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Executive Summary April 24, 2015

The Economy

The second quarter has begun much as the first quarter ended, with a mix of data showing that the economy continues to adjust to a world in which oil prices have been cut in half.

We'll start with industrial production, which fell sharply in March, declining 0.6%, according to a new Federal Reserve report. But the big driver of the decline was utility output, which tends to be seasonally driven. It fell 5.9%. Manufacturing output actually increased 0.1%, while mining output dropped 0.7%. Industrial production capacity utilization, which was near six-and-a-half year highs in November, fell for the fourth straight month. For the first quarter as a whole, industrial production fell 1.0%, the first quarterly decline in nearly six years. The decline "resulted from a drop in oil and gas well drilling and servicing of more than 60 percent at an annual rate," the Fed said.

After major declines in previous months, retail sales jumped 0.9% in March, according to a new report from the Census Bureau. That's just 1.6% higher than they were in the year-ago period, however, one of the lower year-over-year increases we've seen recently.

New claims for unemployment have crept higher since our last newsletter, but are about 6.7% below year-ago levels. Continuing claims, the data for which lag new claims by a week, also inched higher and are about 13.4% below year-ago levels. Overall, the employment picture remains as bright as it has been in many years.

The housing market remains mixed. New home sales fell 11.4% in March, according to the Census Bureau. They are still 15% above year-ago levels, however. Median sale prices were slightly below year-ago levels, while average sale prices were slightly above where they were a year ago.

Housing starts edged higher by 2.0% in March, meanwhile, according to the Census Bureau, putting them about 3.5% below year-ago levels. Permit issuance for new construction fell 5.7%, and is about 7.6% above where it stood a year ago.

On the earnings front, the news has also been mixed. With close to 60 of the S&P 500 companies having reported first-quarter earnings, 77% had beaten earnings estimates, but only 46% had beaten sales estimates, according to FactSet.

Lastly, oil prices have been slowing creeping back upward. A gallon of regular unleaded on average cost $2.48 as of April 22, up from $2.42 a month earlier, according to AAA. That's still more than 30% below where it was a year ago.

Since our last newsletter, the S&P 500 returned 1.0%, while the Hot List returned 0.9%. So far in 2015, the portfolio has returned 14.3% vs. 2.6% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 269.6% vs. the S&P's 111.2% gain.

Portfolio Update

Like the economy, the Hot List has had an up-and-down fortnight. As of early trading on Thursday, 5 of the portfolio's 10 holdings were in the black since our last newsletter, and 5 were in the red.

Leading the way was Sasol Limited, the South Africa-based energy and chemicals firm, which jumped about 10%. Sasol had been hit hard in recent weeks after the oil price plunge led it to close down significant parts of its operations and change its dividend policy. But it's been on the rebound, with two likely catalysts. First, investors often overreact to bad news, so the recent gains have probably been a natural bounce-back as fears subside a bit. Second, Federal Reserve officials decreased their expectations for how high they will raise interest rates this year. As I noted last month, 15 of the 17 Fed officials recently said they still expect to raise the benchmark federal funds rate before year-end, most said they expect the rate to be 0.625% by the end of 2015, about half a percentage point lower than they forecast in December, The Wall Street Journal reported. The more-dovish-than-expected comments boosted emerging market equities -- investors have turned to EMs in a quest for yield amid the US's low-rate environment -- and Sasol likely continues to benefit.

Another strong performer was Credit Acceptance Corp., which was up nearly 6%. There didn't seem to be a stock-specific catalyst for the move. The gains may have been momentum-driven, as shares hit a 52-week high, or may have been part of the normal day-to-day ups and downs in the market.

On the downside, Universal Insurance Holdings fell 5%. A regulatory filing showed that Chief Executive Sean Downes sold 20,000 shares, valuing over half a million dollars. Investor's Business Daily said that that helped push shares lower.

While it's been an up-and-down fortnight for the Hot List, the portfolio remains far ahead of the S&P 500 in 2015. Hopefully, it will have further increased its lead over the index in two weeks when we publish our next newsletter, at which time we will rebalance the portfolio.

Editor-in-Chief: John Reese

Guru Spotlight: Kenneth Fisher

Most of the talking heads you'll hear on financial news offer predictions about where the market is heading today, next week, or next month. And, more often than not, they are wrong. There are simply too many moving parts in the stock market for anyone to consistently make stellar short-term calls. In fact, research from DALBAR, Inc. cited poor market timing decisions as a primary reason why the typical investor underperformed the broader market by about 4% per year from 1993-2012.

Still, people continue to try to make money by jumping in and out of stocks, something Kenneth Fisher talked about way back in his 1984 classic Super Stocks, which forms the basis for one of my top-performing Guru Strategies. "There is no end to the lengths people go to try to find the magic key to the stock market," Fisher wrote, adding that people have tried computers, astrology, demographic studies, sunspots, economics, technical analysis, tea leaves, and even "the skin of a dried lizard at sunset cast to the wind."

"At best, one could hope to be right about the stock market perhaps half the time," Fisher said. "At worst, one is apt to be wrong most of the time. Stock-market seers run hot for a couple of years. Then most embarrass themselves."

Of course, many investors believe they are different -- overconfidence leads them to think they can indeed time the market. But what's really interesting is this: Even if you could predict the market's major moves, Fisher says it wouldn't be worth it. He studied how an investor would have fared had he correctly called every 100-point move of the Dow Jones Industrial Average for the five-year period ending Dec. 31, 1982. Such an investor (which of course, probably doesn't exist) would have earned a compound rate of return of 51.5%.

Taken from Super Stocks (The McGraw-Hill Companies, orig. 1984, republished 2008)


That sounds great, but, according to Fisher, it's no better than the return you could generate by buying a what he called a "super stock" -- the type of stock capable of growing its stock price 3 to 10 times in value in a period of three to five years.

Matching those annualized returns of 51.5% may be a bit ambitious of a goal. But remember, that's what you'd get if you accurately timed every 100-point move, and didn't have to pay taxes or fees. Since the vast majority of those 100-point swings occurred in less than a year, you'd be taxed at higher short-term gains rates. Super stocks make their gains over a three- to five-year period, generating long-term gains that are subject to lower tax rates, Fisher said. When you consider those factors, the choice between picking excellent individual stocks or timing every significant move of the broader market becomes clear.

How do you find a "super stock"? My Fisher-based model looks for stocks with price/sales ratios (PSR) below 0.75; three-year net average profit margins of at least 5%; inflation-adjusted earnings growth rates of at least 15% over the long term; debt/equity ratios below 40%, and positive free cash flows.

Fisher did have some advice for how to time the market. His two rules:

1. When a company is selling at a (sufficiently) low PSR-buy it.
2. If you can't find companies selling at (sufficiently) low PSRs, don't buy stocks.

That's a tongue-in-cheek way of saying, "Don't try to time the market!" because you can almost always find some stocks trading at low PSRs. Indeed, a few hundred stocks get at least some interest from my Fisher-based model right now -- though only five get a perfect 100% score. Here they are:

Sanderson Farms (SAFM)
Pilgrim's Pride Corporation (PPC)
Liquidity Services, Inc. (LQDT)
Arctic Cat Inc. (ACAT)
Winnebago Industries (WGO)

News about Validea Hot List Stocks

Apple Inc. (AAPL): The Apple Watch sold out within hours after pre-ordering began early on April 10, according to multiple news outlets. KGI analyst Ming-Chi Kuo estimated preorders for the watch -- which will be available in select fashion boutiques on April 24 (though not in Apple's own stores) would exceed 2.3 million units, though production bottlenecks were restricting rollout, according to AppleInsider.com. A Piper Jaffray analyst said that the initial ordering indicated "solid demand paired with very limited supply."

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

JLL   |   LCI   |   UVE   |   SAFM   |   GTLS   |   PPC   |   AAPL   |   CACC   |   FOSL   |   SSL   |  

Jones Lang LaSalle Incorporated (Jones Lang LaSalle), is a financial and professional services firm specializing in real estate. Jones Lang LaSalle has over 200 corporate offices worldwide and operations in more than 1,000 locations in 70 countries. The Company offers integrated real estate and investment management services on a local, regional and global basis to owner, occupier and investor clients. It delivers an array of Real Estate Services (RES) across its three geographic business segments: the Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. LaSalle Investment Management, a wholly owned member of the Jones Lang LaSalle group that consists of its fourth business segment, is a diversified real estate investment management company. In July 2014, Jones Lang LaSalle Inc acquired CLEO Construction Management (CLEO), a construction project management services firm that specializes in medical facilities.

Lannett Company, Inc. develops, manufactures, packages, markets and distributes solid oral (tablets and capsules), extended release, topical and oral solution finished dosage forms of drugs. The Company also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. (Cody Labs) subsidiary. The Company operates pharmaceutical manufacturing plants in Philadelphia, Pennsylvania and Cody, Wyoming. Customers of the Company's pharmaceutical products include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, Governmental entities and health maintenance organizations. The Company's products include Levothyroxine Sodium tablets, Digoxin tablets, Butalbital, Cocaine Topical Solution and Morphine Sulfate Oral Solution.

Universal Insurance Holdings, Inc. (UIH) is a vertically integrated insurance holding company. The Company's insurance products are offered to its 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.

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.

Chart Industries, Inc. is an independent global manufacturer of engineered equipment used in the production, storage and end-use of hydrocarbon and industrial gases. The Company supplies engineered equipment used throughout the global liquid gas supply chain. It operates in three segments: energy and chemicals (E&C), distribution and storage or (D&S), and biomedical. The E&C and D&S segments manufacture products used primarily in energy-related and general industrial applications, such as the separation, liquefaction, distribution and storage of hydrocarbon and industrial gases. Through its BioMedical segment, it supplies cryogenic and other equipment used in the storage and distribution of biological materials and oxygen, used primarily in the medical, biological research and animal breeding industries.

Pilgrim's Pride Corp (Pilgrim's) is a chicken producer with operations in the United States, Mexico and Puerto Rico. The Company is engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. As of December 26, 2010, it had the capacity to process more than 38 million birds per week for a total of more than 10.3 billion pounds of live chicken annually. During the fiscal year ended December 26, 2010 (fiscal 2010), it produced 7.7 billion pounds of chicken products. As of December 26, 2010, it operated 26 poultry processing plants located in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina, South Carolina, Tennessee, Texas, Virginia, and West Virginia. It has one chicken processing plant in Puerto Rico and three chicken processing plants in Mexico. In August 2012, Cal-Maine Foods, Inc. announced acquisition of the commercial egg assets of Pilgrim's.

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.

Credit Acceptance Corporation is a provider of financing programs to automobile dealers that enable them to sell vehicles to consumers, regardless of their credit history. The Company's financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements. Credit Acceptance has two programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, it advances money to Dealer-Partners (referred to as a Dealer Loan) in exchange for the right to service the underlying Consumer Loans. Under the Purchase Program, Credit Acceptance buys the Consumer Loans from the Dealer-Partners (referred to as a Purchased Loan) and keeps all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans.

Fossil Group, Inc. a global designer, marketer and distributer company that specializes in consumer fashion accessories. The Company's offerings include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and clothing. Its products are distributed globally through various distribution channels, including wholesale in countries where the Company has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company do not maintain a physical presence. The Company operates in four different segments: the North America Wholesale segment, the Europe Wholesale segment, Asia Pacific Wholesale segment and the Direct to Consumer segment.

Sasol Limited (Sasol) is a South Africa-based international integrated energy and chemicals company. The Company develops and commercializes technologies, builds and operates facilities to produce a range of product streams, including liquid fuels, high-value chemicals and low-carbon electricity. The Company's operations are organized into three focused business clusters: South African Energy Cluster; International Energy Cluster and Chemical Cluster. The South African Energy Cluster is involved in coal mining, gas production, synfuels manufacturing and oil refining. The International Energy Cluster manages the Company's oil and gas business outside South Africa. The Chemical Cluster is involved in making polymers, solvents, olefins and surfactants and other chemicals.

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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