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Executive Summary September 11, 2015

The Economy

After a couple of wild weeks, stocks have begun to stabilize, with solid economic data supporting the rebound in the market.

The economy added 173,000 jobs during August, the Labor Department said, with the unemployment rate falling to 5.1%, the lowest it has been since March 2008. The broader "U-6" unemployment 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 to 10.3%, the lowest it has been since June 2008.

Average hourly wages rose at a 3.8% annualized rate vs. July, and average weekly wages jumped at a 7.3% annualized pace, as hours worked per week also edged higher.

Good news came from the service sector, which expanded in August for the 67th straight month, according to the Institute for Supply Management. The rate of expansion wasn't quite as high as July's record pace, but it was still quite impressive. New orders remained very high, as did the employment sub-index.

The manufacturing sector, meanwhile, expanded for the 32nd straight month, according to ISM, though it did so at the slowest pace in more than two years. Growth in the new orders and employment sub-indexes also slowed but remained positive. Customer inventories increased sharply, a negative sign that bears watching.

Personal income jumped 0.4% in July, according to the Commerce Department.. Real disposable personal income rose 0.4%, while real personal consumption expenditures rose 0.2%. That meant the personal savings rate moved higher to 4.9%, from 4.7%.

Gas prices continue to fall. A gallon of regular unleaded on average cost $2.39 as of September 8, down from $2.61 a month earlier, according to AAA. That's about 30% below where it was a year ago. While the causes of the gas price declines over the past year have mixed implications -- some is due to excessive supply created by fracking, while some is due to China's slowdown -- lower gas prices should continue to help most American businesses.

Since our last newsletter, the S&P 500 returned -1.8%, while the Hot List returned -0.7%. So far in 2015, the portfolio has returned -5.2% vs. -5.2% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 206.6% vs. the S&P's 95.1% gain.

Portfolio Update

While August was a rough month for the Hot List, the portfolio has been rebounding nicely over the past couple weeks. Since our last newsletter, five of our holdings have been in the black and five have been in the red, but the winners have outweighed the losers in magnitude. (Performance data as of afternoon trading on September 10.)

The biggest winner of the fortnight has been Universal Insurance Holdings, the small-cap insurer that offers homeowners insurance in Florida, North Carolina, South Carolina, Hawaii, Georgia, Massachusetts and Maryland. Shares of the UVE have surged 11.6%. The stock had been hit harder than the broader market during the August declines, so the gains over the past two weeks may have been in part a bounce back after investors realized the stock was hit too hard. But the firm also announced a $10 million program to buy back its shares, which runs through the end of 2016, and that likely helped to boost shares as well.

Another nice winter was Forum Energy Technologies, which was up more than 3%. The oil and gas services firm was likely helped by the recent increase in oil prices.

On the downside were a pair of firms that announced earnings. Sanderson Farms fell about 3% after it reported a profit of $50.9 million, or $2.27 a share, down from $76.1 million, or $3.30 a share, a year ago. Revenues fell 3.7% to $739.9 million. Analysts anticipated $2.90 in per-share earnings and $750.9 million in sales, according to Thomson Reuters. The poultry producer's disappointing results were attributable to sharply lower chicken prices, The Wall Street Journal reported.

G-III Apparel Group, also fell about 3%. It reported fiscal second-quarter earnings of $12.5 million, or 27 cents per share. That beat analysts' estimates of 20 cents per share, according to Zacks Investment Research. Revenue was $473.9 million, topping estimates of $470.6 million. G-III also raised its full-year earnings guidance. Still, for whatever reason the generally positive news didn't translate into gains for the stock.

Overall, the performance of both the Hot List and the broader market were encouraging over the past two weeks. Hopefully the rough waters we sailed through in August have passed. We'll check back in again in two weeks, at which time we will rebalance the portfolio.

 
Editor-in-Chief: John Reese












Guru Spotlight: Benjamin Graham

If you are an aficionado of value investing and Warren Buffett, you probably know that one of the biggest influences on Buffett's life was the great Benjamin Graham. Known as the "Father of Value Investing", Graham essentially invented the field of security analysis, and became Buffett's mentor while he was teaching young Warren at Columbia University. But while he had a huge impact on Buffett, Graham inspired a number of other investors -- and a remarkable number of his pupils went on to great success.

In a 1984 speech he gave at Columbia University entitled "The Superinvestors of Graham-and-Doddsville", Buffett examined the remarkable track records of a group of investors who studied under Graham. He explained that from 1954 to 1956, there were four "peasant level" employees working under Graham at the Graham-Newman Corporation (David Dodd and Jerome Newman were among the firm's other directors). Three of those "peasants" (Walter Schloss, Tom Knapp, and Buffett himself) established easily traceable track records after leaving the firm, Buffett said -- and all of those track records were tremendous:

Schloss: Gained 16.1% and 21.3% annualized at two partnerships over a 28-year period, vs. 8.4% for the S&P

Knapp: Gained 20% and 16% annualized at two funds over a 15-year period, vs. 7.0% for the S&P.

Buffett (pre-Berkshire): Annualized returns of 29.5% and 23.8% at two partnerships over a 13-year period, vs. 7.4% for the S&P.

(Data from Buffett's speech, available in the revised version of Graham's The Intelligent Investor)

Of course, that doesn't even include the exceptional returns Buffett has generated at Berkshire Hathaway over the past three-plus decades. What's more, he, Schloss, and Knapp weren't the only highly successful Graham/Dodd/Newman disciples. Bill Ruane, Charlie Munger, John Templeton, John Neff -- all of these gurus and others worked under or learned from Graham and company. Buffett's conclusion: "A concentration of winners that simply cannot be explained by chance can be traced to this particular intellectual village." In other words, the results show that Graham-style value investing works.

It's hard to argue the point, and my success with Graham's strategy only bolsters the already impressive case. Since mid-2003, my 10-stock Graham-based portfolio has returned 9.5% annualized vs. 5.6% for the S&P, while the 20-stock version has returned 10.2% annualized.

Today, one might think that our high-tech world has made it harder for value investing to work, because information is now so easily accessible. In Graham's day, it took a lot of legwork and effort to analyze even one company's financials and fundamentals. But those who had the time, desire, and initiative to find and crunch the numbers could get a huge leg up on others. Today, the Internet gives us financial and fundamental information on thousands of stocks with just a few mouse clicks. Finding a company with a strong return on equity, low debt, and dirt-cheap shares is something that just about anyone can do, and do quite easily.

In theory, that should make an approach like Graham's stop working. If it's known that good value strategies do well over time, and it's easy to find good value stocks, those stocks should be available at cheap prices for just a blink of an eye before everyone piles into them.

But, ironically, the same technological forces that have helped made it easier to find good value stocks have made it harder to stick with those stocks. Turn on the TV, pop open your laptop, click on your phone -- all of them give you a front row seat to every up and down of every stock in your portfolio. Because we humans are emotional creatures, many, if not most, investors end up acting on those short-term ups and downs far more than they should, selling goods stocks that have had a bad day, or buying hot stocks that have had a good day, without regard to what truly matters: what those shares are really worth.

For disciplined investors, that's a good thing. When others bail on good stocks that are having short-term dips, those focused on the long term can swoop in and pick up the bargains left behind. It's hard to do, because in the short term your portfolio can include some very unloved, declining stocks. But, as Graham, Buffett, and other "superinvestors" have shown, over the long haul value and fundamentals win out. Stay disciplined, and you tilt the odds greatly in your favor.



News about Validea Hot List Stocks

G-III Apparel Group (GIII): G-III reported fiscal second-quarter earnings of $12.5 million, or 27 cents per share. That beat analysts estimates of 20 cents per share, according to Zacks Investment Research. Revenue was $473.9 million, topping estimates of $470.6 million. G-III also raised its full-year earnings guidance. Still, for whatever reason the generally positive news didn't translate into gains for the stock, which fell about 3%.

Sanderson Farms (SAFM): Sanderson reported a profit of $50.9 million, or $2.27 a share, down from $76.1 million, or $3.30 a share, a year earlier. Revenue slipped 3.7% to $739.9 million. Analysts anticipated $2.90 in per-share earnings and $750.9 million in sales, according to Thomson Reuters.



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

FL   |   BOFI   |   UVE   |   MYRG   |   TRV   |   GTLS   |   SSB   |   SAFM   |   FET   |   GIII   |  



Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and SIX:02, as well as the retail stores of Runners Point Group, including Runners Point and Sidestep. The Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and the direct-to-customer subsidiary of Runners Point Group, which sell to customers through their Internet and mobile sites and catalogs. As of January 31, 2015, the Company operated 3,423 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. As of January 31, 2015, the Company operated a total of 78 franchised stores, of which 31 are in the Middle East, 27 in Germany and Switzerland, and 20 in the Republic of Korea.





BofI HOLDING, INC., is the holding company for BofI Federal Bank. The Bank has deposit and loan customers nationwide including consumer and business checking, savings and time deposit accounts and financing for single family and multifamily residential properties, small-to-medium size businesses in target sectors, and selected specialty finance receivables. The Bank provides consumer and business banking products through the branchless distribution channels and affinity partners. The Bank's deposit products are demand accounts, savings accounts and time deposits marketed to consumers and businesses located in all 50 states. The Bank's primary lending products are residential single family and multifamily mortgage loans. The Bank's business is primarily concentrated in the state of California and is subject to the general economic conditions of that state.





Universal Insurance Holdings, Inc. (UIH), with its wholly owned subsidiaries, is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. The Company's offers homeowners' insurance through the Insurance Entities, Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC). Substantially all aspects of insurance underwriting, distribution and claims processing are performed by the Company's subsidiaries. UPCIC, a wholly owned subsidiary of the Company, is a writer of homeowners insurance in Florida and has commenced its operations in North Carolina, South Carolina, Hawaii, Georgia, Massachusetts, Maryland, Delaware, and Indiana. APPCIC, also a wholly owned subsidiary, writes homeowners multi-peril insurance on Florida homes valued in excess of $1 million, which are limits and coverages currently not targeted through its affiliate UPCIC.





MYR Group Inc. is a holding company, which provides specialty electrical construction services through its subsidiaries. The Company performs construction services in two business segments: Transmission and Distribution (T&D), and Commercial and Industrial (C&I). T&D segment provides solutions to customers in the electric utility industry and the renewable energy industry. The Company also provides C&I electrical contracting services to property owners and general contractors in the western United States. The Company's wholly owned subsidiaries include The L. E. Myers Co., Harlan Electric Company, Hawkeye Construction, Inc., Great Southwestern Construction, Inc., Sturgeon Electric Company, Inc., MYR Transmission Services, Inc., MYR Group Construction Canada, Ltd., MYR Transmission Services Canada, Ltd. and Northern Transmission Services, Ltd. The Company also provides electrical construction services, and limited gas construction services.





The Travelers Companies, Inc. is a holding company. Through its subsidiaries, the Company is engaged in providing a range of commercial and personal property and casualty insurance products and services to businesses, Government units, associations and individuals. The Company has three operating segments: Business and International Insurance segment, Bond & Specialty Insurance segment and the Personal Insurance segment. Business and International Insurance segment offers a range of property and casualty insurance and insurance related services to its customers, primarily in the United States, as well as in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world. Bond & Specialty Insurance segment provides surety, crime, management and professional liability coverages, and related risk management services. Personal Insurance segment includes a range of property and casualty insurance covering individuals' personal risks.





Chart Industries, Inc. (Chart) is a diversified manufacturer of engineered equipment engineered equipment for the industrial gas, energy, and biomedical industries. The Company's equipment and engineered systems are used for low-temperature and cryogenic applications. It operates through three segments: Energy & Chemicals (E&C), Distribution & Storage (D&S) and BioMedical. Its products include vacuum insulated containment vessels, heat exchangers, cold boxes and other cryogenic components. Its E&C and D&S segments manufacture products used in energy-related and 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 medical, biological research and animal breeding industries. The Company, through Thermax, Inc., provides cryogenic fluid vaporizers utilized in industrial gas, petro-chemical and liquefied natural gas applications.





South State Corporation (South State), formerly First Financial Holdings, Inc. is a bank holding company. The Company provides a range of banking services and products to its customers through its wholly owned bank subsidiary, South State Bank (the Bank), formerly SCBT, a South Carolina-chartered commercial bank. The Bank provides a range of retail and commercial banking services, mortgage lending services, trust and investment services, and consumer finance loans. As at December 31, 2014, the Company had approximately $7.8 billion in assets, $5.7 billion in loans, $6.5 billion in deposits, $984.9 million in shareholders' equity and a market capitalization of approximately $1.6 billion. The Company serves customers and conducts its business from 127 financial centers in 19 South Carolina counties, four North Carolina counties, ten northeast Georgia counties and two coastal Georgia counties.





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.





Forum Energy Technologies, Inc. is an oilfield products company. The Company designs, manufactures and distributes products and engages in aftermarket services, parts supply and related services. Its product offering includes a mix of engineered capital products and replaced items that are used in the exploration, development, production and transportation of oil and natural gas. Its capital products are targeted at drilling rig equipment for rigs, upgrades and refurbishment projects; subsea construction and development projects; the placement of production equipment on producing wells, and downstream capital projects. Its engineered systems are components used on drilling rigs or in the course of subsea operations, while its consumable products are used to maintain operations at well sites in the well construction process, within the supporting infrastructure and at processing centers and refineries. Its segments are Drilling & Subsea and Production & Infrastructure.





G-III Apparel Group, Ltd. designs, manufactures, and markets a range of apparel products. The Company's apparel products include outerwear, dresses, sportswear, swimwear, women's suits and women's performance wear, as well as footwear, luggage and women's handbags, small leather goods and cold weather accessories. The Company operates through three segments, Licensed Products, Non-Licensed Products, and Retail Operations. The Licensed products segment includes sales of products under brands licensed by the Company from third parties. The Non-licensed products segment includes sales of products under its own brands and under private label brands. The retail operations segment consists primarily of its Wilsons Leather and G.H. Bass stores, as well as Calvin Klein Performance stores.





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.





Disclaimer


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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.