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Executive Summary April 10, 2015

The Economy

The economy is continuing to adjust to the plunge in oil prices, and, despite a disappointing March jobs report, the adjustment seems to be going well.

The private sector added 129,000 jobs in March, the Labor Department said, with total nonfarm payrolls rising by 126,000. That was the weakest increase in 15 months. Overall, however, the job market seems solid. Average hourly wages increased 0.3% in March; after six years of sub-2% annual wage growth, wages jumped nearly 1% in the first quarter. The unemployment rate dipped slightly to 5.5% in March, while 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 to 10.9%, the first time it came in under 11% since before Lehman Brothers collapsed in September 2008, triggering the financial crisis.

New claims for unemployment have fallen since our last newsletter, and are 15.4% below year-ago levels. Continuing claims, the data for which lag new claims by a week, also moved lower since our last newsletter and are 16% below year-ago levels. And another Labor Department report showed that job openings jumped to their highest level in 14 years in February.

Still, March's slowdown in job growth has led many economists to predict that the Federal Reserve is now unlikely to raise interest rates in June. A rate hike is more likely in September, many predict.

Manufacturing growth continued to slow in March, meanwhile, though the sector still expanded for the 27th straight month, according to the Institute for Supply Management. New order growth also slowed but remained positive, while employment growth was flat.

ISM's service sector index was more encouraging. It showed that the service sector expanded in March for the 62nd straight month, doing so at about the same strong pace that it did in January and February. New orders and employment growth both accelerated.

Consumer data was also encouraging. Personal income rose 0.3% in February, according to the Commerce Department. Real disposable personal income was up 0.2%, while real personal consumption expenditures fell 0.1%. That helped push the personal savings rate up to a very healthy 5.8%, the highest in over two years.

The slowing manufacturing growth and consumer data seems to be indicating that a.) certain areas of the economy are feeling the negative impact of the oil price plunge that began last summer, and b.) consumers have yet to start spending the money that they are saving at the pump. In terms of the former, a number of downward revisions in the energy sector have meant that Q1 earnings for S&P 500 companies are now expected to decline 4.6%, according to FactSet. In terms of the latter, it wouldn't be surprising to see consumers start spending elsewhere as they get used to saving money on gas.

Since our last newsletter, the S&P 500 returned 1.7%, while the Hot List returned 3.7%. So far in 2015, the portfolio has returned 13.3% vs. 1.6% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 266.5% vs. the S&P's 109.0% gain.

The Case For Guru Strategies

After a rough 2014, our guru-inspired strategies bounced back nicely in the first quarter. All our 10-stock, monthly rebalanced portfolios are ahead of the S&P 500 year-to-date, as of this writing. The Hot List has fared particularly well, already making up all of its 2014 losses.

While I had no idea about the timing of our portfolios' bounce-backs, the fact that our strategies have rebounded is not a surprise. We've been using these strategies long enough to know that they are strategies that work over time -- if you stick with them. The principles behind the strategies our gurus developed -- buy shares of solid companies at good prices -- are timeless, we believe. So while these approaches won't work all the time (no strategy will), we're confident that they will work more often then they won't work, which over the long term makes for very strong returns.

Not everyone has that kind of faith in long-term, guru-inspired strategies. Recently I read an article contending that the strategies of Benjamin Graham -- "the father of value investing" -- can't work in today's environment because times are so different from when Graham managed money. The reasoning sounds logical -- after all, there was no high-frequency trading back in Graham's day, markets were far, far less global, and the 401(k) and retirement account investing that drives a lot of today's equity purchases wasn't a factor. Then there is the notion that once a successful strategy is revealed and becomes widely known, its effectiveness wanes. And, finally, certain variables can go in and out of fashion as investors develop new techniques for evaluating businesses and stocks. All of that makes it seem that yesterday's winning strategies are doomed to fail today.

Nonetheless, our experience and testing shows that successful strategies tend to continue to work long after they are revealed. In fact, Graham's Defensive Investor approach is the basis of one of our top-performing strategies, despite the fact that Graham published it 65 years ago. How can this be?

I think there are a few key reasons. The first is that our Graham strategy (like our other strategies) uses a variety of fundamental criteria that look at a stock from multiple angles. The Graham model looks at valuation from three perspectives: the price/earnings ratio using trailing 12-month earnings per share; the P/E using three-year average EPS; and the price/book ratio. That helps ensure that a) a one-year anomaly in earnings doesn't make a stock look deceptively cheap, and that b) the strategy doesn't fail if the P/E or the P/B goes out of vogue for a while. (By combining a variety of strategies, we add further "variable diversification" to our consensus portfolios.)

Secondly, good strategies don't work because of some numerical hocus-pocus. The variables they use are not magic bullets. We're not buying Graham-style stocks with stable earnings, more net current assets than long-term debt, and low P/E and P/B ratios because we think that, in a year or two, people will greatly value stocks with those qualities. (In fact, when we sell the shares, we hope the P/E and P/B ratios will be much higher.) We're buying them because those numbers tell us a story about a company and its shares. Each variable gives another piece of the puzzle, whether it be the information on a company's balance sheet, the effectiveness of its management, or the attractiveness of its share price.

Sure, certain variables may go in and out of favor at certain times. But good strategies work because the variables they use get at the heart of good business and good investing. Might a metric have come along that is better than the Graham strategy's net current assets to long-term debt comparison? Yes, perhaps. But the goal of that variable is to give a good assessment of the company's balance sheet. While one could argue that there is now a better variable to do that, I find it extremely hard to argue that looking for firms with more net current assets than long-term debt will ever be a bad way to assess a company's financial health. Think about what that metric measures -- essentially, it tells you whether a company could liquidate its assets and use the profits and any other cash it has to pay off all of its debts, without going into the red. In what kind of financial world would that not be an attractive characteristic?

As for the issue of strategies becoming less effective once they are known, that can be true. Good strategies succeed because they exploit some inefficiency in the market -- a blind spot that the investing world has -- allowing you to buy good stocks that were mispriced. Kenneth Fisher's development of the price/sales ratio is a great example of that. Up until he published Super Stocks in the mid-1980s, most investors were focused on price/earnings and price/book ratios when valuing a stock. But in his book, Fisher showed how sales were often a better indicator of a firm's business than either book value or earnings. Earnings, for example, can fluctuate greatly from year to year based on decisions to replace equipment or facilities in one year rather than in another, initiatives to put money into new research that will help the company reap profits later on, or changes in accounting methods. That can all turn one quarter's profits into the next quarter's losses, without regard for what Fisher thought was truly important in the long term -- how well or poorly the company's underlying business was performing. While a stock might look unattractive based on its earnings or P/E, its price/sales ratio might more accurately signal that it was a bargain.

Theoretically, once that concept became well-known, it should have stopped working. The more investors who moved to exploit the inefficiency, the higher the prices of low-price/sales stocks would become, and the less lucrative their returns. But that assumes that humans are rational, and decades and decades of market history show that they are not. Most people, whether individual investors or professional fund managers, don't buy stocks based on cold, hard fundamentals and financials. Instead they follow the crowd, or trying to capitalize on macroeconomic factors, or base their decisions on their biased evaluations of a company's products and services. And if they try to follow a fundamental-based strategy, they often end up ditching it as soon as it hits short-term problems (which any strategy will do), as they can't take the emotional toll of staying the course when things aren't going well. Or, they alter the strategy by vetoing some of its picks that they find too anxiety provoking.

In fact, Joel Greenblatt, another of the gurus we follow, found that over a two-year period investors who were able to pick and choose between stocks his quantitative strategy approved of (and pick the timing of their trades) fared far worse than those who had their buying and selling done on automated fixed intervals, with no ability to veto picks the formula recommended. While the latter beat the market by 21.4 percentage points, the former actually lagged the market by about 3 points. One big reason: They tended to miss out on many of the best performing stocks -- beaten-down value plays that were the subject of scary headlines.

Successful, publicly disclosed strategies can continue to work over the long term if they incorporate a diverse set of variables that measure real and timeless concepts like profitability, debt levels, and valuation -- if, that is, you stick to them through the inevitable short-term ups and downs, as their creators no doubt intended. I believe this not because it sounds good or makes sense theoretically. I believe it instead because I have seen our guru-inspired strategies have great success over the past dozen years. Such strategies won't work on every pick and they won't work all the time. But neither will new, successful strategies -- I guarantee you that the most successful new stock-picking method of 2015 will stumble at some point. The key is to pick a strategy whose variables analyze important, fundamental business concepts -- profitability, debt levels, revenue growth -- and which buys at attractive prices stocks that rate highly in those areas. If you employ those types of strategies in an unemotional, systematic manner, you should continue to enjoy success long after the strategies are well-known.

Editor-in-Chief: John Reese

The Fallen

As we rebalance the Validea Hot List, 2 stocks leave our portfolio. These include: Sodastream International Ltd (SODA) and Zumiez Inc. (ZUMZ).

The Keepers

8 stocks remain in the portfolio. They are: Apple Inc. (AAPL), Sasol Limited (Adr) (SSL), Credit Acceptance Corp. (CACC), Sanderson Farms, Inc. (SAFM), Jones Lang Lasalle Inc (JLL), Universal Insurance Holdings, Inc. (UVE), Lannett Company, Inc. (LCI) and Chart Industries, Inc. (GTLS).

The Newbies

We are adding 2 stocks to the portfolio. These include: Pilgrim's Pride Corporation (PPC) and Fossil Group Inc (FOSL).

Portfolio Changes

Newcomers to the Validea Hot List

Pilgrim's Pride Corporation (PPC): Greeley, Colo.-based Pilgrim's works with approximately 4,000 family farms throughout the U.S. and Mexico, and is the second-largest chicken producer in the world. It has operations in 12 U.S. states as well as in Mexico and Puerto Rico. The $6-billion-market-cap firm has taken in more than $8.5 billion in sales over the past year.

Pilgrim's gets high marks from my Kenneth Fisher- and Joel Greenblatt-inspired models. To read more about it, scroll down to the "Detailed Stock Analysis" section.

Fossil, Inc. (FOSL): Texas-based Fossil makes a variety of watches, handbags, clothing, and other accessories. The $4.3-billion-market-cap firm has taken in $3.5 billion in sales over the past 12 months.

Fossil gets strong interest from both my Warren Buffett- and Peter Lynch-based models. For more on the stock, see the "Detailed Stock Analysis" section below.

News about Validea Hot List Stocks

Zumiez (ZUMZ): Zumiez reported a 5.5% increase in March comparable store sales, but shares dropped because the increase wasn't as strong as analysts had predicted. Analysts on average expected comparable store sales growth of 6.4%, TheStreet.com reported. Overall, Zumiez said sales were up 11% in March, to $70.7 million.

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

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

Universal Insurance Holdings, Inc. (UIH) is a vertically integrated insurance holding company. The Company's insurance products are offered to its customers through Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC), (collectively the Insurance Entities). Substantially all aspects of insurance underwriting, distribution and claims processing are covered through the Company's subsidiaries. Blue Atlantic Reinsurance Corporation (BARC), a wholly owned subsidiary of UIH, is a reinsurance intermediary broker. The Insurance Entities generate revenues primarily from the collection of premiums. Universal Risk Advisors, Inc. (URA), the Company's managing general agent, generates revenue through policy fee income and other administrative fees from the marketing of the Insurance Entities' insurance products through its distribution network of independent agents.

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

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.

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

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

Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. The Company's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud and a variety of accessory, service and support offerings. The Company offers a range of mobile communication and media devices, personal computing products and portable digital music players, as well as a variety of related software, services, peripherals, networking solutions and third-party hardware and software products. The Company's primary products include iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software.

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

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

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

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

Watch List

The Watch List contains the highest scoring stocks according to our guru consensus system that are not currently in the Hot List portfolio. We provide this list both for informational purposes and for investors who are not comfortable with a portfolio of ten stocks.


The names of individuals (i.e., the 'gurus') appearing in this report are for identification purposes of his methodology only, as derived by Validea.com from published sources, and are not intended to suggest or imply any affiliation with or endorsement or even agreement with this report personally by such gurus, or any knowledge or approval by such persons of the content of this report. All trademarks, service marks and tradenames appearing in this report are the property of their respective owners, and are likewise used for identification purposes only.

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.