|Executive Summary | Portfolio | Guru Analysis | Watch List|
|Executive Summary||December 19, 2014|
Can the US continue maintain its strength as oil's plunge and China's slowing growth throw a monkey wrench into other economies across the globe?
So far, so good.
The labor market, for example, continues to impress. The Labor Department said the private sector added 314,000 jobs in November, with total nonfarm payrolls rising by 321,000. It also revised its September and October jobs-added figures to indicate a total of 44,000 more jobs were added in those months than previously thought. The unemployment rate remained at 5.8% in November, the lowest it has been since July 2008; 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 one-tenth of a point to 11.4%.
The Labor Department's "diffusion index", which measures the breadth of industries expanding their payrolls, reached its highest level since January 1998. And wages -- which have long been stagnant -- rose a very solid 0.4%.
Industrial production was also impressive, rising 1.3% in November, according to a new Federal Reserve report. October's figure was also revised from a 0.1% decline to a 0.1% gain. For November, manufacturing output rose 1.1%, the Fed said, while utility output, which tends to be seasonally driven, jumped 5.1%. Mining output fell by 0.1%. Industrial production capacity utilization cracked 80% for the first time since March 2008, and is now equal to its 1972-2013 average.
Retail sales made a nice jump, too, rising 0.7% in November, according to another government report. They are 3.4% above year-ago levels.
Elsewhere, the housing market appears to have taken a pause. Housing starts fell slightly, by 1.6%, in November, according to the Census Bureau. They are 7.5% below year-ago levels. Permit issuance for new construction fell by 5.2%, meanwhile, putting it about 5% below its year-ago pace.
Finally, oil and gas prices continue to deflate. As of Dec. 17, the price for a gallon of regular unleaded was just $2.51, according to AAA. That's down 38 cents over the past month. Largely because of that, we saw deflation in November, with the Consumer Price Index falling 0.3%, according to the Labor Department. That put it just 1.3% ahead of its year-ago pace. If you strip out food and gas prices, so-called core inflation was up 0.1% in November, however, according to the Labor Department. Oil's fall seemed to be largely an issue of supply, but recently it seems investors have also become more wary of demand issues (read: China slowdown).
Since our last newsletter, the S&P 500 returned -0.5%, while the Hot List returned 0.5%. So far in 2014, the portfolio has returned -10.9% vs. 11.5% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 224.3% vs. the S&P's 106.0% gain.
The Year In Review
This year has been a pretty wild one for the stock market, with investors swinging between optimism and fear. In the end, it appears the broader market will end up with a fairly average year -- which actually tends to be a rarity. Over the past 40 years, the S&P 500 has returned between 8% and 15% only twice. This year it's up 11.5% after Thursday's big day.
For the Hot List, it has been a different story. It's down 10.9%, which makes this likely to be just the fourth time in its 12 years (including the partial 2003 year) that it will have lagged the index. (Since inception, the portfolio is more than doubling the index's gain, however.)
So, as 2014 comes to a close, this week I'd like to take a deeper look at the Hot List's performance, and the performance of my other guru-inspired portfolios. Overall, the 14 ten-stock portfolios averaged a 3.1% loss for the year, with only two of the fourteen beating the S&P. While many of their leads on the broader market narrowed in 2014, twelve of the fourteen are still beating the S&P since their inceptions, with three more than doubling the index in terms of annualized returns. Here's a look at a few of the notable strategies' performances (with returns through Dec. 18).
The Hot List: It was rough sledding right from the start for our flagship portfolio, which is on track to lag the S&P by the widest margin in any year since its inception. The portfolio was accurate (meaning it made money) on less than 40% of its picks, hurt greatly by the sell-off in small-caps. As that sell-off progressed, investors seemed to be ditching fundamentally sound, reasonably valued small caps along with the bloated, overpriced little guys. This guilt by association effect meant that even the Hot List's rigorous fundamental tests couldn't help it avoid major losses.
The portfolio still found some nice winners, however. Among the biggest were Rex American Resources -- a one-time retailer that morphed into an ethanol production firm a few years back -- which gained about 38% while in the portfolio from July 3-Aug. 29; Silicon Motion Technology (which returns to the portfolio on today's rebalancing), which gained about 15% from Aug.1-Aug. 29; and Monster Beverage, which gained 12% from Oct. 24-Nov. 21. The winners weren't enough to overcome some sizeable losers, however. Russian media firm CTC Media tumbled almost 30% from Sept. 26-Oct. 24, thanks to news of unfavorable Russian legislation about foreign ownership of media firms. Lannett Company was hit hard amid the biotech bust earlier in the year, falling 28.4%. And BBVA Banco Frances fell 19.2% during its one-month stint in the portfolio in August.
The John Neff-based Portfolio: The Neff portfolio has had a great 2014, rebounding nicely from a stretch of underperformance. It has gained 22.4% for the year, while being less volatile than the broader market (beta of 0.94). It's been accurate on 70% of its picks.
The "Low-PE" Neff approach found several big winners over short spans in 2014, including Banco Bradesco, which gained more than 34% from February 14 to April 11. The portfolio also notched nice gains on two stocks that it held for just one month: Warren Resources, which jumped 31.8% from June 6 to July 3, and AmTrust Financial Services, which jumped 27% from September 26 to October 24. The portfolio did run into some significant losers, too, most notably Employers Holdings, which lost 24% from the start of the year to mid-February. But the winners far outpaced the losers, resulting in a very strong year.
The Motley Fool-based Portfolio: After a tremendous 2013 in which it returned more than 61%, the Fool-inspired portfolio came back to earth this year. It has returned 0.4%, putting it on pace for its worst relative performance to the S&P since its inception.
The portfolio's small-cap approach led it to some sizable losers in 2014, including one that was a big winner the year before. Property and casualty insurer HCI Group joined the portfolio in February 2013 and was up more than 150% when 2014 started. But from the start of the year until it was sold in April, it fell 36%. Other significant losing positions included Alliance Fiber Optic Products, which fell 28.6% in just one month (July 3-Aug. 1) and NetScout Systems, a 24% loser in September and October.
The portfolio did find some nice winners, including Spirit Airlines, which started the year in the portfolio and gained about 22% before it was sold in May. Financial firm Piper Jaffray returned almost 24% from May 9 to July 3, and China Distance Education Holdings jumped almost 23% from April 11 to June 6.
Overall, the Fool-based portfolio still has an impeccable track record. In fact, it is my best-performing individual guru 10-stock portfolio over the long haul, averaging annual gains of 15.4% since its July 2003 inception vs. 6.5% for the S&P.
The Top 5 Gurus Portfolios: Like the Motley Fool portfolio, the Top 5 Gurus portfolio has a stellar long term track record but has underperformed in 2014. It has notched a 6.7% gain, leaving it with an outside chance of catching the S&P over the next week and a half.
The portfolio (which uses the top two picks from five of my best-performing strategies) has been accurate on about 57% of its picks throughout the year. It found some big winners, including magicJack VocalTec, which gained 39% from Jan. 17- April 14; insurance industry software provider Ebix which gained nearly 25% from Aug. 1-Aug 29; and surgical center firm AmSurg, which surged 21% from Feb. 14-June 6.
But the Top 5 Gurus portfolio also found a number of significant losers. Like The Motley Fool portfolio, it took a big loss on HCI Group, which was one of its biggest winners in 2013 but lost 31% while in the portfolio for the first two and a half months of this year. Barrett Business Services was worse, falling 43.5% from Sept. 26-Nov. 21.
The Top 5 Gurus portfolio still has a great long-term track record, though -- in fact, it's been my best performer over the long haul, putting up annualized gains of 16% since its mid-2003 inception to more than double the S&P's annualized return. That's an overall 444% gain vs. 106% for the index.
The Momentum Investor Portfolio: Our second-best performer in 2014 has been the Momentum approach, which is up 14.8% after returning more than 51% in 2013. The portfolio has been accurate on 50.8% of its picks throughout the year, proving once again that you don't need to be right anywhere close to all the time to notch nice gains. It found some big winners, including Taro Pharmaceuticals, which gained 47% from June 6- Aug. 29; Internet banking firm BofI Holdings, a 35% gainer from Jan. 1-March 14; and Carmike Cinemas, up 20% from Jan. 17-March 14.
The Momentum portfolio also found some losers, like Lannett Company, down 28% from March 14-April 11, and Middleby Corp., down 19% from March 14-May 9. But while it has found almost just as many losers as winners, the magnitude of the winners has helped it to a solid year.
The Benjamin Graham-based Portfolio: The 10-stock Graham portfolio has been one of our top performers over the long term, but in 2014 it has struggled mightily, losing 22.8%. The portfolio found big losers in CTC Media, which fell 38% from Sept. 26-Oct. 24; luxury retailer Coach Inc., which lost almost 30% from Feb. 14-Aug. 1; and gun maker Smith & Wesson Holding Corp., which lost 29.7% from July 3-Oct. 24.
The Graham-based model did find some nice winners, however. Discount retailer Big Lots surged 38.6% from Feb. 14-March 14; Cheung Kong Holdings jumped 18.2% from mid-March-early July; and USANA Health Sciences gained 11% during its one-month stint in the portfolio in August.
Despite its 2014 struggles, the 10-stock Graham-based portfolio still has an excellent long-term track record. Since its inception (July 2003), it has averaged annualized returns of 12.1%, vs. 6.5% for the S&P.
While our strategies have had a subpar 2014, we'll continue to stick with them. Some broader market forces -- like the small-cap struggles, in particular -- were at play in 2014 that don't figure to be at play over the long term. It's critical to keep in mind that it's common for good strategies to lag the market for periods of time. Hedge fund manager Joel Greenblatt, one of the top strategists of our era (and one of the gurus who inspired my models) has used a strategy that more than doubled the market over a nearly two-decade-long period. But in his Little Book that Beats the Market, Greenblatt wrote that the strategy lagged the market in five of every twelve months. It also did poorly for more than two years in a row in one out of every six periods tested. There were even times when it underperformed for three years in a row.
Greenblatt says the key to generating strong long-term returns is sticking with a good strategy during the down periods, when undisciplined investors bail. That allows you to pick up the high-quality bargains they leave behind. And he's not alone. Many other highly successful investors have expressed a similar view. James O'Shaughnessy -- whose study into the performance of various investment strategies is perhaps the most in-depth of its kind -- didn't cite great foresight or timing or intricate business knowledge in explaining how to beat the market. Instead, he said the key is having the discipline to "consistently, patiently, and slavishly stick with a strategy".
So while most of our models have underperformed this year, we believe that they are good strategies, and their long-term track records support that belief. As I've said before, they look at a myriad of different fundamental and financial criteria that get at the heart of good business and good investing, and they apply these criteria in a disciplined, unemotional way. That's how history's best investors have beaten the market, and we believe it's the way to beat the market going forward.
Have a great holiday, and we'll see you in 2015.
As we rebalance the Validea Hot List, 5 stocks leave our portfolio. These include: Valero Energy Corporation (VLO), Foot Locker, Inc. (FL), Piper Jaffray Companies (PJC), Middleby Corp (MIDD) and Credit Acceptance Corp. (CACC).
5 stocks remain in the portfolio. They are: Agco Corporation (AGCO), Jones Lang Lasalle Inc (JLL), Universal Insurance Holdings, Inc. (UVE), Zumiez Inc. (ZUMZ) and Amtrust Financial Services Inc (AFSI).
We are adding 5 stocks to the portfolio. These include: Blackrock, Inc. (BLK), Sasol Limited (Adr) (SSL), Williams-sonoma, Inc. (WSM), Silicon Motion Technology Corp. (Adr) (SIMO) and United Insurance Holdings Corp.(Nda) (UIHC).
Newcomers to the Validea Hot List
United Insurance Holdings Corp. (UIHC): The parent of United Property & Casualty Insurance Company and its affiliated companies, United is primarily engaged in the homeowners property and casualty insurance business in the United States. It currently writes in Florida, Massachusetts, New Jersey, North Carolina, Rhode Island, and South Carolina, and was recently licensed to write in Texas and New Hampshire. Its target market currently consists of areas where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies, creating opportunities for firms like UIHC.
United ($430 million market cap) gets strong interest from my John Neff-based model. To read more about its fundamentals, check out the "Detailed Stock Analysis" section below.
Silicon Motion Technology Corporation (SIMO): Silicon Motion is a fabless semiconductor company that makes high-performance, low-power semiconductor solutions for the multimedia consumer electronics market. Its products include mobile storage, mobile communications, multimedia systems-on-a-chip (SoCs) and other products.
Silicon Motion ($800 million market cap) gets strong interest from my Peter Lynch-based model and high marks from several other strategies. To read more about it, scroll down to the "Detailed Stock Analysis" section.
Sasol Limited (SSL): This South Africa-based firm is an international integrated energy and chemicals company which has more than 33 000 people working in 37 countries. It develops and commercializes technologies, and builds and operates world-scale facilities to produce a range of product streams, including liquid fuels, high-value chemicals and low-carbon electricity.
Sasol ($23 billion market cap) gets strong interest from my Peter Lynch-, Benjamin Graham-, and Warren Buffett-based models. For more on the stock, see the "Detailed Stock Analysis" section below.
Williams-Sonoma Inc. (WSM): This San Francisco-based cookware and kitchen supply store, which also owns home products and furniture stores like Pottery Barn and West Elm, has nearly 600 stores across the U.S. and Canada.
Sonoma ($6.7 billion market cap) gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. To read more about it, scroll down to the "Detailed Stock Analysis" section below.
BlackRock Inc. (BLK): With more than $4.3 trillion in assets under management, BlackRock is the world's largest asset manager. It has taken in more than $11 billion in sales over the past year, and has been growing earnings per share at a 23% clip over the long term.
BlackRock ($57 billion market cap) gets strong interest from my Peter Lynch- and Martin Zweig-based models. For more on the stock, see the "Detailed Stock Analysis" section below.
News about Validea Hot List Stocks
AGCO Corporation (AGCO): AGCO announced that its Board of Directors has authorized a share repurchase program of up to $500 million of the company's common stock. The actual timing, number and value of shares repurchased under the latest program will be determined by management at its discretion within the terms of the authorization, and will depend on a number of factors, the firm said.
The Next Issue
In two weeks, we will publish another issue of the Hot List, at which time we will rebalance the portfolio. If you have any questions, please feel free to contact us at email@example.com.
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