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Executive Summary July 3, 2014

The Economy

While many investors remain trepidatious over the ongoing strife in the Middle East, the US economy has been gaining steam, new data shows.

For starters, private payroll processor ADP said the private sector added 281,000 jobs in June, the most in over a year. Small businesses as usual led the way, creating 117,000 new jobs. The Labor Department's June jobs report hadn't been released as of this writing, but hopefully we'll see a similarly strong number from that.

The manufacturing sector expanded in June for the 13th straight month, and did so at about the same pace it did in May, according to the Institute for Supply Management. The survey's New Orders sub-index rose and remains at a very healthy level. The Employment sub-index showed that manufacturing employment conditions continued to improve, at about the same pace as they did in May. The Prices sub-index, which has been elevated for much of the last year, dipped a bit but showed that prices continued to rise at a fairly rapid rate.

Speaking of which, inflation has been accelerating. The Consumer Price Index rose 0.4% in May, according to the Labor Department. That put it 2.1% ahead of its year-ago pace, the biggest year-over-year gain in almost two years. That figure is hardly troubling, but inflation remains something to keep an eye on going forward.

Elsewhere, personal income again rose at a good pace in May, increasing 0.4%, according to a new government report. Real disposable personal income rose 0.2%. For the second straight month, consumers tightened their belts, with real personal consumption expenditures falling 0.1%. That helped boost the personal savings rate from 4.5% in April to 4.8% in May.

Good news also came from the housing market, which had been scuffling a bit in recent months. New home sales rose 18.6% in May, according to a new government report. That put them 22.5% ahead of the May 2013 pace. Prices rose 4.5% versus April. Existing home sales, meanwhile, jumped 4.9% in May, according to the National Association of Realtors. While they were still 5% below year-ago levels, the 4.9% increase represented the largest monthly gain since August 2011. Inventory gains moderated price growth, the group said, with median prices up 5.1% compared to last May. Pending home sales also made a nice jump, increasing 6.1% in May, according to the realtor group. That was the biggest gain since April 2010, when homebuyers rushed to take advantage of the expiring government tax credit offer. Pending sales are still down 5.2% compared to May 2013, however. All in all, though, the housing data is looking up.

Overseas, Iraq and ISIS continue to be the main story. So far the economic impacts in terms of oil and gas prices hasn't been significant. But it's certainly something to keep an eye on as the conflict continues.

Overall since our last newsletter, the S&P 500 returned 0.9%, while the Hot List returned -3.0%. For the year, the portfolio stands at -13.1% vs. 6.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 216.0% vs. the S&P's 97.4% gain.

Are You Ready For A Fall?

Lingering concerns about the US debt crisis, Europe's own financial crisis, the debt ceiling debacle of a few years ago, Congress's sequestration of the budget, uprisings in the Middle East, major trouble in Iraq -- the bull market that began in March 2009 has climbed a steep wall of many, many worries over the past five-plus years. But while investors have had plenty of reasons to be fearful, the bull has actually had very few major hiccups. Perhaps because so many fled the market in late 2008 and early 2009 and were then very cautious about getting back into stocks, there just weren't enough market-timers left to bail when these issues heated up. Whatever the case, the trouble-filled last five years have included only two corrections (declines of at least 10% in the broader market). Currently, the S&P 500 has gone more than 1,000 days without a correction, according to Birinyi Associates, one of the longest stretches ever.

Make no mistake, however: A correction will come at some point. And, as Jason Zweig wrote in a recent Wall Street Journal piece, it's best to prepare for one now, and not get complacent because of the lengthy stretch we've had between corrections. "In a downturn, you won't be the same investor that you are now -- unless you rely on rules and procedures, rather than willpower alone, to regulate your behavior," writes Zweig. "New research shows that the kind of stress brought on by a collapsing stock market fundamentally changes how people make financial decisions."

Zweig examined the research of Mauricio Delgado, a neuroscientist in the psychology department at Rutgers University, who has found that even a moderate amount of sudden stress can make people more sensitive to losses and indifferent to small gains. "In these experiments, people are put under stress by immersing their dominant hand in ice water (at about 39 degrees Fahrenheit) or wearing an arm wrap cooled to the same temperature," Zweig writes. "Shortly thereafter, most people show an impaired short-term memory and an elevated level of the stress hormone cortisol. People are then asked to choose between simple gambles with varying odds and different amounts of money at stake."

The results: When under stress, the participants tended to make bets that gave them a higher probability of making a smaller amount of money. Successful gambles resulted in a smaller-than-usual reaction in the brain, blunted by stress, says Zweig. "Exposure to stress makes people more loss-averse and diminishes their overall sensitivity to reward," says Prof. Delgado. "And if a reward is of low magnitude, [people under stress] often don't care about it very much." If investors are more loss-averse, they are more likely to want to limit short-term losses during market declines; such moves, however well-intentioned, usually lead to selling low, which hurts long-term performance.

That's decision-making with a cold hand; just think about how decision-making is impacted with the stress of having your nest egg on the line in a falling stock market. One impact, says Delgado, is a reversion to "habit-based" decisions. "Stress tends to exacerbate your typical biases," he says. "If you usually make conservative choices, it will make you more conservative." If you typically make risky choices, stress "will make you more risk-seeking."

Zweig says that investors should have procedures in place on how they will deal with market downturns before the downturns occur. I couldn't agree more. The fact that times of stress can alter your decision-making is one reason that we at Validea use a highly systematic, disciplined approach to investing. We try to remove the possibility for emotional, stress-driven decision-making through a few key processes:

Stick to the Numbers: My guru-inspired portfolios buy stocks based purely on quantitative factors (the criteria outlined in books or papers by or about the gurus themselves). We never pick stocks based on headlines, or because the broader market (or a particular stock) has been hot. The models pick stocks because they have sound fundamentals and financials -- in good times, bad times, and everything in between.

Scheduled Selling: When it comes to selling, meanwhile, we buy and sell only at regularly scheduled intervals. With the Hot List portfolio, that means every four weeks, without fail. We don't allow ourselves to be tempted to try to guess which way the market or our stocks are headed tomorrow or next week or next month. Doing so, history shows, is a recipe for failure.

Disciplined Rebalancing: One of the things Zweig recommends investors do now, before a correction hits, is rebalance their holdings, decreasing their stake in holdings that have risen a lot and increasing their stake in holdings that have declined. We believe that doing so isn't just a good idea right now; it's a good idea to do on a continual, systematic basis. On our designated buying/selling days, we also return any holdings that have gotten particularly overweight or underweight back to their equal target waiting within the portfolio. Doing so ensures that we are spreading the portfolio's risk pretty evenly across all holdings. It also helps us to buy when a stock's price is lower, and sell when it's higher -- the opposite of what most emotion-driven investors do.

By putting rules like these in place, you add an extra line of security against your pesky emotions. When times get tough and the market starts falling, rules like these will help you focus on the long-term and not get swayed by stress or emotion. If you set rules with the intent of keeping your emotions at bay, you feel as though you've failed if you break the rules. That's a good incentive to help keep you on track.

Of course, setting rules doesn't mean that you won't break them. You have to believe in the rules, to believe that they really are in your best interest. That's why I recommend learning as much as you can about stock market history and strategy. Go through Warren Buffett's old Berkshire Hathaway shareholders letters. Read Peter Lynch's One Up on Wall Street, or Joel Greenblatt's Little Book that Beats the Market (or if you're crunched for time, read my book, The Guru Investor, which summarizes the writings and strategies of Buffett, Lynch, Greenblatt and several other gurus). Check out the research of Dalbar Inc. on why investors underperform. Review charts of historical sentiment readings (such as the American Association of Individual Investors sentiment survey or Robert Shiller's Crash Confidence survey) to see for yourself how times when investors are most fearful usually are the best times to buy stocks.

We've done all those things, and the lessons we've taken from doing so have led us to believe very strongly that a systematic, quantitative approach to investing is the best way to beat the market over the long haul. That data-driven belief helps us stick to our system when times get tough and emotions run high. Whether it's our approach or another that you develop, you'd be very wise to make sure that you or your financial advisors have rules or systems in place that you believe in, to ensure your portfolio is managed in a disciplined manner. If not, you run the risk of letting emotion -- not reason -- drive your returns. History shows that's a recipe for failure.

 
Editor-in-Chief: John Reese










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The Fallen

As we rebalance the Validea Hot List, 6 stocks leave our portfolio. These include: Smith & Wesson Holding Corp (SWHC), Robert Half International Inc. (RHI), Bed Bath & Beyond Inc. (BBBY), Williams-sonoma, Inc. (WSM), Usana Health Sciences, Inc. (USNA), Nu Skin Enterprises, Inc. (NUS), .

The Keepers

4 stocks remain in the portfolio. They are: Agco Corporation (AGCO), Valero Energy Corporation (VLO), Anika Therapeutics, Inc. (ANIK) and Coach Inc (COH).

The Newbies

We are adding 6 stocks to the portfolio. These include: Ross Stores, Inc. (ROST), The Tjx Companies, Inc. (TJX), Rex American Resources Corp (REX), Tech Data Corp (TECD), Banco Macro Sa (Adr) (BMA), Tal Education Group (Adr) (XRS), .

Portfolio Changes



Newcomers to the Validea Hot List

Banco Macro SA (BMA): Banco Macro SA is an Argentina-based financial institution. The Bank offers traditional banking products and services to businesses and individuals nationwide. It divides its operations into personal banking, which provides services for individuals and microenterprises; and corporate baking, which covers small, medium and large companies, as well as major corporations and agribusinesses.

BMA ($2.7 billion market cap) gets strong interest from my Peter Lynch-based model and high marks from several of my other strategies, including my Warren Buffett approach. To read more about it, scroll down to the "Detailed Stock Analysis" section below.

Ross Stores, Inc. (ROST): This frequent Hot List favorite is a California-based discount clothing apparel and home goods retailer, which operates under the Ross Dress for Less and dd's DISCOUNTS names. It has taken in about $10 billion in sales in the past year.

Ross, which has a $14 billion market cap, gets approval from my Peter Lynch- and Warren Buffett-based models. For more on the stock, see the "Detailed Stock Analysis" section below.

The TJX Companies (TJX): The parent of Marshalls, T.J. Maxx, and HomeGoods, this Massachusetts-based firm offers brand-named clothing and merchandise at discount prices -- making it attractive when times are good or bad. The $37-billion-market-cap firm has taken in about $27 billion in sales in the past year.

TJX gets approval from my Peter Lynch- and Warren Buffett-based models. To read more about the stock, scroll down to the "Detailed Stock Analysis" section below.

Tech Data Corp (TECD): You might not have heard of it, but Florida-based Tech Data is one of the largest wholesale IT distributors in the world. It's a small-cap ($2.4 billion), but it's taken in more than $27 billion in sales in the past year.

Tech Data gets strong interest from my Ken Fisher-based model. To read more about it, scroll down to the "Detailed Stock Analysis" section below.

REX American Resources (REX): In fiscal 2009 REX completed its transformation out of retail and into the alternative energy industry. It has interests in several ethanol production facilities in the Midwest and Northern US.

REX ($625 million market cap) gets strong interest from my Peter Lynch-based model and my Momentum Investor model. To read more about it, scroll down to the "Detailed Stock Analysis" section.

TAL Education Group (XRS): TAL is a holding company for a group of companies engaged in provision of after-school tutoring programs for primary and secondary school students in the People's Republic of China. The Company offers tutoring services to K-12 students covering core academic subjects, including mathematics, English, Chinese, physics, chemistry and biology , history, political science and geography as well as preschool classes.

TAL ($2.2 billion market cap) gets strong interest from my Peter Lynch-based model and good scores from several other models. To read more about it, scroll down to the "Detailed Stock Analysis" section.



News about Validea Hot List Stocks

Bed Bath & Beyond: Shares of the home goods retailer fell 7.2% last Thursday following the firm's earnings announcement. The company reported earnings of 93 cents per diluted share on revenue of $2.66 billion, both below analysts' expectations of 94 cents per diluted share on $2.7 billion in revenue, TheStreet.com reported. The Hot List is selling the stock today, as other stocks have become more attractive.



The Next Issue

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

ANIK   |   VLO   |   REX   |   XRS   |   TECD   |   ROST   |   TJX   |   BMA   |   COH   |   AGCO   |  



Anika Therapeutics, Inc. (Anika) develops, manufactures and commercializes therapeutic products for tissue protection, healing and repair. These products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. As of December 31, 2011, Anika's wholly owned subsidiary, Anika Therapeutics S.r.l., had over 20 products commercialized, primarily in Europe. These products are also all made from hyaluronic acid, based on two technologies: HYAFF, which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA.





Valero Energy Corporation (Valero) is an independent petroleum refining and marketing company. Valero's refineries can produce conventional gasoline's, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products, as well as a slate of premium products, including conventional blendstock for oxygenate blending and reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board, a diesel fuel, and low-sulfur and ultra-low-sulfur diesel fuel. It also owns 10 ethanol plants in the central plains region of the United States with a combined ethanol nameplate production capacity of about 1.1 billion gallons per year. It operates in three business segments: refining, ethanol, and retail. In May 2013, CST Brands Inc announced that the Company which includes Corner Store and Depanneur du Coin, spun off from Valero Energy Corporation.





Rex American Resources Corporation (REX) is a holding company to succeed to the entire ownership of three affiliated corporations, Rex Radio and Television, Inc., Stereo Town, Inc. and Kelly & Cohen Appliances, Inc. As of January 31, 2012, the Company had lease agreements, as landlord, for six owned former retail stores and had 16 vacant former retail properties. The Company also owns one former distribution center that is partially leased, partially occupied by its corporate office personnel and partially vacant. As of January 31, 2012, the Company invested in five ethanol production entities, two of which the Company has a majority ownership interest in. These properties include One Earth Energy, LLC, NuGen Energy, LLC, Patriot Renewable Fuels, LLC, Levelland Hockley County Ethanol, LLC, and one group consisting of Big River Resources, LLC-W Burlington, Big River Resources, LLC-Galva and Big River United Energy, LLC.





TAL Education Group is a holding company for a group of companies engaged in provision of after-school tutoring programs for primary and secondary school students in the People's Republic of China (the PRC). The Company is a K-12 after-school tutoring services provider in the PRC. The Company offers tutoring services to K-12 students covering core academic subjects, including mathematics, English, Chinese, physics, chemistry and biology , history, political science and geography as well as preschool classes. It delivers its tutoring services through small classes, personalized premium services (such as one-on-one tutoring) and online course offerings. As of February 28, 2013, it network consisted of 255 learning centers and 237 service centers in 15 cities throughout China, with most of these learning centers and service centers located in Beijing and Shanghai, as well as its online platform.





Tech Data Corporation (Tech Data) is a wholesale distributor of technology products. The Company's customers include more than 125,000 value-added resellers (VARs), direct marketers, retailers and corporate resellers. The Company sells to customers in more than 100 countries throughout North America, South America, Europe, the Middle East and Africa. Tech Data distributes and markets more than 150,000 products from more than 500 computer hardware suppliers, networking equipment suppliers, software publishers, and other suppliers of computer peripherals, physical security, consumer electronics, digital signage and mobility hardware. In September 2012, it acquired Brightstar Corp.'s 50% ownership interest in Brightstar Europe Limited. In November 2013, Tech Data announced that it had completed the acquisition of joint venture partner Brightstar Corp.'s 50% ownership interest in TDMobility.





Ross Stores, Inc. is an off-price apparel and home fashion chain in the United States. The Company operates two brands of off-price retail apparel and home fashion stores: Ross Dress for Less (Ross) and dd's DISCOUNTS. Ross offers designer apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. Its merchandise offerings also include, but are not limited to, small furniture and furniture accents, educational toys and games, luggage, gourmet food and cookware, watches, and sporting goods. As of February 1, 2014, it operated 130 dd's DISCOUNTS stores in 10 states that features brand apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices. At February 1, 2014, it operated a total of 1,276 stores, of which 1,146 were Ross locations in 33 states, the District of Columbia and Guam.





The TJX Companies, Inc. (TJX) is the off-price apparel and home fashions retailer in the United States and worldwide. As of January 28, 2012, the Company operated in four business segments. It has two segments in the United States, Marmaxx (T.J. Maxx and Marshalls) and HomeGoods; one in Canada, TJX Canada (Winners, Marshalls and HomeSense) and one in Europe, TJX Europe (T.K. Maxx and HomeSense). As a result of the consolidation of the A.J. Wright chain, all A.J. Wright stores ceased operations by the end of February 2011. It completed the consolidation of A.J. Wright, converting 90 of the A.J. Wright stores to T.J. Maxx, Marshalls or HomeGoods banners and closed the remaining 72 stores, two distribution centers and home office. In December 2012, the Company acquired Sierra Trading Post, an off-price Internet retailer.





Banco Macro SA is an Argentina-based financial institution. The Bank offers traditional banking products and services to businesses and individuals nationwide. It divides its operations into personal banking, which provides services for individuals and microenterprises; and corporate baking, which covers small, medium and large companies, as well as major corporations and agribusinesses. The Bank's products and services portfolio includes loans, insurance, debit and credit cards, investment advice and fixed-term deposits, among others. As of December 31, 2012, the Bank owned fully consolidated subsidiaries Banco del Tucuman SA, Banco Privado de Inversiones SA, Macro Bank Limited, Macro Securities SA Sociedad de Bolsa, Macro Fiducia SA and Banco del Tucuman SA.





Coach, Inc. (Coach) is a marketer of accessories and gifts for women and men. The Company offers a range of modern, fashionable handbags and accessories. Its product offerings include women's and men's bags, accessories, footwear, wearables, jewelry, travel bags, sunwear, watches and fragrance. The Company operates in two segments: North America, which includes sales to North American consumers through Company-operated stores, including the Internet, and sales to wholesale customers and distributors and International, which includes sales to consumers through Company-operated stores in Japan and mainland China, including the Internet, Hong Kong, Macau, Singapore, Taiwan, Malaysia and Korea and sales to wholesale customers and distributors in 25 countries.





AGCO Corporation (AGCO) is a manufacturer and distributor of agricultural equipment and related replacement parts globally. The Company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements. It also manufactures and distributes grain storage and handling equipment systems, as well as protein production systems. Its products are recognized in the agricultural equipment industry and are marketed under a range of brands, including Challenger, Fendt, Massey Ferguson and Valtra. The Company distributes its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In September 2013, Grain Systems, Inc. (GSI), a global brand of the Company announced that it has purchased Johnson System Inc. (JSI), manufacturer of catwalks, towers and support structures based in Marshall, Michigan.
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


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.