Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary January 16, 2015

The Economy

Despite a couple minor hiccups over the past week or two, the US economy is continuing to look quite strong as we head into 2015 -- particularly in comparison to the rest of the world.

The private sector added 240,000 jobs in December, for example, the Labor Department said, with total nonfarm payrolls rising by 252,000. The October and December jobs-added figures were also revised upwards to indicate a total of 50,000 more jobs were added in those months than previously thought. The unemployment rate fell to 5.6% in December, the lowest it has been since June 2008; the broader "U-6" rate (which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job) fell two-tenths of a point to 11.2%, lowest it has been since the financial crisis exploded in September 2008. On the downside, the number of people not in the labor force jumped by 456,000, and average hourly earnings dipped by 0.2%.

New claims for unemployment rose slightly since our last newsletter, and are now just a bit below where they were one year ago, according to new Labor Department data. Continuing claims, the data for which lags new claims by one week, also rose slightly, but are 17% below their year-ago level. Job openings, meanwhile, rose 2.9% to 4.97 million in November -- the most since January 2001, according to another Labor Department report.

Elsewhere, retail sales tumbled 0.9% in December, according to a new report from the Census Bureau. But, they were up a solid 4.6% vs. the year-ago period. That may be an indication that some seasonal factors were in play in the monthly decline.

Oil and gas prices just keep falling. As of Jan. 14, the average price for a gallon of regular unleaded was just $2.10, according to AAA. That's down 46 cents over the past month.

Globally, the big news was the Swiss National Bank's decision to end its three-year policy of keeping the Swiss franc pegged at 1.20 per euro. It had fixed the rate to promote exchange rate stability, given that Switzerland does not use the euro. But it now appears that, with the European Central Bank having engaged in significant quantitative easing that has lowered the value of the euro, the Swiss didn't want their own currency to be debased anymore. Some have conjectured that this means more easing is coming from the ECB, though that remains to be seen.

Since our last newsletter, the S&P 500 returned -3.2%, while the Hot List returned -3.0%. So far in 2015, the portfolio has returned -3.0% vs. -3.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 213.7% vs. the S&P's 99.2% gain.

Reasons for Optimism

There's no getting around it: 2014 was a rough year for the Hot List. While the S&P 500 returned 11.4% for the year, the Hot List lost 11.1%. A good portion of the underperformance was a result of smaller stocks struggling in 2014. My models, as you may know, tend to focus more on small- and mid-cap stocks than larger picks. Over the long haul that has helped us, but last year it weighed on performance.

Looking forward, however, I remain optimistic on stocks and optimistic that the Hot List will beat the market over the long haul. Of course, in the short term, no one knows what is going to happen; there are simply too many factors that move the market from day to day. But while I don't know exactly what 2015 will hold for the portfolio, there are a number of reasons that I think now is a good time to be investing in stocks and in fundamental-focused strategies like ours. Here are a handful of those reasons.

Small-Cap Valuations
As a group, smaller stocks were pricier a year ago than they are today. At the start of 2014, small- and mid-caps were trading at a 26% premium to mega-caps. At the start of 2015, however, the premium was down to 23%. That's good news for strategies that tend to key on smaller stocks, like ours. Since the end of 2005, when the small stock premium has been below 25% at the start of the year, small stocks have significantly outperformed. In such years, the Russell 2000 index of smaller stocks has beaten the S&P 500 each time, doing so by an average of nearly 5 percentage points.

Oil Prices
Oil prices are now down about 60% from their 2014 highs, and their rapid decline has created some worry among investors who fear that it is a sign of coming economic weakness across the globe. To be sure, growth has slowed in China and other big emerging markets, which has decreased demand. But it appears that other factors -- the dollar's ascent and a glut of supply -- are more significant catalysts for oil's drop.

With all that in mind, cheaper oil is a big benefit to businesses and consumers alike. When businesses have more cash, they can use it to pay dividends, buy back shares, or reinvest in their businesses, all of which benefit shareholders. And when consumers have more disposable income, it's good for our economy, about two thirds of which is composed of consumer spending. There are possible downsides to cheaper oil, like job cutbacks in the energy industry and possible defaults on loans by overextended oil and gas companies, which could have some impact on the financial sector. But it appears that the positives outweigh the negatives right now.

The Strong Dollar
While the relationship between stocks and the dollar is a very complex one, a stronger dollar should benefit smaller firms, which tend to do more of their business at home in the US than larger companies, which often get a good deal of their profits from overseas in weaker currencies. Again, that's a plus for our models.

US Strength
Over the past 6 to 12 months, the US economy has been as strong as we've seen it at any time in this recovery. In fact, by some measures, it has been as strong as it has been in well over a decade. Overall in 2014, for example, payrolls rose by an average of 246,000 -- the best yearly average since 1999. The unemployment rate has fallen 1.1 percentage points since the end of 2013, with December's 5.6% reading the best since June 2008. The broader "U-6" rate (which unlike the headline number takes into account those working part-time who want full-time work, and discouraged workers who have given up looking for a job) has fallen nearly 2 full percentage points since the end of 2013, and is now the lowest it has been since the financial crisis exploded in September 2008.

A big part of all this has been the US's manufacturing boom. Through November, industrial production had increased by 5.2% over the past year (December figures aren't yet available). If that held up through December, it would make for the highest annual gain since 2010, and the second highest since 1998. The manufacturing sector expanded in each month of 2014, according to the Institute for Supply Management, with output really picking up in the summer and fall. The service sector also expanded in each month of the year, in most months by a significant amount. That makes it 59 straight months that the sector has expanded, according to ISM. All of this helped the US post gross domestic product growth of 5.0% in the third quarter -- its strongest quarterly growth rate since 2003.

The improvements in the US have come at a time when Europe and emerging markets are struggling. While the economy and stock market are not always attached at the hip, the US's relative strength versus the rest of the world should continue to keep money flowing into US stocks, especially given that ...

Valuations & Sentiment Conditions Are Still Attractive
Over the past year or two, many pundits have continue to say that stocks have gotten significantly overvalued, and that sentiment has gotten far too bullish. The data just does not back them up.

A survey done by Yale that asks investors how confident they are about the stock market over the next year, for example, shows that individual investors confidence levels have recently been at or near 25-year lows. Institutional investors' confidence levels have been at their lowest level since about 2000.

In addition, consider what Charles Schwab Chief Investment Strategist Liz Ann Sonders recently had to say about valuations. "S&P earnings have tripled since March of 2009, while the stock market is up [about] 245%," she wrote. "From the negative low in earnings, the E in the market's P/E has appreciated well more than the P, which is why valuation is no worse than about neutral now. In fact, both on a trailing and forward basis, the market is about at historic median P/Es; while most of the macro conditions supporting higher valuations remain in place." As for claims that valuations have risen artificially thanks to quantitative easing and ultralow interest rates, Sonders adds, "Interestingly though, the multiple expansion in this bull market has been about average for bull markets since 1957. So if valuation expansion has been average, why have stock market returns been so high? Earnings! Earnings growth in the current bull market has been 20% above the average level of growth for all bull markets since 1957."

When valuations are reasonable and sentiment is relatively sour, you often get a good environment for stocks -- one in which the market can avoid getting overheated and can keep climbing a wall of worry.

Staying Disciplined

In the end, no one knows exactly what 2015 has in store for investors. But as I noted above, a number of factors bode well for our models going forward. More importantly, these strategies have proven to be winners over the long haul, and they've done so by picking attractively priced shares of solid companies. While doing so doesn't always work (nothing always works), that approach has been a winning one for long-term investors since the stock market was created. The worst thing an investor can do is ditch a solid strategy because of short-term struggles -- it's the equivalent of buying high and selling low. So we'll stay disciplined and stick to the gurus' strategies, and over three long haul I'm confident that will lead to significant outperformance.

Editor-in-Chief: John Reese

The Fallen

As we rebalance the Validea Hot List, 3 stocks leave our portfolio. These include: United Insurance Holdings Corp.(Nda) (UIHC), Williams-sonoma, Inc. (WSM) and Jones Lang Lasalle Inc (JLL).

The Keepers

7 stocks remain in the portfolio. They are: Agco Corporation (AGCO), Blackrock, Inc. (BLK), Sasol Limited (Adr) (SSL), Universal Insurance Holdings, Inc. (UVE), Zumiez Inc. (ZUMZ), Silicon Motion Technology Corp. (Adr) (SIMO) and Amtrust Financial Services Inc (AFSI).

The Newbies

We are adding 3 stocks to the portfolio. These include: Sanderson Farms, Inc. (SAFM), Skyworks Solutions Inc (SWKS) and Starwood Property Trust, Inc. (STWD).

Portfolio Changes

Newcomers to the Validea Hot List

Sanderson Farms (SAFM): Mississippi-based Sanderson, founded in 1947, is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared food items. It has more than 11,000 employees in operations spanning five states and 13 different cities, and is the third largest poultry producer in the United States.

Sanderson ($1.8 billion market cap) gets strong interest from my Peter Lynch-, Joel Greenblatt- and Kenneth Fisher-based models. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.

Skyworks Solutions, Inc. (SWKS): Created in 2002 when Alpha Industries and the wireless communications business of Conexant merged, Skyworks makes high performance analog semiconductors for a range of applications, ranging from automotive to broadband to medical to smartphones and tablets.

Massachusetts-based Skyworks ($14 billion market cap) gets strong interest from my Peter Lynch- and Joel Greenblatt-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section.

Starwood Property Trust (STWD): Connecticut-based Starwood is the nation's largest commercial mortgage Real Estate Investment Trust, with more than 500 employees worldwide. It is managed by Starwood Capital Group, a real estate finance company that employs an additional 260 people and manages more than $29 billion in assets.

Starwood ($5.3 billion market cap) gets strong interest from my Martin Zweig-, David Dreman-, and John Neff-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section below.

News about Validea Hot List Stocks

Universal Insurance (UVE): Universal declared a quarterly dividend of $0.12 per share, or $0.48 annualized, a 20% increase from its prior dividend of $0.10, according to StreetInsider.com. The dividend will be payable on March 2, 2015, to stockholders of record on February 18, 2015, with an ex-dividend date of February 13, 2015. The annual yield on the dividend is 2.3 percent.

Silicon Motion Technology Corporation (SIMO): SIMO said on Jan. 8 that based upon its preliminary fourth quarter financial results, revenue is expected to decline 7 to 8% sequentially, at the midpoint of its original guidance range of a decline of 5 to 10% that the company issued on October 30. Gross margin (non-GAAP) is expected to be 51.5 to 52.5%, above the company's original guidance range of 50 to 52%. SIMO will release its full fourth quarter 2014 results after the market closes on January 26.

The Next Issue

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

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

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.

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.

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.

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.

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.

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).

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.

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.