclosed.

The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at hotlist@validea.com.

Current Portfolio

Detailed Stock Analysis

Disclaimer: The analysis is from Validea's selection and interpretation of content from the guru's book or published writings, and is not from nor endorsed by the guru. See Full Disclaimer

PII   |   BMA   |   SAFM   |   VLO   |   TBI   |   SYNT   |   TSO   |   CALM   |   SIMO   |   AAPL   |  

Polaris Industries Inc. (Polaris) designs, engineers and manufactures off-road vehicles (ORV), including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and small vehicles (SV). These products are sold through dealers and distributors located in the United States, Canada and Europe. The Company's ORVs include core ATVs, and RANGER and RZR side-by-side vehicles. The Company produces a range of snowmobiles, consisting of 32 models, ranging from youth models to utility and economy models to performance and competition models. Polaris' Motorcycles division consists of Victory, Indian motorcycles and three-wheel roadster motorcycle, Slingshot. The Company offer products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the small vehicles industry. The Company produces or supplies a range of replacement parts and accessories for its product lines.

Banco Macro S.A. (the Bank) is a bank. The Bank offers traditional bank products and services to companies, including those operating in regional economies, as well as to individuals. The Bank offers savings and checking accounts, credit and debit cards, consumer finance loans (including personal loans), mortgage loans, automobile loans, overdrafts, credit-related services, home and car insurance coverage, tax collection, utility payments, automatic teller machines (ATMs) and money transfers. The Bank offers Plan Sueldo payroll services, lending, corporate credit cards, mortgage finance, transaction processing and foreign exchange. The Bank offers transaction services to its corporate customers, such as cash management, customer collections, payments to suppliers, payroll administration, foreign exchange transactions, foreign trade services, corporate credit cards and information services, such as its Datanet and Interpymes services.

Sanderson Farms, Inc. is a poultry processing company which is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. In addition, the Company is engaged in the processing, marketing and distribution of prepared chicken through its wholly owned subsidiary, Sanderson Farms, Inc. (Foods Division). It produces a range of processed chicken products and prepared chicken items. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the south-eastern, south-western, north-eastern and western United States and to customers who resell frozen chicken into export markets. During the fiscal year ended October 31, 2013 (fiscal 2013), it processed 452 million chickens, or over 3.0 billion dressed pounds.

Valero Energy Corp (Valero) is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. The Company's refineries can produce conventional gasolines, premium gasolines, gasoline, diesel fuel, low-sulfur diesel fuel, ultra-low-sulfur diesel fuel, CARB diesel fuel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products. The Company markets branded and unbranded refined products through approximately 7,400 outlets. The Company also owns 11 ethanol plants in the central plains region of the United States that primarily produce ethanol. The Company operates through two segments. The refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment primarily includes sale of internally produced ethanol and distillers grains.

TrueBlue, Inc. (TrueBlue), is a provider of specialized workforce solutions, helping clients improve growth and performance. The Company provides staffing, recruitment process outsourcing, and managed service provider solutions. The Company operates through two reportable segments, Staffing Services and Managed Services. The Company offers on-premise temporary blue-collar staffing together with outsourced service offerings in recruitment process outsourcing (RPO) and managed services provider (MSP) solutions. On-premise staffing is sourcing, screening, recruiting and management of the contingent labor workforce at a customer's facility. RPO is high-volume sourcing, screening, and recruiting of permanent employees for all industries and jobs. MSP solutions manage its customer's overall contingent labor program including vendor selection, vendor performance management, vendor compliance monitoring and risk management, and reducing vendor costs.

Syntel, Inc. (Syntel) is a provider of digital transformation, information technology (IT) and knowledge process outsourcing (KPO) services. Syntel operates through five segments: Banking and Financial Services, Healthcare and Life Sciences, Insurance, Retail, Logistics and Telecom, and Manufacturing. The Banking and Financial Services segment serves financial institutions around the world. The Healthcare and Life Sciences segment serves various companies in the healthcare industry. The Insurance segment serves property and casualty insurers, insurance brokers, personal, commercial, life and retirement insurance service providers. The Retail, Logistics and Telecom segment serves a range of retailers and distributors, and clients in the logistics and telecom industry. The Manufacturing segment provides business consulting and technology services for industrial and automotive clients. The Company offers its products and services under the Syntel brand.

Tesoro Corporation is an independent petroleum refining and marketing company. Through its subsidiaries, the Company primarily transports crude oil and manufactures, transports and sells transportation fuels. The Company operates through three business segments: Refining operating segment, which owns and perates six petroleum refineries with a combined crude oil capacity of 850 thousand barrels per day (Mbpd) located in the western United States and sells transportation fuels to a variety of customers; TLLP, a publicly traded limited partnership, which includes certain crude oil and natural gas gathering assets, natural gas processing and crude oil and refined products terminalling, transportation and storage assets, and Retail operating segment, which sells transportation fuels in approximately 16 states through a network of approximately 2,267 retail stations under the ARCO, Shell, Exxon, Mobil, USA Gasoline and Tesoro brands.

Cal-Maine Foods, Inc. is a producer and marketer of shell eggs in the United States. The Company's primary business is the production, grading, packaging, marketing and distribution of shell eggs. The Company sells its shell eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The Company markets its shell eggs through its distribution network to a group of customers, including national and regional grocery store chains, club stores, foodservice distributors and egg product consumers. Some of its sales are completed through co-pack agreements. It has a total flock of approximately 33.7 million layers and 8.4 million pullets and breeders. The Company markets its specialty shell eggs under brands, such as Egg-Land's Best, Land O' Lakes, Farmhouse and 4-Grain. The Company also produces, markets and distributes private label specialty shell eggs to several customers.

Silicon Motion Technology Corporation (SMTC) is a fabless semiconductor company. The Company designs, develops and markets low-power semiconductor solutions to original equipment manufacturers (OEMs) and other customers in the mobile storage and mobile communications markets. For the mobile storage market, the Company's products are microcontrollers used in solid state storage devices, such as Solid State Drives (SSDs), Embedded Multimedia Cards (eMMCs) and other embedded flash applications, as well as removable storage products. For the mobile communications market, the Company's products are mobile communication transceivers and mobile television (TV) System on Chips (SoCs). The Company's products are used in smartphones, tablets, notebooks, desktop personal computers, and industrial and commercial applications. The Company markets its mobile storage products under the SMI brand and mobile communications products under the FCI brand.

Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. The Company's primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software.

Watch List

The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks.


The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

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