Invest By Model

Top 20 Trades for 11/1

These four trades rebalance the portfolio modestly and raise just a little cash.  We are selling two stocks.  One we added to recently and it jumped 16.5% on no news.  It offers just 23% to my one-year target and is a little overbought, but I am intrigued by the recent action enough to retain a portion.  The other too is a recent add-to that popped nicely.  The expected return there is just 34%, which is slightly below the typical stock.  This trade reduces it to average in size.  Neither of these companies has reported yet.

The buys include one stock that we just trimmed before it was hammered on its earnings report.  It looks like profit-taking.  With an expected return of 41% to my target, this trade makes it average in size.  The other stock also got slammed on earnings and is now a bit oversold.  I may need to lower my current target somewhat, but the stock returns 76% to the current target.  This company has engaged in a series of potentially transformative actions, including some M&A as well as an exit from a business that has added volatility to the earnings.  The near-term impact is to reduce profitability, but I think that this company is creating a lot of value.  

Invest By Model - October Review and Initial 2014 Equity Outlook

The first month of the final quarter was more of the same for the markets, with new all-time highs for stocks and not much action for bonds.  Interest-rates were steady, though the value of the dollar declined somewhat against the Euro.  What a year it has been for stocks! Here is how the two models look as of month-end:

Top 20 basically tracked the market this month.  With its skew towards smaller stocks, which underperformed in October, there was a little pressure to keep up with the S&P 500.  Nevertheless, both returned about 4.6%.  Given the huge Q3 that we enjoyed, I am happy to start Q4 tracking the rallying market.  I was quite pleased to see some very strong performance from a number of our stocks - we had several double-digit winners, including two of more recent buys (BGFV and URI, both of which are up 15-16% since our buys in late September).  We also had a very nice add to PLPC in late September - it's up 16.5% and now at an all-time high.  We had trimmed the stock at its prior all-time high earlier this year.  Helping performance too were some timely trims of two of our larger positions, both of which sold off after earnings reports.

Conservative Growth/Balanced has had a great year, but the softness continued of late.  Again, this model portfolio will typically struggle to keep up with a rallying market while also usually performing better than the market when it is declining.  For October, CG/B returned 2.14% compared to the 60% stock and 40% bond index rallying 3.06%.  Here, in addition to the small-cap challenge, we had profit-taking in some of our stronger names in 2013.  Like Top 20, the record over the past five plus years has been stellar, and I think the current portfolio, which is somewhat below our index in bond exposure and moderately above it in stock exposure (almost 70%, which is below the 75% maximum) is well positioned for the balance of the year.

2014 Outlook for Stocks

Today I finalized my initial thoughts for 2014, and I am more bullish than I had expected previously.  Let me again remind everyone that I have no crystal ball.  My forecasts are single points, but the reality is that there is a range of outcomes that depend on many factors.  

Before I share my new outlook, let's discuss how 2013 has progressed.  Recall that 2012 was a miss of sorts for me after having fantastic calls in 2010 and 2011.  Last year, I had projected 1600 for the S&P 500, but we fell short, as the market ended up roughly unchanged at 1426.  I figured that I was just early, and used a similar method to forecast 2013:  Modest PE multiple expansion and modest earnings growth.  I suggested a year-end target of 1664 based on 14.5PE.  At the time, most of you probably thought I was crazy.  Indeed, most of the Wall Street forecasts were for much more modest performance.  On August 1st, as we approached 1700 and had cleared my year-end forecast, I updated my views, suggesting 15 PE (and on slightly higher projected earnings), leading to my still-current year-end forecast of 1740 (we closed at 1756.54 after trading as high as 1775 on 10/30).  

My forecast for 2014 (drum roll, please) is for more of the same, with earnings growth of 6% and the market PE rising to 16X.  This results in a year-end prediction of 1968 (just below the round number of 2000 too).  Inherent in this view is that interest rates will rise only modestly.  I believe that my forecast could be achieved with a lower multiple but higher EPS should the economy be more robust than we expect.  I will have more specific forecasts beyond just the S&P 500 at year-end.  The changing of the guard at the Federal Reserve (Bernanke out, Yellen in) and the mid-term national elections are what we know about.  On the other hand, there is so much we don't know about!  Foreign stock markets seem to be forecasting better times outside the U.S., and I think that this will be one of the key areas to watch.

We still have two months to go in 2013.  Last month, I raised the low-end of my expected range to 1550 from 1500 while maintaining the high-end at 1800.  I am sticking with the 1800 ceiling and raising my low-end to 1650 after the strong October and with just two months left.  I suspect that there will be limited selling for most stocks over the balance of the year - too many capital gains and too few losses to harvest. There could be some real bargains to pick up as the year-ends, as I expect extreme pressure on this year's losers.  Fewer than 6% of the stocks in the Russell 3000 have declined by more than 20% this year.  On the other hand, be prepared for some high-fliers to lose some wind once the new year begins, as those who didn't want to sell for tax reasons (and window-dressing) hit the bid.

Trades in Both Models

In Conservative Growth/Balanced, we are adding back the position we trimmed recently after a sharp decline.  My target is 66, suggesting 33% upside along with a 2% dividend yield over the next year.

In Top 20, we are selling one of our three big  losers.  I think that this could be a rough couple of months for stocks that have performed poorly as tax-loss harvesting should be fierce.  This company has really disappointed me, and I shouldn't have stayed with it this long.  The company we are buying is one we sold earlier this year.  It's up in price since then, though not much more than a market-performer, if that.  It's more important to look forward, and I am encouraged by several aspects of the story, which I detail in the research piece.  The expected return is slighly below the stock that we are selling, but I have a lot more confidence and also believe that my target may prove to be too conservative.  We are also adding to a position we had trimmed earlier this month following a post-earnings decline.  

Another Week, Another All-Time HIgh

Record highs again, and they were good for both of the Invest By Model model portfolios:

Top 20 returned 0.8% for the week, which was almost double the 0.43% gain by the S&P 500.  So far in October, the model is up 4.8%, which is 0.5% better than the market and extends upon the exceptional Q3 results.  The best stock was PLPC - very happy with our recent addition there after having sold near the highs earlier in the year.  SMCI, which we had trimmed recently, did pull back following its Q1 earnings report.  I have a new name I will be adding Monday most likely.

Conservative Growth/Balanced returned 0.55% this week compared to 0.4% for the index of 60% stocks and 40% bonds.  This model continues to lag and is behind the 2.9% benchmark in October, with a 2.31% return so far.  A stock we recently trimmed  and that was one of the smallest holdings in the portfolio was hammered today - I will be looking to add to the position at this lower price.

 

Outlook

I am having a flashback to the 90s - the "Goldilocks" economy, though perhaps in slow motion, as the rate of growth is certainly not the same level.  We can watch things like commodity prices, currencies and interest rates, and certainly we need to focus on things like PE and earnings, but everything looks just fine at the moment in every regard.  It must be time for a surprise!  I continue to believe that the high for 2013 is near, with a limit of 1800 and likely to occur before Thanksgiving.  I am not looking for much of a pullback, though, until January.  I will be formulating an initial 2014 outlook - not easy!  I hope to post it in my October review next week.

 

Articles

• Joy Global - Liston Street Pulse
• Carlisle Companies - Seeking Alpha

 

Have a great weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

 

Trades in Top 20 and Conservative Growth/Balanced

In Top 20, the name we are trimming is a bit overbought and a bit extended heading into earnings.  With an expected return over the next year of 30% to my target, the stock offers below-average return compared to other holdings.  This trade more appropriately positions the size of our exposure.

In CG/B, we are trimming a name that offers only 18% to our one-year price target.  The stock is a little overbought too.  Our buy offers 42% to the one-year target and is a little oversold.

S&P Takes Out My Year-End Target

What a week!  My 1740 year-end target was met today 11 weeks ahead of schedule.  Here is how the models look after our third-to-last options expiration in 2013:

Top 20 had a fantastic week.  The smaller stocks did a little better than the big ones, which helped a bit, but one of our newer purchases, United Rentals (URI) blasted to an all-time high on the tail of a decent earnings report and solid outlook.  You have made about 15% in the four weeks or so since you bought it - congrats!  You are also enjoying an almost 37% gain in Rosetta Resources (ROSE) in less than six months.  That took some time to develop but has been a real winner.  For the week, the model returned 3.72%, which was 1.28% better than the S&P 500 and good enough to get us ahead of the index in October  (3.97% vs. 3.86%).

Conservative Growth/Balanced kept pace with its 60% stock and 40% bond index, rising 1.64%, just slightly behind the 1.68% return on the benchmark.  The model is up 1.75% this month, which is trailing the 2.5% return on the balanced index.  CG/B is having a great year, but a sharply rising market is the most challenging one in terms of keeping up with the market.

 

Outlook

I have been looking for 1550-1800 on the S&P 500 to contain the Q4 price action, with a best-guess year-end close at 1740 (which was raised earlier this year from 1664).  Years and years of experience tells me that when it feels this good, it's probably about the best it can be.  I think the market will build a plateau here and don't expect to pierce 1800.  Recall that I suggested that the year-end high should come between mid-October and Thanksgiving.  I use these as reference points, but I actually would pin-point it as between today and 11/15.  These are the options expirations date.    

One huge topic to address is tax-loss selling.  It's going to be nasty this year, as the gains are big and the losers hard to find.  From a trading perspective, this says to be careful bottom-fishing and also that the overall market likely won't fall sharply.  In other words, now that we are near the upper -end of my forecast, the 1550 is probably off the table for the rest of they year.  Something to ponder.

 

Articles

• Sherwin-Williams - Liston Street Pulse
• Garbage Companies - TradeKing

 

Have a great weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

Trades for 10/14/13

In Top 20, we are reallocating from a technology name that is now offering 38% to my one-year target to a healthcare name that could return 67%.

In CG/B, we are adding two new names that offer about 30% to my one-year target, one of which we had sold at a higher price earlier this year after holding for more than a year.  We are trimming two names from the healthcare sector.  The device company is "overbought" and now offers just 21% to my recently increased target.  It has returned almost 18% since our purchase in August.  The distributor offers 26% to my recently increased target and has returned over 30% since our buy in March. 

Big Bounce Week

After touching the lowest levels since August, the market ended higher for the week after bouncing hard on Thursday.  Here is how the models look as of tonight:

Top 20 actually declined slightly, falling 0.43% compared to a 0.81% increase in the S&P 500. The model is off to a slow start this month, up 0.24% compared to the 1.38% gain in the overall market.  This comes after an exceptionally strong quarter.  We did have one stock that accounted for the majority of the underperformance.

Conservative Growth/Balanced rose 0.21%, slightly trailing the 0.48% return for the 60% stock and 40% bond index.  So far this month, the model is up 0.11% compared to the benchmark's increase of 0.80%.

Outlook

Not much data being released, that's for sure thanks to the government's shutdown.  I continue to see a modest bias higher.  One encouraging factor is strength in emerging markets and international stocks.

Articles

• mCig CEO Interview - Seeking Alpha
• Cannabis Stocks After The 'Green Light' - Seeking Alpha
• Flying High But Under The Radar - TradeKing

 

Have a great weekend!

 

 

Alan Brochstein, CFA

www. InvestByModel.com

 

Government Shuts Down Economic Data

One of the casualties of the infantile partisan bickering in Washington, D.C. was the regular data market participants depend upon to help make informed decisions.  Then again, as much as that data gets revised, I am not so sure it even matters!  Stepping down from the soapbox, here is how the models look four days into the 4th and final quarter of 2013:

As a reminder, I shared my Q3 review and Q4 outlook earlier this week.  

Top 20 continued its advance from Q3 marginally, rising .67% since month-end, which is just slightly ahead of the market.  For the full week, it rallied 0.89%, which was 0.94% better than the S&P 500.

Conservative Growth/Balanced continued to give up some of its very strong YTD performance, declining 0.1% in the first few days of October, which is 0.43% worse than the benchmark of 60% stocks and 40% bonds.  For the week, it underperformed by 0.16%.

 

Outlook

Given that I just updated my views, which raised the lower end of my expected S&P 500 range at 1550 now while maintaining the upper end at 1800, I will refer readers to the piece from earlier this week.

Articles

• Disney - Liston Street Pulse
• A Potentially Smarter Play than Nike - TradeKing

 

Special Research Piece

•  Download The 420 Investor Guide to Cannabis Stocks

 

Have a great weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

 

Q3 Review and Q4 Outlook

Q3 was very strong for the capital markets, with both stocks and bonds rising.  The benchmark S&P 500 returned 5.25%, and smaller stocks performed much better, with the Russell 2000, for instance, up 6.38%.  Addditionally, there was a massive shift among stocks away from "value" to "growth", with investors running as well from the dividend-payers that had attracted them through the first half of the year.  The bond market, which was quite volatile during the quarter, enjoyed a very strong September that left the Barclay's Aggregate Bond Market index up 0.51% for the quarter, though its return of -1.94% so far in 2013 has punished holders.  Here is how the two models at Invest By Model look:

Performance Review

Top 20 had a fantastic September to cap off one of its best quarters ever, with the Q3 return of 13.35% blowing away the S&P 500 by more than 8%.  While the MAKO acquisition was helpful as was the generally stronger performance of smaller stocks, the model benefited from some timely purchases and sales as well.  We exited OUTR with a good return before a collapse late in the quarter that we avoided, and we closed out nice gains in PBI, PLCM and STJ.  We had three positions that we held during the entire quarter that appreciated by more than 20%, including Rosetta Resources, Super Micro Computer and Masimo.  We had several others improve by more than 10%, while only one name dropped by more than 10%.

Conservative Growth/Balanced had a rare underperformance relative to its benchmark this quarter, albeit slight.  For the quarter, the model returned 2.11%, which lagged its 60% stock and 40% bond benchmark by 1.32%.  So far in 2013, the model has significantly outperformed the index, ending Q3 with a 5.76% advantage YTD.  We had one new stock perform relatively poorly, but four stocks we held during the quarter return more than 10%.  In general, the types of stocks that qualify for inclusion in a conservative portfolio didn't fare well in Q3, and that was the major factor.  One smart move was our timely exit of Men's Wearhouse, which plunged after our sale near the highs of the year.  We did a decent job in terms of increasing our exposure to stocks in a timely manner, adding four names during the quarter and increasing our exposure from underweight to slightly more than our targeted 60% in stocks.  We also upped our bond exposure near the lows from extremely underweight  levels, increasing it from 20% to 25%.

Market Outlook

I intend to have a more detailed look ahead later this month or in November.  In late 2012, I shared my view that the S&P 500 could end the year near 1666, and I later updated my outlook to 1740.  At that time, I suggested as well that the range over the balance of the year of 1500-1800.  While I still expect 1800 to contain the upside over the balance of the year, I am at this time raising the lower end to 1550.  This would represent an almost 10% decline from the peak last month and about 8.5% from the close on 9/30.  I will also share that I expect the peak in 2013 to occur between mid-October and mid-November.  

As I predicted earlier this year (but also, incorrectly, last year and probably the year before!), the end of "easy money" or an accomodative Federal Reserve has become a big focus of the market, with long-term interest rates spiking earlier this year and again during the quarter.  The 10-year Treasury tested 3% before declining to end the quarter at 2.61%, up just slightly from June.  I expect that rates won't rise as much as many fear - the economy just isn't strong enough yet.  Still, I expect a continued "normalization", which, to me, means rates could move towards 3-4% over the next year.

Portfolio Structure

Top 20 has a weighted-average PE of 14.5X.  3 of the names are Large-Cap, 7 have market-caps less than $1 billion and half of the portfolio is invested in companies with a market-cap of $1-10 billion.  The largest differences between Top 20 and the S&P 500 in terms of sector exposure are overweights in Industrials, Materials and Other (we own Emerging Markets) and underweights in Financials and Consumer Staples.  While the model is up 23.3% YTD (including dividends), the current holdings are actually down by almost 1% on  a weighted-average basis, reflecting portfolio repositioning.

CG/B currently has 64% stocks (60% benchmark), 25% bonds (40% benchmark) and 11% cash.  The stocks in the model  have a weighted-average forward PE of 13.4X, which is a discount to the S&P 500's 14.7X.  The dividend yield is 2.5% compared to 2.0%.  In general, the balance sheets are much stronger, with 7 of the 15 companies actually having more cash than debt.  The weighted-average net-debt-to-capital is just 14%.  Our market-caps range from $2 billion to over $200 billion, with an average in excess of $40 billion.  In terms of sector exposures, we have higher exposure to Consumer Staples, Consumer Discretionary and Technology than the S&P 500, while we are lower in Industrials, Financials and Energy (with the other four sectors within 5%).