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Executive Summary February 17, 2012

The Economy

New data seems to be confirming that the recent upturn in the labor market is no fluke, providing the biggest of several boosts to the steadily improving U.S. economy.

According to a Labor Department report, the number of new claims for unemployment fell to 348,000 last week. That marked the lowest level in nearly four years -- not since the first week of March 2008 have new claims been that low. Continuing claims also fell, dropping about 3% or so, and remain in pre-Lehman Brothers-collapse territory, the report added.

That weekly claims data came on the heels of news from earlier this month that the private sector added more than 250,000 jobs in January. That caused the unemployment rate to fall for the fifth consecutive month, to 8.3%. The so-called "U-6" unemployment rate, which takes into account discouraged workers who have given up looking for a job, fell for the fourth straight month.. Both the traditional and U-6 unemployment rates remain high -- the traditional at 8.3% and the U-6 at 15.1% -- but the downward trend is very encouraging.

Good news also came from the service sector, which expanded in January for the 25th straight month, and did so at its fastest pace in nearly a year, according to the Institute for Supply Management. The group's new orders and employment sub-indices also both made significant jumps higher, good signs.

Another good sign: Retail and food service sales increased 0.4% in January, according to the Commerce Department. It marked the eighth straight month that sales rose, and they are now 5.8% above where they were a year ago. So much for the tapped-out American consumer.

The housing market, meanwhile, remains weak but is continuing to stabilize and offer some hopeful signs. Housing starts increased 1.5% in January, according to a new government report, and are almost 10% above where they were a year ago. Privately-owned housing units authorized by building permits in January rose 0.7%, according to the same report, and are 19.0% above year-ago levels.

Of course, the European debt crisis continues to hang over the market. Greece is still looking for a bailout, and has been met with a mixture of support and opposition. But investors seem to be growing less and less fearful that the situation will lead to a debt contagion that would spread across the ocean. Still, given the number of players involved, the complexity of the situation, and the intense media scrutiny, the debt crisis in all likelihood is not done having a big impact on short-term market movements.

Since our last newsletter, the S&P 500 returned 2.5%, while the Hot List returned -0.1%. So far in 2012, the portfolio has returned 12.0% vs. 8.0% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 153.1% vs. the S&P's 35.7% gain.

An Investing Mission Statement

On any given day, we investors are bombarded with a seemingly never-ending stream of earnings reports, P/E ratios, gross domestic product figures, unemployment rates, national debt ratios, and much, much more. Given the omnipresence of the Internet and 24-hour cable news networks, it can be easy to get too caught up in the latest news of the day. It can also be dangerous -- if you allow that latest bit of news to obscure your investing principles and long-term goals.

That's something I was reminded of recently while reading a great column from the Wall Street Journal's Jason Zweig. Writing on WSJ's Total Return blog, Zweig considered the following question, and posed it to a number of top financial minds: Could you sum up your investing beliefs in 10 words or less?

At first skeptical that he could distill his own approach down into that short of a mantra, Zweig found that he could, in fact, do just that: "Anything is possible, and the unexpected is inevitable. Proceed accordingly," he wrote. Other top strategists he interviewed were also able to do so. Among the responses:

"Determine value. Then buy low, sell high. ;-)"
-- David Herro, manager of Oakmark International Fund (and a Morningstar Fund Manager of the Decade)

"Own competently managed, competitively advantaged businesses at discounted prices."
-- O. Mason Hawkins, Southeastern Asset Management

"Fallible, emotional people determine price; cold, hard cash determines value."
-- Christopher C. Davis, Davis Advisors and Davis New York Venture Fund

Zweig's piece got me thinking about how some of the gurus who inspired my investing approach (and I myself) might respond. He offers a suggestion for one of them, the late, great Benjamin Graham, who once wrote, "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY."

I wouldn't want to put words in any of their mouths, so I looked for wise words that some of the other gurus I follow have already imparted, and which seem to capture the essence of their approach in no more than ten words. Warren Buffett -- Graham's protege -- has advised, for example, to "be fearful when others are greedy; greedy when others fearful" (I've edited out a couple extraneous words there). Hedge fund guru and author Joel Greenblatt, meanwhile, has offered this simple yet powerful advice that too many investors forget: "Buying good companies at bargain prices makes sense." And James O'Shaughnessy, whose research into investment strategy may be the most substantial ever done, has offered, "Disciplined implementation of active strategies is the key to performance."

Distilling investment advice down into ten words or less is of course somewhat of an incomplete endeavor. You probably shouldn't offer a novice investor ten words and then give him or her $100,000 to invest; things are of course more complicated than that. But when you examine the ten-word advice of some very successful strategists, like the gurus I follow and those that Zweig quoted, some important themes emerge -- themes that average investors all too often lose sight of. Among them:

Focus on facts and figures: Most good stock-pickers have key fundamental and financial characteristics they look for in their buys (and key criteria for selling stocks, too). Greenblatt looks at earnings yield and return on capital; one of Herro's favorite metrics is free cash flow yield; Graham looked at price/earnings and price/book ratios, as well as the current ratio and the ratio of a company's long-term debt to net current assets. There's no one "right" strategy, but the important thing is that the best investors tend to use metrics that identify financially sound companies whose shares are selling on the cheap.

It's also important that you focus on facts and figures plural. As I noted earlier, you don't want to hyperfocus on just one piece of data. In my dozen-plus years of researching history's best investment strategies, I've found that any good strategy uses multiple variables, and most use four, five, six, or more.

Beware Emotion: It's easy to get swept up in an exciting story surrounding a stock and buy it, or get swept up in a negative story and sell it. But doing so without actually crunching the numbers often leads to buying high and selling low. The best investors don't let hype alter their decisions. Consider what Peter Buffett once told PBS television about the key to his father's success: "I think it's because he's removed emotion from his decision-making. He is not colored by anything he thinks somebody else is doing, somebody else might want, some feeling he has about something that might not be rational. Ultimately, it's because he is clear and unemotional, dispassionate about his relationship to those numbers on the page and the information he's taking in."

Stay Disciplined Over The Long Term: No strategy will beat the market every month, or even every year. If that's your goal, you'll probably end up jumping from strategy to strategy and chasing hot stocks, which is a recipe for buying high and selling low. Sometimes, it just takes time for the market to recognize bargain stocks. If you think long-term -- as in, a time horizon of at least five years -- you'll be able to better deal with short-term underperformance, and reap the full rewards of the bargains that a good strategy identifies.

So, with all of that in mind, what would my own 10-words-or-less investing mantra be? I think it would boil down to something like this:

Follow proven strategies, stay disciplined, trust facts, and beware emotions.

Successful investing takes more than a 10-word "mission statement". But don't underestimate the importance of such an exercise. The stock market -- and our own emotions -- continually throw tricks and traps our way that eat away at our returns. If you don't have a clear understanding of why, and how, you are investing -- or if you lose sight of that plan -- you can easily get swept up in some very dangerous tides.

So one of these days, I'd encourage you to sit down and try coming up with your own 10-words-or-less mission statement or mantra. And when the market tides of fear and greed roll in -- and if there is anything you can count on in the market, it is that they will roll in -- make sure you have that mission statement close at hand. Those 10 words just might end up offering you the sort of clarity and perspective that can prevent some portfolio-pummeling mistakes.

Editor-in-Chief: John Reese

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The Fallen

As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Telecom Argentina S.a. (Adr) (TEO), Capella Education Company (CPLA), Cash America International, Inc. (CSH) and Jos. A. Bank Clothiers, Inc. (JOSB).

The Keepers

6 stocks remain in the portfolio. They are: Forest Laboratories, Inc. (FRX), Tech Data Corp (TECD), Aeropostale, Inc. (ARO), Ternium S.a. (Adr) (TX), Bridgepoint Education, Inc. (BPI) and Altisource Portfolio Solutions S.a. (ASPS).

The Newbies

We are adding 4 stocks to the portfolio. These include: Caci International Inc (CACI), Big Lots, Inc. (BIG), Northrop Grumman Corporation (NOC) and Coinstar, Inc. (CSTR).

Portfolio Changes

Newcomers to the Validea Hot List

Big Lots, Inc. (BIG): Big Lots offers brand-name closeout and bargain merchandise, including consumables, seasonal products, furniture, housewares, and toys. It operates more than 1,400 retail stores across 48 states, and has a $2.8 billion market cap.

Ohio-based Big Lots gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about it, see the "Detailed Stock Analysis" section below.

Coinstar Inc. (CSTR): You may have seen this Washington-State-based firm's kiosks in grocery stores and other retail shops. Its automated coin-counting machines allow users to turn their spare change into cash or credit for a fee, while its automated redbox DVD kiosks let customers rent DVDs. The company has a $1.7 billion market cap, and has a total of close to 50,000 kiosks.

Coinstar gets strong interest from my Peter Lynch-, Martin Zweig-, and James O'Shaughnessy-based models. Scroll down to the "Detailed Stock Analysis" section below to read more about it.

Northrop Grumman Corporation (NOC): One of the country's largest defense contractors, this Virginia-based firm is involved in the aerospace, electronics, information systems, and technical services arenas, serving government and commercial customers across the globe. Its products include unmanned aircraft systems, B-2 stealth bombers, the James Webb space telescope, radar systems, 911 public safety systems, and cybersecurity solutions, to name just a few.

Grumman has a $15 billion market cap, and gets strong interest from my Peter Lynch-, Joel Greenblatt-, and Kenneth Fisher-based models. To read more about it, see the "Detailed Stock Analysis" section below.

CACI International Inc. (CACI): Based in Arlington, Va., CACI provides IT and professional services in the defense, intelligence, homeland security, and IT modernization and government transformation arenas. The $1.6-billion-market-cap firm has taken in more than $3.7 billion in sales in the past year, and has more than 120 offices across North America and Western Europe.

CACI gets strong interest from my Martin Zweig-, Joel Greenblatt-, and James O'Shaughnessy-based models. To learn more about it, scroll down to the "Detailed Stock Analysis" section below.

News about Validea Hot List Stocks

Altisource Portfolio Solutions S.A. (ASPS): Altisource on Feb. 16 reported Net Income Attributable to Altisource of $25.7 million or $1.02 per diluted share for the fourth quarter, and $71.1 million or $2.77 per diluted share for the full year. Both the quarterly and full-year figures were higher than the year-ago figures of $16.8 million or $0.64 per share for the fourth quarter of 2010, and $49.3 million or $1.88 per diluted share for the full 2010 year.

Capella Education Company (CPLA): On Feb. 14, Capella announced net fourth-quarter income of $12.1 million or $0.85 per diluted share, down from $18.1 million or $1.09 per diluted share in the year-ago period. Revenues were down 4.1% to $110.0 million, as total active enrollment fell 4.5% and new enrollment decreased by 9.4% vs. the year-ago quarter. For the full 2011 year, net income was $52.1 million or $3.40 per weighted average number of diluted shares outstanding, compared to $61.3 million or $3.64 per share for 2010. Revenues rose 0.9 percent to $430.0 million. For-profit education firms have been under increasing regulatory scrutiny, and the firm also cited a tough economic climate, increasing competition, and the elimination of 63 non-faculty positions that resulted in a $1.3 million charge as reasons for the fourth-quarter declines in net income and revenue. Shares fell 13% the day of the announcement, though they had rebounded a bit as of mid-day on Feb. 16. The Hot List is selling off the position on today's rebalancing; through Feb. 15, it had gained about 32% on the position since scooping up the stock on Sept. 2 of last year.

The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will take a closer look at my strategies and investment approach. 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

BIG   |   BPI   |   CACI   |   CSTR   |   NOC   |   FRX   |   ARO   |   TX   |   TECD   |   ASPS   |  

Big Lots, Inc. is a closeout retailer. The Company's merchandising categories include Consumables, Furniture, Home, Hardlines, Seasonal, and Other. The Consumables category includes the food, health and beauty, plastics, paper, chemical, and pet departments. The Furniture category includes the upholstery, mattresses, ready-to-assemble, and case goods departments. Case goods consist of bedroom, dining room, and occasional furniture. The Home category includes the domestics, stationery, and home decorative departments. The Hardlines category includes the electronics, appliances, tools, and home maintenance departments. The Seasonal category includes the lawn and garden, Christmas, summer, and other holiday departments. The Other category includes the toy, jewelry, infant accessories, and apparel departments. At January 29, 2011, it operated a total of 1,398 stores in 48 states. In July 2011, the Company acquired Liquidation World Inc.

Bridgepoint Education, Inc. (Bridgepoint) is a provider of postsecondary education services. The Company's wholly owned subsidiaries, Ashford University and the University of the Rockies, are regionally accredited academic institutions that offer associate's, bachelor's, master's and doctoral programs in the disciplines of business, education, psychology, social sciences and health sciences. These institutions deliver programs online, as well as at its traditional campuses located in Clinton, Iowa, and Colorado Springs, Colorado. As of December 31, 2010, it offered approximately 1,345 courses, 71 degree programs and 134 specializations. As of December 31, 2010, it had 77,892 students enrolled in its institutions, 99% of whom were attending classes online.

CACI International Inc (CACI) along with its wholly owned subsidiaries and joint ventures, is an international information systems, high technology services, and professional services corporation. It delivers professional services and information technology solutions to its clients, primarily the United States government. Other customers include state and local governments, commercial enterprises and agencies of foreign governments. The Company operates two units: domestic operations and international operations. CACI delivers professional services and information technology (IT) solutions to its clients. Its services are primarily targeted to the areas of defense, intelligence, homeland security and IT modernization. In November 2010, the Company acquired TechniGraphics, Inc. and Applied Systems Research Inc. In July 2011, it acquired Pangia Technologies, LLC. In September 2011, CACI acquired Paradigm Holdings, Inc. In October 2011, the Company acquired Advanced Programs Group, LLC.

Coinstar, Inc. (Coinstar) is a provider of automated retail solutions. Coinstar's core offerings in automated retail include its digital video disk (DVD) business, where consumers can rent or purchase movies from self-service kiosks (DVD Services segment), and its Coin business, where consumers can convert their coin to cash or stored value products at coin-counting self-service kiosks (Coin Services segment). As of December 31, 2010, the Company had approximately 30,200 DVD kiosks in 26,100 locations and 18,900 coin-counting kiosks in 18,700 locations (approximately 12,100 of which offer a variety of stored value products to customers) in supermarkets, drug stores, mass merchants, financial institutions, convenience stores, and restaurants. On May 25, 2010, the Company sold its subsidiaries consisting of its E-Pay Business to InComm Holdings, Inc. and InComm Europe Limited (collectively InComm).

Northrop Grumman Corporation (Northrop Grumman) provides products, services, and integrated solutions in aerospace, electronics, information and services to its global customers. As of December 31, 2011, the Company operated in four segments: Aerospace Systems, Electronic Systems, Information Systems and Technical Services. The Company conducts most of its business with the United States Government, principally the Department of Defense (DoD) and intelligence community. It also conducts business with local, state, and foreign Governments and domestic and international commercial customers. Effective as of March 31, 2011, the company completed the spin-off of Huntington Ingalls Industries, Inc. (HII). HII operates the Company's former shipbuilding business.

Forest Laboratories, Inc. (Forest) develops, manufactures and sells branded forms of ethical drug products, most of which requires a physician's prescription. The Company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners. Its products include those developed by the Company and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. The Company's principal products include Lexapro, Namenda, Bystolic, Savella and Teflaro. On April 13, 2011, the Company acquired Clinical Data Inc. (Clinical Data), a specialty pharmaceutical company.

Aeropostale, Inc. is a mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aeropostale stores and 7 to 12 year-old kids through its P.S. from Aeropostale stores. The Company designs, sources, markets and sells all of its own merchandise. P.S. from Aeropostale products can be purchased in P.S. from Aeropostale stores, in certain Aeropostale stores, including its new Times Square store in New York City and online at www.ps4u.com. As of January 29, 2011, it operated 965 Aeropostale stores, consisting of 906 stores in 49 states and Puerto Rico, 59 stores in Canada, as well as 47 P.S. from Aeropostale stores in 13 states. In addition, pursuant to a Licensing Agreement, one of its international licensees operated 10 Aeropostale stores in the United Arab Emirates as of January 29, 2011. During March 2011, it announced that it had signed a second licensing agreement.

Ternium SA is a steel company in Latin America that manufactures and processes flat and long steel products for the construction, home appliances, capital goods, container, food, energy and automotive industries. The Company operates in three segments: Flat Steel Products, comprising the manufacturing and marketing of hot rolled coils and sheets, cold rolled coils and sheets, tin plate, welded pipes, hot dipped galvanized and electro-galvanized sheets and pre-painted sheets; Long Steel Products, comprising the manufacturing and marketing of billets (steel in its basic, semi-finished state), wire rod and bars; Others, comprising mainly pig iron, pellets and pre-engineered metal buildings. During the year ended December 31, 2010, Flat Steel Products accounted to 86% of the Company's overall revenues. Approximately 57% of Ternium's sales were generated in North America and 41% in South and Central America.

Tech Data Corporation (Tech Data) is a distributor of technology products. The Company serves approximately 125,000 value-added resellers (VARs), direct marketers, retailers and corporate resellers in more than 100 countries throughout North America, Latin America and Europe. In February 2011, the Company announced that it had created two new business divisions: HP Solutions Division And Networking Solutions Group. On October 1, 2010, the Company completed the acquisition of Triade Holding B.V. (Triade). On October 1, 2010, Brightstar Europe Limited (BEL), a consolidated joint venture between the Company and Brightstar Corporation, acquired Mobile Communication Company B.V. and Mobile Communications Company Belgium N.V. In October 2011, Mensch und Maschine Software SE sold its complete distribution business to the Company.

Altisource Portfolio Solutions S.A. (Altisource) together with its subsidiaries, is a provider of services focused on high value, knowledge-based functions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management. The Company utilizing integrated technology that includes decision models and behavioral-based scripting engines. The Company has three segments: Mortgage Services consists of mortgage management services that span the mortgage lifecycle; Financial Services principally consists of unsecured asset recovery and customer relationship management, and Technology Services consists of modular, integrated technological solutions for loan servicing, vendor management and invoice presentment and payment, as well as providing infrastructure support. In February 2010, Altisource acquired the interests of The Mortgage Partnership of America, L.L.C. (MPA).

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.

Validea is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Validea is not responsible for trades executed by users of this site based on the information included herein. The information presented on this website does not represent a recommendation to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment. The information on this website is generic by nature and is not personalized to the specific situation of any individual. The user therefore bears complete responsibility for their own investment research and should seek the advice of a qualified investment professional prior to making any investment decisions.

Performance results are based on model portfolios and do not reflect actual trading. Actual performance will vary based on a variety of factors, including market conditions and trading costs. Past performance is not necessarily indicative of future results. Individual stocks mentioned throughout this web site may be holdings in the managed portfolios of Validea Capital Management, a separate asset management firm founded by Validea.com founder John Reese. Validea Capital Management, which is a separate legal entity and an SEC registered investment advisory firm, uses, in part, the strategies on the web site to select stocks for its clients.