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Executive Summary January 30, 2015

The Economy

While there have been a couple bumps in the road, the US economy has by and large continued to show signs of improvement -- very significant improvement, in some areas -- as we make our way deeper into 2015.

New claims for unemployment fell last week to their lowest level since April 2000, for example. They now stand 21.7% below year-ago levels. Continuing claims, the data for which lag new claims by a week, also moved lower since our last newsletter and are 17.8% below year-ago levels.

Manufacturing sector activity increased in December for the 19th straight month, according to the Institute for Supply Management. It did so at a slower rate than it did in November -- the pace was the slowest since June -- but that's more a commentary on just how strong manufacturing activity was in much of the second half of 2014 than it is on December's figure, which was still quite strong. The sub-index for new orders also fell but remained at very high level, while the employment sub-index showed that job growth continues to improve in the sector. Prices, which had been very high over the summer, declined sharply for the third straight month. A big part of that is the sharp drop in oil prices we've seen lately.

The service sector offered a similar story, expanding for the 59th straight month, according to ISM. Both the overall service sector index and the new orders sub-index fell from November but remained at high levels, while job growth in the sector continued at about the same healthy pace that it did a month ago.

New home sales, meanwhile, jumped 11.6% in December, according to the Census Bureau. That put them almost 10% above year-ago levels. Sales prices also rose, with median prices now about 8% above where they were a year ago.

Housing starts also increased, rising 4.4% in December, according to the Census Bureau. They are 8.4% above year-ago levels. Permit issuance for new construction dipped 1.9%, but is about 3.6% above where it stood a year ago.

One main negative report involved nondefense capital goods spending excluding aircraft, which is considered a good gauge of business investment. It dropped 0.6 percent in December, and has now declined in four straight months -- the first time that has happened since 2012. Economists had expected a 0.5% increase, so Wall Street did not take the news well.

Finally, gas and oil prices just keep pushing lower. A gallon of regular unleaded on average cost $2.04 as of Jan. 28, down 26 cents from a month earlier, according to AAA. The oil declines, while a positive for the consumer, are probably one of the reasons behind the durable goods declines, with energy firms cutting back sharply on their capital spending because of the revenue hits they're taking.

Since our last newsletter, the S&P 500 returned 1.4%, while the Hot List returned 7.5%. So far in 2015, the portfolio has returned 4.3% vs. -1.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 237.4% vs. the S&P's 102.0% gain.

Portfolio Update

After a subpar 2014, the Hot List has been bouncing back strong in the new year. Since our last newsletter, all ten of the portfolio's holdings are in the black (as of mid-afternoon trading on Jan. 29), with four notching double-digit gains.

Leading the way was Skyworks Solutions, which jumped more than 16%. The firm announced fiscal first quarter revenues of $805.5 million, up 59% from the year-ago period and exceeding previous guidance of $770 million. Diluted earnings per share more than doubled from a year ago, to $1.01 from $0.49. The semiconductor company had several strong developments during the quarter, including capturing new design wins in Cisco's latest home gateway for cable operators, securing multiple analog devices in a leading telematics platform for GM vehicles, and expanding wearable designs with multiple devices in Timex's Ironman smartwatch.

Another semiconductor company -- Silicon Motion Technology -- was up more than 14%. The firm also reported strong earnings, and shares appeared to have been helped by the news that Steven Cohen's Point72 hedge fund upped its stake in the company. Net fourth-quarter sales jumped more than 50% vs. the year-ago period, SIMO said, while diluted earnings per American Depository Share more than doubled.

Other big winners for the fortnight were Universal Insurance Holdings, up 13.2%, and Sasol Ltd., up 10.9%. Hopefully, this strong performance is a sign of good things to come for the Hot List in 2015. In two weeks, we'll rebalance the portfolio and see whether January's winners have what it takes to remain in the Hot List.
Editor-in-Chief: John Reese

Guru Spotlight: James O'Shaughnessy

James O'Shaughnessy's research into stock investing strategies is among the most comprehensive ever performed. In his What Works on Wall Street, O'Shaughnessy back-tested a myriad of different strategies -- each using different quantitative variables -- to see which have performed best over the long haul. Some of the top performers he found became the basis of the models that drive my Growth/Value Investor portfolio.

O'Shaughnessy also performed extensive research into sector performance, which is what I'd like to focus on today. In the most recent version of his book, he looked at how different sectors had performed over the long term both in terms of raw returns and risk-adjusted returns. In a world in which you can get direct exposure to specific sectors through exchange-traded funds, this is valuable information.

So, what did O'Shaughnessy find? Was it the high-flying tech sector that has led the market over the long haul? The energy sector, which has powered our economy and provided the fuel to spur numerous technological advances? Nope. From 1968 through 2009, O'Shaughnessy found that good ol' boring consumer staples stocks were the best performers. They averaged compound annual returns of 13.6%, beating the next-best sector (financials) by 1.2 percentage points per year. And, staples had the second-lowest standard deviation out of the market's 10 sectors; the only one that was less volatile was utilities. In addition, the most fundamentally sound stocks within the consumer staples sector tended to do even better than the sector as a whole.

"Industries that make goods and services that people have to buy, regardless of economic circumstances, are bound to do well whatever the economic conditions," O'Shaughnessy wrote in his book. In a CNBC interview, he also said many consumer staples firms don't deal with as much competitive challenges as other flashier companies. "There are probably not three guys in a garage out in Palo Alto trying to think up a new formula to beat Coke," he said. "There's all sorts of people out there trying to beat Google."

O'Shaughnessy's research on sectors points to a broader idea: that in investing, sexy companies and stocks more often than not lose out to solid, steady Eddies. Remember, for every Google or Facebook, there are dozens of hyped-up stocks of companies that end up floundering. While most investors are loading up on those high-risk plays, you should consider focusing on stocks of good companies with attractive valuations and solid balance sheets.

On the Validea Professional portion of our website, we track sector portfolios picked using my Guru Strategies. The top sector since these portfolios' 2007 inceptions? You guessed it: consumer staples. (We actually refer to it as "Consumer Non-Cyclical", but it's essentially the same thing.) It has returned 172.7% since inception -- that's 13.2% annualized -- vs. 41.1% (or 4.4% annually) for the S&P 500. Here's a look at its current holdings.

Validea Professional Consumer Non-Cyclical Portfolio (as of Jan. 29, 2015)

News about Validea Hot List Stocks

Sasol Ltd.: Amid the plunge in oil prices, Sasol announced that it has delayed a $14 billion project in southwestern Louisiana to make diesel out of natural gas, The New York Times reported. The project was expected to create at least 1,200 permanent jobs and 7,000 construction jobs. But the project -- described as "highly speculative, and expensive" by the Times, became impractical with the decline in oil prices.

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

AFSI   |   SAFM   |   ZUMZ   |   AGCO   |   SSL   |   STWD   |   UVE   |   SWKS   |   SIMO   |   BLK   |  

Amtrust Financial Services, Inc., (AmTrust) is a provider of property and casualty insurance. The Company operates in four business segments: small commercial business, Specialty Risk and Extended Warranty, specialty program and personal lines reinsurance. Small Commercial Business segment provides workers' compensation to small businesses. The Company's Specialty Risk and Extended Warranty segment provides coverage for consumer and commercial goods and custom designed coverages. The Company's Specialty Program segment provides workers' compensation, package products, general liability, commercial auto liability, excess and surplus lines programs and other specialty commercial property and casualty insurance. The Company subsidiaries include: Technology Insurance Company, Inc. (TIC), Rochdale Insurance Company (RIC), AmTrust Insurance Company of Kansas, Inc. (AICK), AmTrust Lloyd's Insurance Company of Texas (ALIC), Oryx Insurance Brokerage, Inc. and TMI Solutions, LLC.

Sanderson Farms, Inc. is a poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. 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 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 434 million chickens, or over 3.0 billion dressed pounds.

Zumiez Inc. (Zumiez) is a specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. As of January 28, 2012, the Company operated 434 stores in the United States and 10 stores in Canada. In addition, the Company operates a Website that sells merchandise online. At January 28, 2012, its stores averaged approximately 2,900 square feet. Its apparel offerings include tops, bottoms, outerwear and accessories, such as caps, bags and backpacks, belts, jewelry and sunglasses. Zumiez's footwear offerings primarily consist of action sports related athletic shoes and sandals. Its equipment offerings, or hardgoods, include skateboards, snowboards and ancillary gear, such as boots and bindings. The Company also offers a selection of other items, such as miscellaneous novelties.

AGCO Corporation is engaged in manufacturing and distributing agricultural equipment and related replacement parts throughout the world. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, application equipment, hay tools, forage equipment, tillage, implements, engines, precision farming technologies, grain storage and protein production systems, and replacement parts. Its products are used in the agricultural equipment industry and are marketed under a number of brands, including Challenger, Fendt, GSI, Massey Ferguson and Valtra. The Company distributes most of its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In addition, the Company provides retail financing, through its retail finance joint ventures with Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank).

Sasol Limited (Sasol) is an integrated energy and chemicals company. Sasol mines coal in South Africa and produce natural gas and condensate in Mozambique, oil in Gabon and shale gas in Canada. In South Africa it refines imported crude oil and retail liquid fuels. It has chemical manufacturing and marketing operations in South Africa, Europe, the Middle East, Asia and the Americas. It operates in four segments: South African energy cluster, International Energy Cluster, Chemical Cluster and Other businesses. Effective March 31, 2013, Sasol Olefins & Surfactants sold G.D. Portbury Ltd. On 16 August 2013, Sasol Investment Company (Pty) Limited, a wholly owned subsidiary of Sasol, entered into a definitive sale and share purchase agreement pursuant to which Main Street 1095 (Pty) Limited, completed the acquisition of 100% of the interest of SPI International (Pty) Limited (SPII). SPII is the indirect owner of a 50% interest in the Iranian joint venture, Arya Sasol Polymer Company.

Starwood Property Trust, Inc. is a holding company and conducts its business through its subsidiaries. The Company is focused on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (CMBS), and other commercial real estate-related debt investments. In addition, it also invests in residential mortgage loans and residential mortgage-backed securities (RMBS). It makes certain investments in RMBS, which it uses as an alternative investment for its available cash. In April 2013, Starwood Property Trust Inc acquired LNR Property LLC from Vornado Realty Trust, iStar Financial Inc (24%), Cerebrus, and Oaktree Capital Management LP. In February 2014, Starwood Property Trust, Inc. spun off Starwood Waypoint Residential Trust.

Universal Insurance Holdings, Inc. (UIH) is a vertically integrated insurance company. The Company's insurance products are offered to the Company's customers through Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC), (collectively the Insurance Entities). Substantially all aspects of insurance underwriting, distribution and claims processing are covered through the Company's subsidiaries. Blue Atlantic Reinsurance Corporation (BARC), a wholly owned subsidiary of UIH, is a reinsurance intermediary broker. The Insurance Entities generate revenues primarily from the collection of premiums. Universal Risk Advisors, Inc. (URA), the Company's managing general agent, generates revenue through policy fee income and other administrative fees from the marketing of the Insurance Entities' insurance products through its distribution network of independent agents.

Skyworks Solutions, Inc. (Skyworks) is a producer of analog semiconductors. The Company offers custom linear products automotive, broadband, cellular infrastructure, energy management, global positioning system (GPS), industrial, medical, military, wireless networking, smartphone and tablet applications. Its portfolio consists of amplifiers, attenuators, battery chargers, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, light emitting diode (LED) drivers, mixers, modulators, optocouplers, optoisolators, phase shifters, phase locked loops (PLLs)/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches, voltage regulators and technical ceramics. Its customers include Cisco, Ericsson, Foxconn, Fujitsu, General Electric, Google, Honeywell, LG Electronics, Nest, Netgear, Nokia, Northrop Grumman, Rockwell Collins, Samsung, Sensus and ZTE.

Silicon Motion Technology Corporation is a Taiwan-based holding company. The Company develops microcontroller ICs for NAND flash storage devices and specialty RF ICs for mobile devices. The Company designs, develops and markets, low-power semiconductor solutions to OEMs and other customers in the mobile storage and mobile communications markets. For the mobile storage market, the Company's key products are microcontrollers used in solid state storage devices such as SSDs, eMMCs and other embedded flash applications, as well as removable storage products. For the mobile communications market, the Company's key products are handset transceivers and mobile TV IC solutions. The Company's products are used in smartphones, tablets, and industrial and commercial applications.

BlackRock, Inc. (BlackRock) is an investment management firm. The Company provides a range of investment and risks management services. The Company's clients include retail, high net worth (HNW) and institutional investors, consists of pension funds, official institutions, endowments, insurance companies, corporations, financial institutions, central banks and sovereign wealth funds. The Company's platform enables the Company to offer active (alpha) investments with index (beta) products and risk management to develop tailored solutions for clients. Its product range includes single- and multi-asset class portfolios investing in equities, fixed income, alternatives and/or money market instruments. In October 2013, BlackRock Inc acquired Macquarie Global Property Advisors Ltd. In January 2014, Forge Group Limited announced that BlackRock Inc. and subsidiaries had ceased to be the substantial holder of Forge Group Limited.

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.