Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary November 27, 2009

The Economy

While a number of concerns remain, the economy is continuing to show signs of improvement in some key areas as we head into the final month of 2009.

One of those important areas in which strides are being made is one that played a major role in last year's financial crisis and the recent recession: the housing market. This week, the National Association of Realtors reported that existing home sales jumped 10.1% in October, with sales activity hitting its highest point in more than two-and-a-half years. It was the sixth time in seven months that existing home sales rose, with the number of sales in October representing a 23.5% increase over October 2008 levels.

New home sales also jumped, rising 6.2% in October, the Commerce Department reported. New home prices also rose slightly, though the average existing home sale price fell for the fourth straight month, as buyers continued to snatch up distressed properties.

Another important bit of news in the housing sector involves inventories. New home inventories hit their lowest level in almost 40 years, according to the Associated Press, while existing home supply levels are at their lowest level in more than 30 months, almost 15% lower than they were in October 2008. That's good news for homebuilders -- and for those looking for work in the homebuilding industry.

Retail sales also registered a surprise jump in October, rising 1.4% over September levels. That shows some resilience on the part of the American consumer. But the October figure was still down 1.7% from October 2008, the Commerce Department reported, a sign of just how much ground still needs to be made up.

Industrial production also took a baby step forward in October, rising 0.1%. While the increase was small, it was the fourth straight month industrial production has risen, according to the Federal Reserve, a good sign. Capacity usage also gained slightly for the fourth straight month, though it remains about 10 percentage points below its historical average.

Of course, the main problem that continues to hover over the economy is employment. We got some encouraging numbers this week -- the number of people filing new jobless claims fell by 7.5% in the most recent week, according to new Labor Department data, reaching the lowest level in more than a year. But that is still a lot of people going off of payrolls, and with the unemployment rate over 10%, much improvement is needed. Hopefully the Obama Administration's renewed pledge to create jobs will yield results sooner rather than later.

Finally, one of the most significant economic factors for investors in recent weeks has been the dollar, which continues to tumble. It fell to a 15-month low against the euro this week and was near a decade-and-a-half low against the yen, as the newly released minutes of the Federal Reserve's early November meeting indicated that the Fed has no plans to raise historically low interest rates anytime soon. The falling dollar raises a number of issues, but it isn't necessarily a bad thing for investors.

With the economic news generally featuring more hope than fear, the market trended slightly upward over the past fortnight. The S&P 500 rose 1.1%, while the Hot List gained 2.9%. Heading into the final month of the year, the portfolio is far ahead of the market in 2009, having gained 43.5% vs. the S&P's 20.0% increase. And since its inception more than six years ago, the Hot List is up 135.3%; the S&P has risen just 11.0% in that time.

Shaking Up the Portfolio

The Hot List is due for its monthly rebalancing today, and it is making some major changes. The portfolio is selling off five of its holdings and replacing them with five that now have higher ratings from my Guru Strategies.

The departing stocks include several strong performers. Leading the way was Chinese I/T firm VanceInfo Technologies, which gained more than 30% after joining the portfolio in early September. The firm posted some very strong third quarter results during its time in the Hot List, with net income jumping 33% and net revenue jumping 45%, part of what drove the stock higher. Two other of the departing stocks, Raytheon Company and Humana, were both up more than 14% (Raytheon since joining the portfolio on Oct. 30 and Humana since joining on Oct. 2). The lone departing stock that lost ground was Frontier Oil.

The newcomers feature several capital goods firms, including EMCOR Group and Jacobs Engineering, both of which are involved in construction services, and Dresser-Rand Group, which supplies products and services to firms in the oil, gas, petrochemical and process industries.

Also joining the Hot List are two former holdings, Chevron and Aeropostale, both of which spent time in the portfolio earlier this year. Now my models think they're again selling at attractive values -- particularly Aeropostale, which is the lone stock in the market that currently gets approval from four of my Guru Strategies.

(Another) Jobless Recovery

Looking ahead, one of the key issues many investors are focused on is unemployment. Many pundits and strategists have noted that a high jobless rate will be a threat to the economic recovery, and they're right. More unemployed Americans means fewer people spending, and with consumer spending making up about 70% of the U.S. economy, that's not a recipe for long-term growth.

But there are a couple things to consider when looking at employment figures. The first is that the notion of a "jobless recovery" is nothing new. In fact, employment is often one of the final pieces of the recovery puzzle to fall into place. Take the recession of 1973-1975. While the recession ended in March of '75, unemployment didn't peak until May of '75, at 9%. It stayed above 8% through the end of '75, and didn't get below 7% until the fall of 1977.

Other recoveries show a similar trend. The recession that ended in November of 1982 featured very high unemployment that peaked in December of '82 at 10.7%. While GDP growth began surging at the start of 1983, unemployment remained above 10% through June of '83; it didn't fall below 8% until the start of the next year.

For a final example, take the recession that ended in March of 1991. While GDP turned positive in the second quarter of '91, unemployment didn't peak until June of 1992, at 7.8%. And it remained above 7% for another year after that.

Of course, every recession is different, and this one no doubt has aspects -- the massive deleveraging of America, for example -- that present unique problems in terms of employment. Given the tremendous levels of fear that hit both consumers and businesses last fall, it may take longer than usual for consumers to open their wallets and businesses to feel comfortable enough to start hiring again. But if history is any indication, the wallets will open, and the "Help Wanted" signs will start popping up, perhaps sooner than many expect.

The second key factor to consider involving unemployment is one I've stressed many times before: The economy isn't the stock market. The economy is one factor that impacts the market, but it's not the only one -- especially not right now. In a recent interview, Barry Ritholtz, one of the top strategists I keep an eye on, delved into this issue. Ritholtz noted that the factors driving the market right now are historically low interest rates and huge stimulus spending by the government -- two factors that are extremely bullish for stocks. Moreover, he says that when we do start getting strong jobs reports, the market may head lower, because investors will begin to think that the economic improvements will portend the government raising interest rates and pulling back some of its stimulus efforts.

Don't get me wrong -- I'm not saying I want to see a weak economy and high unemployment. No one wants to see big numbers of Americans struggling to find work, and in the end a solid, healthy economy will likely be best for stocks over the long haul. But the point is that looking at individual pieces of economic data -- even major ones like unemployment figures -- and making investment decisions based on them is a dangerous game. There are a myriad of complicated, ever-changing factors that drive stocks up or down, ranging from investor emotions to government policies to the economy. Trying to jump in and out of the market because of one piece of economic data, or even several pieces of economic data, can end very badly. That's why I'll continue to stick to my long-term strategy with the Hot List, and I expect that over the long term it will benefit the portfolio.

Editor-in-Chief: John Reese

Hot List Editor John Reese Announces Publication of New Book

The Guru Investor shows you how to implement the strategies of Wall Street legends like Warren Buffett, Peter Lynch and Benjamin Graham in your own portfolio.

Buy Your Copy Now!

The Fallen

As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Humana Inc. (HUM), Frontier Oil Corporation (FTO), World Fuel Services Corporation (INT), Raytheon Company (RTN) and Vanceinfo Technologies Inc. (VIT).

The Keepers

5 stocks remain in the portfolio. They are: Itt Educational Services, Inc. (ESI), Tidewater Inc. (TDW), National-oilwell Varco, Inc. (NOV), Oil States International, Inc. (OIS) and Fuqi International, Inc. (FUQI).

The Newbies

We are adding 5 stocks to the portfolio. These include: Jacobs Engineering Group Inc. (JEC), Chevron Corporation (CVX), Emcor Group, Inc. (EME), Aeropostale, Inc. (ARO) and Dresser-rand Group Inc. (DRC).

Portfolio Changes

Newcomers to the Validea Hot List

Aeropostale (ARO): This mall-based clothing retailer targets youngsters age 14 to age 17 through more than 900 stores in 49 states, Puerto Rico, and Canada. Its new P.S. from Aeropostale stores also are aimed at 7- to 12-year-old youngsters. In the past year, the $2.1 billion market cap firm has raked in more than $2 billion in sales. New York City-based Aeropostale has upped earnings per share in every year of the past decade, and has increased EPS and sales in each quarter in 2009 so far.

Aeropostale gets approval from four of my models -- those I base on the approaches of Peter Lynch, Warren Buffett, Joel Greenblatt, and James O'Shaughnessy. To see why, check out the "Detailed Stock Analysis" section below.

Chevron Corporation (CVX): This California-based oil giant does business in more than a hundred countries and has a market cap of almost $160 billion. It specializes in oil and natural gas, but has also invested billions in alternative and renewable energy technologies (including solar, geothermal, and hydrogen power) and energy efficiency services since 2002. Chevron, which has taken in almost $170 billion in sales in the past year, gets approval from my Peter Lynch- and James O'Shaughnessy-based models. To find out why, scroll down to the "Detailed Stock Analysis" section below.

EMCOR Group, Inc. (EME): Based in Connecticut, this construction and facilities services firm does electrical, mechanical, lighting, air conditioning, heating, security, fire protection and power generation systems work for companies in a wide variety of industries. The $1.6 billion market cap company has taken in close to $6 billion in sales in the past year.

EMCOR gets high marks from my Peter Lynch-, James O'Shaughnessy-, and Joel Greenblatt-based models. The "Detailed Stock Analysis" section below explains why.

Jacobs Engineering Group (JEC): This California-based firm provides technical, professional, and construction services to industrial, commercial, and government clients. It is involved in scientific and specialty consulting and all aspects of engineering and construction, and operations and maintenance. Among the types of firms it works with: Aerospace and Defense, Automotive and Industrial, Chemicals and Polymers, Energy, Infrastructure, Oil and Gas, Pharmaceuticals and Biotechnology, and Technology

Jacobs, which has a $4.5 billion market cap, gets approval from my top-performing model, my Benjamin Graham-based strategy. To see why, scroll down to the "Detailed Stock Analysis" section.

Dresser-Rand Group (DRC): Based in Texas, Dresser-Rand supplies centrifugal and reciprocating compressors, steam turbines, gas turbine packages, and control systems to firms in the oil, gas, petrochemical and process industries. It has manufacturing facilities in seven countries, and service centers in 17 countries. The $2.4 billion market cap firm has taken in about $2.5 billion in sales in the past 12 months.

Dresser-Rand gets approval from my James O'Shaughnessy- and Joel Greenblatt-based models. The "Detailed Stock Analysis" section below explains why.

News about Validea Hot List Stocks

National Oilwell Varco (NOV): Varco announced on Nov. 17 that it will pay a one-time cash dividend of $1 per share. The dividend will be payable on Dec. 16 to shareholders of record as of Dec. 2, according to MarketWatch. Varco will also pay a regular quarterly cash dividend of $0.10 per share starting on Dec. 16, MarketWatch reported.

Jacobs Engineering (JEC): On Nov. 16, Jacobs announced that its fourth-quarter profit fell 31% and its sales dropped 20% compared to the year-ago quarter. Jacobs also issued full-year fiscal 2010 profit guidance of $2.00-$2.60 per share, lower than analysts' average estimates of $2.83 per share, the Associated Press reported. The stock fell almost 15% the following day (before the Hot List purchased it).

The Next Issue

In two weeks, we will publish another issue of the Hot List, at which time we will take an in-depth look at one of my individual Guru 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

FUQI   |   EME   |   ARO   |   OIS   |   NOV   |   JEC   |   CVX   |   DRC   |   ESI   |   TDW   |  

Fuqi International, Inc. (Fuqi) is a designer of precious metal jewelry in China, developing, promoting, and selling a range of products in the Chinese luxury goods market. The Company's products consist of a range of styles and designs made from gold and other precious metals, such as platinum and Karat gold (K-gold). The Company also produce jewelry items that contain diamonds and other precious stones on a custom-order basis. Its design database contains over 30,000 products. The Company operates through its wholly owned subsidiary Fuqi International Holdings Co., Ltd. (Fuqi BVI) and its wholly owned subsidiary, Shenzhen Fuqi Jewelry Co., Ltd. (Fuqi China). As of December 31, 2008, the Company had 69 jewelry retail counters and stores in China.

EMCOR Group, Inc. (EMCOR) is an electrical and mechanical construction and facilities services company in the United States, Canada, the United Kingdom and in the world. The Company's segments include United States electrical construction and facilities services, United States mechanical construction and facilities services, United States facilities services, Canada construction and facilities services, United Kingdom construction and facilities services, and Other international construction and facilities services. The Company specializes in providing construction services relating to electrical and mechanical systems in facilities of all types and in providing services for the operation, maintenance and management of all aspects of such facilities (referred to as facilities services).

Aeropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 14 to 17 year-old young women and young men. The Company also sells Aeropostale merchandise through its e-commerce Website, www.aeropostale.com. As of January 31, 2009, it operated 914 stores, consisting of 874 Aeropostale stores in 48 states and Puerto Rico, 29 Aeropostale stores in Canada, and 11 Jimmy'Z stores in 10 states. The Company locates its stores primarily in shopping malls, outlet centers and, to a much lesser degree, lifestyle and off-mall shopping centers. The Company has developed a new retail store concept called P.S. from Aeropostale, which will offer casual clothing and accessories focusing on elementary school children between the ages of seven and 12. It offers a focused collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear and accessories.

Oil States International, Inc. (Oil States) through its subsidiaries, is a provider of specialty products and services to oil and gas drilling and production companies worldwide. The Company operates in a number of oil and gas producing regions, including the Gulf of Mexico, United States onshore, West Africa, the North Sea, Canada, South America and Southeast and Central Asia. Its customers include many of the national oil companies, major and independent oil and gas companies and other oilfield service companies. Oil States operates in three principal business segments: offshore products, tubular services and well site services. The Company's well site services segment includes the accommodations, rental tools and drilling services businesses. On February 1, 2008, Oil States purchased all of Christina Lake Enterprises Ltd., the owners of an accommodations lodge (Christina Lake Lodge) in the Conklin area of Alberta, Canada.

National Oilwell Varco, Inc. (NOV) is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates in three segments. The Rig Technology segment designs, manufactures, sells and services systems for the drilling, completion and servicing of oil and gas wells. The Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells, service pipelines, flowlines and other oilfield tubular goods. The Distribution Services segment provides maintenance, repair and operating (MRO) supplies, and spare parts to drill site and production locations worldwide.On April 21, 2008, NOV acquired Grant Prideco, Inc. In December 2008, it acquired Sakhalin Outfitters LLC and Mid-South Machine, Inc. In April 2009, NOV acquired ASEP Group Holding B.V. and Anson Limited.

Jacobs Engineering Group Inc. is a technical professional services firm in the United States. It provides a range of technical, professional, and construction services to industrial, commercial, and governmental clients globally. The Company provides four categories of services, including project services, which include engineering, design, architectural, and similar services; process, scientific and systems consulting services, which includes services performed in connection with a range of scientific testing, analysis, and consulting activities; construction services, which encompasses construction services, as well as modular construction activities, and includes direct-hire construction and construction management services, and operations and maintenance services, which includes services performed in connection with operating facilities on behalf of clients, as well as services involving process plant maintenance.

Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to the United States and International subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations of coal and other minerals, power generation and energy services. Exploration and production (upstream) operations consist of exploring for, developing and producing crude oil and natural gas, and also marketing natural gas. Refining, marketing and transportation (downstream) operations relate to refining crude oil into finished petroleum products; marketing crude oil and the many products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. In April 2009, Reliance Industries Limited bought back Chevron Corporation's 5% stake in Reliance Petroleum Limited.

Dresser-Rand Group Inc. is the global supplier of custom-engineered rotating equipment solutions for the applications in the oil, gas, petrochemical and process industries. The products and service applications include oil and gas production; high-pressure field injection, gas lift, and enhanced oil recovery; natural gas processing; gas liquefaction; gas transmission and storage; refining; petrochemical production; and general industrial markets, such as paper, steel, sugar, distributed power and United States Navy. The Company operates globally with manufacturing facilities in the United States, France, United Kingdom, Germany, Norway, China and India. It operates a range of products and clients to the global client base in over 140 countries from the global locations in 18 United States states and 26 countries. The Company operates in two business segments: new units, and aftermarket parts and services.

ITT Educational Services, Inc. (ITT/ESI), is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2008, the Company offered master, bachelor and associate degree programs to approximately 62,000 students. As of December 31, 2008, it had 105 institutes and nine learning sites located in 37 states. All of its institutes are authorized by the applicable education authorities of the states, in which they operate, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). During the year ended December 31, 2008, the Company began its operations at eight new institutes. As of December 31, 2008, the Company offered 33 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences.

Tidewater Inc. provides offshore supply vessels and marine support services to the offshore energy industry through the operation of offshore marine service vessels. As of March 31, 2008, the Company had a total of 430 vessels, of which 10 were operated through joint ventures, 61 were stacked and 11 vessels withdrawn from service. The Company provides services supporting all phases of offshore exploration, development and production, including towing of and anchor handling of mobile drilling rigs and equipment; transporting supplies and personnel necessary to sustain drilling, workover and production activities; assisting in offshore construction activities, and a variety of specialized services, including pipe laying, cable laying and three-dimensional (3-D) seismic work. The Company operates in two segments: United States and International.

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.