Executive Summary  |   Portfolio  |   Guru Analysis  |   Watch List

Executive Summary March 15, 2013

The Economy

As the Dow Jones Industrial Average continues to make new all-time highs and the S&P 500 edges closer to its record high, their gains are being backed by some solid improvement in the U.S. economy.

In February, for example, the private sector added a net of 246,000 jobs, according to the Labor Department, over 100,000 more than were added in January. That pushed the unemployment rate down to 7.7% -- the lowest it's been since December 2008. That's still too high for a healthy economy, as is the 14.3% rate for the broader "U-6" measure of unemployment, which also takes into account workers who have given up looking for a job and those working part-time who wish to work full-time. (That figure fell 0.1% in February.) Still, we're definitely seeing continued gains in the labor market.

Improvement also came in the weekly unemployment claims data. New claims fell more than 4% since our last newsletter, and are more than 7% below their year-ago level. The seasonally adjusted 332,000 claims was the second-lowest the figure has been since mid-January 2008. Continuing claims have also fallen since our last newsletter, and are now more than 10% below their year-ago level.

Good news also came from the manufacturing sector. Manufacturing activity expanded for the third straight month in February, according to the Institute for Supply Management, and it did so at its fastest pace since June 2011. The group's new orders sub-index reached its highest level since April 2011, a sign that production could continue to be strong in coming months.

ISM's service sector index, meanwhile, stayed well in expansion territory in February, the 38th straight month it has done so. Its new orders sub-index also made a nice jump, and its employment sub-index stayed well in expansion territory.

Consumer data continues to be quite volatile, thanks to the late 2012 push by many companies to pay dividends out early in order to distribute them before the fiscal cliff tax hikes went into effect. That helped push personal income and the personal savings rate much higher in December, but created a bounce back effect in January. According to the Bureau of Economic Analysis, disposable personal income decreased 3.6% in January. Excluding seasonal factors, however, like the dividend payouts, the decrease was just 0.3%. The seasonal factors have also had a big impact on the personal savings rate, which in December had jumped to 6.4%, its highest level in about three years. In January, it fell to 2.4%, the lowest it's been since the start of the Great Recession. It's hard to draw too much of a conclusion from the December and January figures, however, given the seasonal factors.

Consumers have apparently picked up their spending more recently, with retail and food service sales jumping 1.1% in February, according to a new Census Bureau report. That was, however, just 1.2% above the February 2012 level, a much smaller year-over-year gain than was seen in January, when the year-over-year increase was more than 6%.

Since our last newsletter, the S&P 500 returned 3.2%, while the Hot List returned 3.2%. So far in 2013, the portfolio has returned 10.3% vs. 9.6% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 199.2% vs. the S&P's 56.3% gain.

The Trouble With Timing

As stocks continue to head higher and higher, it gets more and more tempting to try to call a market top. After all, the last time stocks were this high, few investors realized they were about to be hit by one of the sharpest, most painful bear markets of their lifetime. It's thus natural to think back on those events and fear that similar pain is going to follow again this time.

That, however, is a very, very dangerous game, and a couple recent studies showed just how difficult -- and detrimental to your portfolio -- trying to time the market can be. One came from Dalbar, Inc., the research group that tracks how well mutual fund investors actually do compared to the funds in which they invest. Dalbar has found that investors have a strong tendency to make bad market timing decisions, jumping into overheated markets and selling when prices are low, and the latest data from the firm is sobering. Over the past 20 years through December, the average individual stock mutual fund investor earned 4.25% per year, while the S&P 500 returned 8.21%, The New York Times reported. A $10,000 investment at 4.25% annualized would be worth $22,989 after 20 years; at 8.2%, it would be worth $48,456 after 20 years.

The gap in performance is due in part to the fees mutual funds charge, but also to investors making emotional decisions to jump in and out of the market at inopportune times. "They get excited or they panic, and they hurt themselves," Dalbar President Louis S. Harvey said. His advice: Unless you can time the market (and who can?), Harvey says to "make sure that you select a reasonably defensive asset allocation strategy first," adding, "The most important thing, once you have a strategy is to find a way to actually stick with it."

The other study came from Mark Hulbert, who for decades has been monitoring the performance of dozens of investment newsletters through his Hulbert Financial Digest. In a recent Barron's column, Hulbert looked at returns since October 2007 of the more than 100 market-timing newsletters and web-based advisors monitored by HFD, looking to see who correctly called both the market top in 2007 and the market bottom in 2009. No one called the top and bottom on the exact days, he found, but that's an incredibly tough standard. So he used a relaxed standard -- a much relaxed standard -- and he found that the results were still very poor.

Hulbert considered an advisor to have called both the top and bottom if they had decreased their allocation to stocks by at least 25% within a month of the October 9, 2007 top, and increased their stock allocation by at least 25% within a month of the March 9, 2009 bottom. He found that of 140 strategies tracked by HFD, only 15 had significantly lower equity exposure a month after the 2007 top. Of those, just six had markedly higher equity exposure a month after the bottom. "In other words," Hulbert said, "96% of the market-timing strategies monitored by the HFD failed to jump over these seemingly modest hurdles."

What's more, the six that did meet the timing criteria had other issues. Each gave a number of other buy and sell signals in the intervening periods "that had the unfortunate effect of frittering away the gains they otherwise would have realized if they had left well enough alone," Hulbert says. He did say that about 25% of the market-timers he tracks have beaten the market since stocks hit their 2007 high, but "none of them did so by getting out at or near the top and getting in at or near the bottom."

Like Harvey, Hulbert also says discipline is crucial when following a market-timing approach. And he says investors shouldn't expect they'll come close to timing market tops and bottoms correctly. "Realistic expectations are crucial," he says. "Without them, you are more likely to try something rash and end up losing even more money. For example, you should give up hoping to both catch anything like the top and the subsequent bottom."

I agree completely. There are some effective market-timing strategies out there, and if you do feel strongly about using one, a few words of advice: Make sure the approach you choose is quantitative in nature; do not try to jump in and out of the market based on hunches or guesswork. In addition, the approach should have a proven, long-term track record of success. And, most importantly, once you find that approach, stick with it, no matter how rocky the road gets in the short term.

For most investors, however, market-timing is best left alone. As Warren Buffett noted in his latest letter to Berkshire Hathaway shareholders, "Periodic setbacks will occur [for the market], yes, but investors and managers are in a game that is heavily stacked in their favor. Since the basic game is so favorable, Charlie [Munger, his partner at Berkshire] and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it."

The Hot List, as always, will continue to stay in the game. While others will try to jump in and out of the market in an impossible quest to catch market tops and market bottoms, the Hot List will keep focusing on strong companies with attractively valued shares. On today's regularly scheduled rebalancing, for example, the portfolio is adding four new stocks, including Royal Dutch Shell. Though it has taken in nearly a half-trillion dollars in sales over the past 12 months, sports a 15% return on equity, and has a 5.2% dividend yield, Shell trades at exceptionally cheap valuations: just 7.8 times trailing 12-month earnings, 8.2 times projected 12-month earnings, 0.46 times TTM sales, and 1.1 times book value. It seems that lingering fears of an economic catastrophe in Europe that has not materialized are keeping investors away from very attractively priced stock in a solid company.

Those types of stocks -- good companies whose shares are trading on the cheap -- are what the Hot List portfolio has focused and will continue to focus on. In the short term, as emotions drive investors' actions, that can lead to some big ups and downs. But over the long term (and the long term is the only thing you should be concerned about), value wins out more often than not, and stocks follow the businesses behind them. If you focus on good companies with cheap shares and stay disciplined, you should produce some very strong long-term returns, without ever having to call a single market top or bottom.

Editor-in-Chief: John Reese

Validea Capital Management - Private Portfolio Management Based on Strategies of Legends

Are you looking for an alternative to your underperforming mutual funds or financial advisor? Click here to download Validea Capital's investment kit and learn more about the firm's guru-based portfolios.

Get More Information on Validea Capital!

** Validea Capital Management is a separate investment advisory firm managed by Validea.com founder John Reese. Thre information above in not intended as personal investment advice and should not be interpreted as such.

The Fallen

As we rebalance the Validea Hot List, 4 stocks leave our portfolio. These include: Questcor Pharmaceuticals Inc (QCOR), Main Street Capital Corporation (MAIN), Western Digital Corp. (WDC) and Ross Stores, Inc. (ROST).

The Keepers

6 stocks remain in the portfolio. They are: The Tjx Companies, Inc. (TJX), World Acceptance Corp. (WRLD), Usana Health Sciences, Inc. (USNA), Lukoil (Adr) (LUKOY), Lear Corporation (LEA) and Starz (STRZA).

The Newbies

We are adding 4 stocks to the portfolio. These include: Jos. A. Bank Clothiers Inc (JOSB), Telecom Argentina S.a. (Adr) (TEO), Royal Dutch Shell Plc (Adr) (RDS.A) and Dollar Tree, Inc. (DLTR).

Portfolio Changes

Newcomers to the Validea Hot List

Royal Dutch Shell PLC (RDS.A): This Netherlands-based energy giant is one of the largest firms in the world, with a $213 billion market cap and close to half a trillion dollars in sales over the past 12 months. Its shares are cheap -- they trade for just 7.8 times trailing 12-month earnings -- and come with a 5.2% dividend yield. Fundamentals like those help it earn strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about the stock, see the "Detailed Stock Analysis" section below.

Jos. A. Bank Clothiers (JOSB): This Maryland-based men's dress and casual apparel retailer ($1.2 billion market cap) has had some very successful stints in the Hot List over the years, and it's back again. The firm took some hits recently when it announced it will likely fail to increase annual EPS in the 2012 fiscal year for the first time in a decade, but that's made it a big bargain, according to my models. My Warren Buffet-based model, for one, gives it very high marks. For more on the stock, see the "Detailed Stock Analysis" section below.

Telecom Argentina S.A. (TEO): This Argentine firm ($2.4 billion market cap) also offers cellular services in Paraguay. It is majority-owned by Nortel SA.

Telecom Argentina's shares took a big hit after its mixed late-February earnings report, but quickly rebounded and have made up all of their lost ground. Both my Kenneth Fisher- and Peter Lynch-based model think it has more room to run, and give it very high ratings. To read more about the stock, see the "Detailed Stock Analysis" section below.

Dollar Tree, Inc. (DLTR): This Virginia-based company sells a variety of products (food, household goods, toys, and more) -- all at the price of $1 or less. It actually increased sales and earnings throughout the "Great Recession", and has continued to do so since the recession ended.

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

News about Validea Hot List Stocks

The TJX Companies Inc. (TJX): TJX said that consolidated same-store sales increased 1% year over year in the four-week period ending March 2, Zacks Equity Research reported. Total sales were up 7% to $1.8 billion. Severe winter storms in some parts of the U.S. and Canada negatively impacted sales in the first part of the month, but comparable store sales exceeded management's expectations.

Main Street Capital Corporation (MAIN): Main Street announced net investment income per share of $0.56 for the fourth quarter, up from $0.45 a year earlier. For the year, net investment income per share was $2.01, up from $1.69 in 2011. The firm also said it would be increasing its dividend payout by 11%. Shares moved upward sharply on the news, gaining 7% since our last newsletter (through March 12). The portfolio is taking the profit and selling the position on today's rebalancing.

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

LUKOY   |   USNA   |   STRZA   |   TEO   |   LEA   |   RDS.A   |   WRLD   |   DLTR   |   JOSB   |   TJX   |  

NK Lukoil OAO (Neftyanaya Kompaniya LUKOIL OAO or NK LUKOIL OJSC) is a Russia-based integrated oil and gas company. The Company is engaged in the business of oil exploration, production, refining, marketing and distribution. It is an owner of refineries, gas processing, petrochemical plants and gas stations network located in Russia, Eastern and Western Europe, as well as Africa. The Company's petroleum products are sold in the Russian Federation, the Commonwealth of Independent States (CIS) countries, Eastern and Western Europe, Asia and the United States. NK Lukoil OAO operates through numerous subsidiaries and affiliated companies. As of December 31, 2011, the Company's major shareholder was ING Bank (Eurasia) ZAO with a stake of 75.93%.

USANA Health Sciences, Inc. develops and manufactures science-based nutritional and personal care products. The Company has operations in 15 markets worldwide, where it distributes and sells its products by way of direct selling. The Company reports operations in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands. Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. The Company's customer base consists of two types of customers: Associates and Preferred Customers. As of December 31, 2011, the Company had 222,000 active Associates and 64,000 active Preferred Customers worldwide.

Starz, formerly Liberty Media Corporation, is an integrated global media and entertainment company with operating units that provide subscription video programming on domestic United States pay television channels (Starz Channels), global content distribution (Starz Distribution) and animated television and movie production (Starz Animation). As of January 14, 2013, its network included Starz, Encore, and Movieplex, Retroplex and Indieplex. Its businesses included Anchor Bay Entertainment, Starz Worldwide Distribution, and Starz Digital Media. Starz Animation produces animated television (TV) and movie content for studios and networks. Starz Distribution develops, produces and acquires entertainment content, distributing it to consumers globally on digital versatile disk (DVD). On January 11, 2013, Liberty Media Corporation (Liberty) and Starz announced the completion of the spin-off of Liberty from Starz.

Telecom Argentina SA, (Telecom), is an Argentina-based company primarily engaged in the provision of national fixed-line telecommunication services, international long-distance service, data transmission and Internet services, as well as mobile telephony. The Company also offers such solutions as online business and Web hosting, virtual private network (VPN), mobile operating systems developed by Microsoft and Blackberry, toll-free telephone numbers, call centers and voice over Internet protocol (VoIP) line, as well as other services mainly aimed at corporate clients. As of December 31, 2012, the Company owned its subsidiaries structured in two business segments, Fixed Telephony, which comprised Telecom Argentina USA Inc and Micro Sistemas SA; and Mobile Services, with Telecom Personal SA, Nucleo SA and Springville SA.

Lear Corporation is a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. As of December 31, 2011, it had 20 joint ventures located throughout Asia, as well as five in North America, two in Europe and Africa and one with operations in all three regions.

Royal Dutch Shell plc (Shell) is an independent oil and gas company. The Company owns, directly or indirectly, investments in the numerous companies constituting Shell. Shell is engaged worldwide in the principal aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. The Company operates in three segments: Upstream, Downstream and Corporate. Upstream combines the operating segments Upstream International and Upstream Americas, which are engaged in searching for and recovering crude oil and natural gas; the liquefaction and transportation of gas; the extraction of bitumen from oil sands that is converted into synthetic crude oil, and wind energy. Downstream is engaged in manufacturing; distribution and marketing activities for oil products and chemicals. Corporate represents the key support functions, comprising holdings and treasury, headquarters, central functions and Shells self-insurance activities.

World Acceptance Corporation operates a small-loan consumer finance business in 12 states and Mexico. The Company is engaged in the small-loan consumer finance business, offering short-term small loans, medium-term larger loans, related credit insurance and ancillary products and services to individuals. As of March 31, 2012, the Company offered standardized installment loans through 1,137 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, Wisconsin, and Mexico. The Company serves individuals with limited access to consumer credit from banks, credit unions, other consumer finance businesses and credit card lenders. In the United States offices, the Company also offers income tax return preparation services to its customers and others.

Dollar Tree, Inc. (Dollar Tree) is an operator of discount variety stores offering merchandise at the fixed price. As of January 28, 2012, the Company operated 4,351 discount variety retail stores. Its stores operate under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant and Dollar Bills. As of January 28, 2012, it operated 4,252 stores in 48 states and the District of Columbia, as well as 99 stores in Canada. It buys approximately 58% to 60% of its merchandise domestically and imports the remaining 40% to 42%. Its domestic purchases include basic, seasonal, closeouts and promotional merchandise. It maintains a selection of products within variety store categories. During the fiscal year ended January 28, 2012 (fiscal 2011), the Company opened 278 new stores.

Jos. A. Bank Clothiers, Inc. (Jos. A. Bank) is a designer, manufacturer, retailer and direct marketer (through stores, catalog call center and Internet) of men's tailored and casual clothing and accessories and is a retailer of tuxedo rental products. Jos. A. Bank sells all of its products under the Jos. A. Bank label through 556 retail stores (as of January 28, 2012, which includes 25 outlet and factory stores and 15 franchise stores) located throughout 43 states and the District of Columbia in the United States, as well as through its catalog call center and Internet (www.josbank.com) operations. It sources substantially all of its merchandise from suppliers and manufacturers or through buying agents using Jos. A. Bank designs and specifications. It has two segments: Stores and Direct Marketing. The Stores segment includes all Company-owned stores, excluding outlet and factory stores (full-line stores). The Direct Marketing segment includes the catalog call center and the Internet.

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.

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.