Category: Industry Rotation

Industry Ranks May 2014

Industry Ranks May 2014

Industry Ranks 6_1521_image002

My main industry model is illustrated in the graphic. Green industries are cold. Red industries are hot. If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted?? Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted. Yes, things are bad, but are they all that bad? Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled ?Dig through.?

You might notice that I have no industries from the red zone. That is because the market is so high. I only want to play in cold industries. They won?t get so badly hit in a decline, and they might have some positive surprises.

If you use any of this, choose what you use off of your own trading style. If you trade frequently, stay in the red zone. Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion. I generally play in the green zone because I hold stocks for 3 years on average.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh? Why change if things are working well? I?m not saying to change if things are working well. I?m saying don?t change if things are working badly. Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes. Maximum pain drives changes for most people, which is why average investors don?t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then. This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year. It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology stocks here, some industrials, some retail?stocks, particularly those that are strongly capitalized.

I?m looking for undervalued industries. I?m not saying that there is always a bull market out there, and I will find it for you. But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive. I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting. The red zone is pretty cyclical at present. I will be very happy hanging out in dull stocks for a while.

That said, some dull companies are fetching some pricey valuations these days, particularly those with above average dividends. This is an overbought area of the market, and it is just a matter of time before the flight to relative safety reverses.

The Red Zone has a Lot of Financials; be wary of those. I have been paring back my reinsurers, but I have been adding to P&C insurers. What I find fascinating about the red momentum zone now, is that it is loaded with cyclical companies.

In the green zone, I picked almost all of the industries. If the companies are sufficiently well-capitalized, and the valuation is low, it can still be an rewarding place to do due diligence.

Will cyclical companies continue to do well? Will the economy continue to limp along, or might it be better or worse?

But what would the model suggest?

Ah, there I have something for you, and so long as Value Line does not object, I will provide that for you. I looked for companies in the industries listed, but in the top 5 of 9 balance sheet safety categories, and with returns estimated over 12%/year over the next 3-5 years. The latter category does the value/growth tradeoff automatically. I don?t care if returns come from mean reversion or growth.

But anyway, as a bonus here are the names that are candidates for purchase given this screen. Remember, this is a launching pad for due diligence, not hot names to buy.

I’ve tightened my criteria a little because the number of stocks passing last quarter’s screen was much higher, which was likely an artifact of earnings expectations rolling forward another year.

Anyway, enjoy the list of purchase candidates — I know that I will:

Industry Ranks 6_19997_image002

Full Disclosure: long SYMC

An Idea for When the Market is High

An Idea for When the Market is High

Last night I was at the Towson University?International Markets Summit. ?I’m grateful to the students for inviting me, as it is an honor. ?During the presentation, I mentioned the book “Accounting for Value” by Stephen Penman. ?I reviewed the book two years ago. ?A great book, and one that should lead readers to modify their views on value investing.

But one aspect of the book was easy to implement, he cited his paper that you can read here,?Returns to Buying Earnings and Book Value: Accounting for Growth and Risk. ?Buy the stocks that are the cheapest as measured by the highest quintiles of book value to price, and trailing twelve month earnings per share to price.

I ran this analysis for all US-traded stocks with over $100 million of market capitalization. ?Here are the results:

Company Ticker Industry Country B/P E/P
Petrobras Argentina SA ADR PZE 0606 – Oil & Gas – Integrated Argentina

1.26

7.95

Pampa Energia S.A. (ADR) PAM 1203 – Electric Utilities Argentina

0.83

11.41

OMV AG (ADR) OMVKY 0609 – Oil & Gas Operations Austria

1.13

11.33

Validus Holdings, Ltd. VR 0709 – Insurance (Life) Bermuda

1

13.3

Everest Re Group Ltd RE 0715 – Insurance (Property & Casualty) Bermuda

0.88

15.35

Maiden Holdings, Ltd. MHLD 0715 – Insurance (Property & Casualty) Bermuda

0.93

10.11

Montpelier Re Holdings Ltd. MRH 0715 – Insurance (Property & Casualty) Bermuda

0.99

11.83

Axis Capital Holdings Limited AXS 0715 – Insurance (Property & Casualty) Bermuda

1.01

13.2

Platinum Underwriters Holdings PTP 0715 – Insurance (Property & Casualty) Bermuda

1.02

11.25

White Mountains Insurance Grou WTM 0715 – Insurance (Property & Casualty) Bermuda

1.07

8.49

Aspen Insurance Holdings Limit AHL 0715 – Insurance (Property & Casualty) Bermuda

1.12

9.61

Assured Guaranty Ltd. AGO 0715 – Insurance (Property & Casualty) Bermuda

1.18

18.59

Partnerre Ltd PRE 0715 – Insurance (Property & Casualty) Bermuda

1.23

10.75

Argo Group International Holdi AGII 0715 – Insurance (Property & Casualty) Bermuda

1.27

11.55

Endurance Specialty Holdings L ENH 0715 – Insurance (Property & Casualty) Bermuda

1.31

12.55

Gerdau SA (ADR) GGB 0121 – Iron & Steel Brazil

1.32

6.84

Gafisa SA (ADR) GFA 0215 – Construction Services Brazil

2.04

15.52

Petroleo Brasileiro Petrobras PBR 0606 – Oil & Gas – Integrated Brazil

1.67

13.2

Telefonica Brasil SA (ADR) VIV 0915 – Communications Services Brazil

0.85

7.58

Companhia de Saneamento Basico SBS 1209 – Water Utilities Brazil

0.89

8.57

Endeavour Silver Corp EXK 0118 – Gold & Silver Canada

0.89

9.9

Teck Resources Ltd (USA) TCK 0124 – Metal Mining Canada

1.33

6.84

TransGlobe Energy Corporation TGA 0609 – Oil & Gas Operations Canada

0.85

10.03

Granite Real Estate Investment GRP.U 0933 – Real Estate Operations Canada

0.87

7.53

Brookfield Office Properties I BPO 0933 – Real Estate Operations Canada

1.08

10.08

Boardwalk REIT (USA) BOWFF 0933 – Real Estate Operations Canada

1.14

11.54

Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (Property & Casualty) Cayman Islands

0.9

19.45

Sinopec Shanghai Petrochemical SHI 0103 – Chemical Manufacturing China

1.52

11

Yongye International, Inc YONG 0103 – Chemical Manufacturing China

1.65

43.36

China XD Plastics Co Ltd CXDC 0109 – Containters & Packaging China

1.13

22.71

Lihua International Inc LIWA 0127 – Misc. Fabricated Products China

2.31

41.21

Xinyuan Real Estate Co., Ltd. XIN 0215 – Construction Services China

5.22

42.83

China Automotive Systems, Inc. CAAS 0415 – Auto & Truck Parts China

0.99

11.04

China Petroleum & Chemical Cor SNP 0609 – Oil & Gas Operations China

0.87

10.11

Concord Medical Services Hldg CCM 0806 – Healthcare Facilities China

3.06

12.45

China Telecom Corporation Limi CHA 0915 – Communications Services China

1.17

7.03

Xueda Education Group (ADR) XUE 0969 – Schools China

0.84

6.63

Changyou.Com Ltd (ADR) CYOU 1018 – Computer Services China

1.23

20.92

Nam Tai Electronics, Inc. NTE 1024 – Electronic Instruments & Controls China

1.11

21.58

Jinpan International Limited JST 1024 – Electronic Instruments & Controls China

1.7

13.36

Semiconductor Manufacturing In SMI 1033 – Semiconductors China

0.96

8.06

China Eastern Airlines Corp. L CEA 1106 – Airline China

1.05

12.11

China Southern Airlines Co Ltd ZNH 1106 – Airline China

1.7

13.19

Guangshen Railway Co. Ltd (ADR GSH 1112 – Railroads China

1.34

6.64

Axa SA (ADR) AXAHY 0709 – Insurance (Life) France

1.19

9.46

Volkswagen AG (ADR) VLKAY 0412 – Auto & Truck Manufacturers Germany

0.94

9.73

Allianz SE (ADR) AZSEY 0715 – Insurance (Property & Casualty) Germany

0.92

11.08

E.ON SE (ADR) EONGY 1203 – Electric Utilities Germany

1.28

8.17

National Bank of Greece (ADR) NBG 0727 – Regional Banks Greece

2

131.03

Capital Product Partners L.P. CPLP 1118 – Water Transportation Greece

0.83

10.36

Safe Bulkers, Inc. SB 1118 – Water Transportation Greece

0.83

11.99

StealthGas Inc. GASS 1118 – Water Transportation Greece

1.32

9.08

Navios Maritime Holdings Inc. NM 1118 – Water Transportation Greece

1.32

13.4

Sun Hung Kai Properties Limite SUHJY 0215 – Construction Services Hong Kong

1.44

15.22

Hysan Development Company Limi HYSNY 0215 – Construction Services Hong Kong

1.66

20.18

Tai Cheung Holdings Ltd (ADR) TAICY 0215 – Construction Services Hong Kong

2.11

34.38

Le Gaga Holdings Ltd ADR GAGA 0509 – Crops Hong Kong

1.55

14.63

Bank of East Asia Ltd. (ADR), BKEAY 0727 – Regional Banks Hong Kong

0.85

8.78

Iao Kun Group Holding Co Ltd IKGH 0912 – Casinos & Gaming Hong Kong

1.36

12.89

Cheung Kong (Holdings) Limited CHEUY 0933 – Real Estate Operations Hong Kong

1.16

11.07

Seaspan Corporation SSW 1118 – Water Transportation Hong Kong

1.05

15.2

Magyar Telekom Tavkozlesi Nyrt MYTAY 0915 – Communications Services Hungary

1.34

6.66

XL Group plc XL 0715 – Insurance (Property & Casualty) Ireland

1.12

11.72

Fly Leasing Ltd(ADR) FLY 0939 – Rental & Leasing Ireland

1.3

17.39

Ellomay Capital Ltd. ELLO 1033 – Semiconductors Israel

0.93

10.95

FUJIFILM Holdings Corp. (ADR) FUJIY 0112 – Fabricated Plastic & Rubber Japan

1.55

6.64

Kobe Steel, Ltd. (ADR) KBSTY 0121 – Iron & Steel Japan

1.47

14.7

Mitsui & Co Ltd (ADR) MITSY 0218 – Misc. Capital Goods Japan

1.33

13.26

Wacoal Holdings Corporation (A WACLY 0403 – Apparel/Accessories Japan

1.45

7.14

Toyota Motor Corp (ADR) TM 0412 – Auto & Truck Manufacturers Japan

0.82

10.5

Honda Motor Co Ltd (ADR) HMC 0412 – Auto & Truck Manufacturers Japan

0.92

7.61

Nissan Motor Co., Ltd. (ADR) NSANY 0412 – Auto & Truck Manufacturers Japan

1.11

10.04

Nomura Holdings, Inc. (ADR) NMR 0718 – Investment Services Japan

1.09

10.18

Mizuho Financial Group Inc. (A MFG 0727 – Regional Banks Japan

1.13

14.9

Sumitomo Mitsui Financial Grp, SMFG 0727 – Regional Banks Japan

1.28

16.67

Mitsubishi UFJ Financial Group MTU 0727 – Regional Banks Japan

1.53

13.67

Nippon Telegraph & Telephone C NTT 0915 – Communications Services Japan

1.39

8.93

ORIX Corporation (ADR) IX 0939 – Rental & Leasing Japan

0.98

7.59

Ternium S.A. (ADR) TX 0121 – Iron & Steel Luxembourg

0.89

7.61

ING Groep NV (ADR) ING 0709 – Insurance (Life) Netherlands

1.14

9.46

VimpelCom Ltd (ADR) VIP 0915 – Communications Services Netherlands

0.93

13.67

ASM International NV (ADR) ASMI 1033 – Semiconductors Netherlands

1.01

74.95

Petroleum Geo-Services ASA (AD PGSVY 0612 – Oil Well Services & Equipment Norway

0.81

9.85

Banco Latinoamericano Comerc E BLX 0727 – Regional Banks Panama

0.85

8.39

Compania de Minas Buenaventura BVN 0118 – Gold & Silver Peru

1.18

10.05

OFG Bancorp OFG 0727 – Regional Banks Puerto Rico

0.93

11.04

Popular Inc BPOP 0727 – Regional Banks Puerto Rico

1.52

19.77

Triple-S Management Corp. GTS 0806 – Healthcare Facilities Puerto Rico

1.79

12.52

LUKOIL (ADR) LUKOY 0606 – Oil & Gas – Integrated Russian Federation

1.91

19.08

China Yuchai International Lim CYD 0218 – Misc. Capital Goods Singapore

1.2

15.34

Net 1 UEPS Technologies Inc UEPS 0703 – Consumer Financial Services South Africa

0.91

6.79

POSCO (ADR) PKX 0121 – Iron & Steel South Korea

1.72

6.97

Shinhan Financial Group Co., L SHG 0727 – Regional Banks South Korea

1.24

8.42

Woori Finance Holdings Co., Lt WF 0727 – Regional Banks South Korea

1.91

9.86

SK Telecom Co., Ltd. (ADR) SKM 0915 – Communications Services South Korea

0.89

11.87

Repsol SA (ADR) REPYY 0606 – Oil & Gas – Integrated Spain

1.06

7.93

Transocean LTD RIG 0612 – Oil Well Services & Equipment Switzerland

1.14

9.54

ACE Limited ACE 0715 – Insurance (Property & Casualty) Switzerland

0.84

10.92

Allied World Assurance Co Hold AWH 0715 – Insurance (Property & Casualty) Switzerland

1

11.73

United Microelectronics Corp ( UMC 1033 – Semiconductors Taiwan

1.3

8.02

Silicon Motion Technology Corp SIMO 1033 – Semiconductors Taiwan

1.96

19.74

BP plc (ADR) BP 0606 – Oil & Gas – Integrated United Kingdom

0.85

15.1

Noble Corporation PLC NE 0612 – Oil Well Services & Equipment United Kingdom

1.08

10.05

Subsea 7 SA (ADR) SUBCY 0612 – Oil Well Services & Equipment United Kingdom

1.09

7.02

ENSCO PLC ESV 0612 – Oil Well Services & Equipment United Kingdom

1.11

12.2

Rowan Companies PLC RDC 0612 – Oil Well Services & Equipment United Kingdom

1.3

6.71

HSBC Holdings plc (ADR) HSBC 0727 – Regional Banks United Kingdom

0.94

8.09

Vodafone Group Plc (ADR) VOD 0915 – Communications Services United Kingdom

1.47

31.68

J Sainsbury plc (ADR) JSAIY 0957 – Retail (Grocery) United Kingdom

0.96

10.57

Global Ship Lease, Inc. GSL 1118 – Water Transportation United Kingdom

2.11

16.62

Cliffs Natural Resources Inc CLF 0124 – Metal Mining United States

1.87

12.76

M.D.C. Holdings, Inc. MDC 0215 – Construction Services United States

0.91

23.28

M/I Homes Inc MHO 0215 – Construction Services United States

0.92

27.21

URS Corp URS 0215 – Construction Services United States

1.16

7.02

Mestek, Inc. MCCK 0218 – Misc. Capital Goods United States

0.98

11.53

General Motors Company GM 0412 – Auto & Truck Manufacturers United States

0.83

7.98

Rocky Brands Inc RCKY 0418 – Footwear United States

1.21

6.82

Johnson Outdoors Inc. JOUT 0430 – Recreational Products United States

0.87

7.83

LeapFrog Enterprises, Inc. LF 0430 – Recreational Products United States

0.89

17.58

Yasheng Group HERB 0509 – Crops United States

11.77

70.4

Seaboard Corporation SEB 0515 – Food Processing United States

0.82

6.77

John B. Sanfilippo & Son, Inc. JBSS 0515 – Food Processing United States

0.84

8.55

Omega Protein Corporation OME 0515 – Food Processing United States

1.01

12.24

Ennis, Inc. EBF 0518 – Office Supplies United States

0.92

8.43

ACCO Brands Corporation ACCO 0518 – Office Supplies United States

1.01

11.07

Universal Corp UVV 0524 – Tobacco United States

0.93

10.8

Hess Corp. HES 0609 – Oil & Gas Operations United States

0.86

12.86

Approach Resources Inc. AREX 0609 – Oil & Gas Operations United States

0.93

9.48

Equal Energy Ltd. (USA) EQU 0609 – Oil & Gas Operations United States

0.96

9.38

Sandridge Mississippian Trust SDT 0609 – Oil & Gas Operations United States

1.49

63.59

PHI Inc. PHII 0612 – Oil Well Services & Equipment United States

0.85

8.96

Medallion Financial Corp TAXI 0703 – Consumer Financial Services United States

0.94

9.13

CIT Group Inc. CIT 0703 – Consumer Financial Services United States

0.96

7.26

Goldman Sachs Group Inc GS 0703 – Consumer Financial Services United States

0.97

10.16

Ellington Financial LLC EFC 0703 – Consumer Financial Services United States

1.04

13.7

Walter Investment Management C WAC 0703 – Consumer Financial Services United States

1.11

23.94

Chimera Investment Corporation CIM 0703 – Consumer Financial Services United States

1.12

11.58

PHH Corporation PHH 0703 – Consumer Financial Services United States

1.19

9.68

EZCORP Inc EZPW 0703 – Consumer Financial Services United States

1.58

7.55

WellPoint Inc WLP 0706 – Insurance (Accident & Health) United States

0.89

9.52

Employers Holdings, Inc. EIG 0706 – Insurance (Accident & Health) United States

0.93

10.46

Reinsurance Group of America I RGA 0706 – Insurance (Accident & Health) United States

1.08

7.49

American Equity Investment Lif AEL 0709 – Insurance (Life) United States

0.86

16.77

Protective Life Corp. PL 0709 – Insurance (Life) United States

0.92

9.76

FBL Financial Group FFG 0709 – Insurance (Life) United States

0.96

9.73

Unum Group UNM 0709 – Insurance (Life) United States

0.98

9.55

Assurant, Inc. AIZ 0709 – Insurance (Life) United States

1

9.67

Lincoln National Corporation LNC 0709 – Insurance (Life) United States

1.07

9.76

Symetra Financial Corporation SYA 0709 – Insurance (Life) United States

1.23

8.64

CNO Financial Group Inc CNO 0709 – Insurance (Life) United States

1.29

12.39

Imperial Holdings, Inc. IFT 0709 – Insurance (Life) United States

1.38

37.03

National Western Life Insuranc NWLI 0709 – Insurance (Life) United States

1.63

10.85

Genworth Financial Inc GNW 0709 – Insurance (Life) United States

1.72

6.87

Fortegra Financial Corp FRF 0712 – Insurance (Miscellaneous) United States

1.28

8.18

Allstate Corporation, The ALL 0715 – Insurance (Property & Casualty) United States

0.82

8.75

HCC Insurance Holdings, Inc. HCC 0715 – Insurance (Property & Casualty) United States

0.82

8.92

State Auto Financial Corp STFC 0715 – Insurance (Property & Casualty) United States

0.83

6.92

Stewart Information Services C STC 0715 – Insurance (Property & Casualty) United States

0.83

7.96

Safety Insurance Group, Inc. SAFT 0715 – Insurance (Property & Casualty) United States

0.84

7.39

Investors Title Company ITIC 0715 – Insurance (Property & Casualty) United States

0.86

9.85

First American Financial Corp FAF 0715 – Insurance (Property & Casualty) United States

0.87

6.75

American Financial Group Inc AFG 0715 – Insurance (Property & Casualty) United States

0.87

9.15

ProAssurance Corporation PRA 0715 – Insurance (Property & Casualty) United States

0.87

10.86

Old Republic International Cor ORI 0715 – Insurance (Property & Casualty) United States

0.88

10.53

Selective Insurance Group SIGI 0715 – Insurance (Property & Casualty) United States

0.9

8.51

Horace Mann Educators Corporat HMN 0715 – Insurance (Property & Casualty) United States

0.91

9.6

Kemper Corp KMPR 0715 – Insurance (Property & Casualty) United States

0.95

9.64

Baldwin & Lyons Inc BWINB 0715 – Insurance (Property & Casualty) United States

0.98

9.42

Hanover Insurance Group, Inc., THG 0715 – Insurance (Property & Casualty) United States

0.99

9.44

Alleghany Corporation Y 0715 – Insurance (Property & Casualty) United States

1.01

9.15

EMC Insurance Group Inc. EMCI 0715 – Insurance (Property & Casualty) United States

1.02

9.88

United Fire Group, Inc. UFCS 0715 – Insurance (Property & Casualty) United States

1.05

10.3

Navigators Group, Inc, The NAVG 0715 – Insurance (Property & Casualty) United States

1.09

7.68

Cna Financial Corp CNA 0715 – Insurance (Property & Casualty) United States

1.1

8.15

American International Group I AIG 0715 – Insurance (Property & Casualty) United States

1.34

12

American National Insurance Co ANAT 0715 – Insurance (Property & Casualty) United States

1.4

8.99

MBIA Inc. MBI 0715 – Insurance (Property & Casualty) United States

1.45

10.86

FBR & Co FBRC 0718 – Investment Services United States

1.03

29.21

KKR Financial Holdings LLC KFN 0718 – Investment Services United States

1.05

11.24

NASDAQ OMX Group, Inc. NDAQ 0718 – Investment Services United States

1.13

6.66

Piper Jaffray Companies PJC 0718 – Investment Services United States

1.17

7.42

Primus Guaranty, Ltd. PRSG 0718 – Investment Services United States

1.25

50.12

Arlington Asset Investment Cor AI 0718 – Investment Services United States

1.28

11.6

Oppenheimer Holdings Inc. (USA OPY 0718 – Investment Services United States

1.34

6.71

CIFC Corp CIFC 0718 – Investment Services United States

1.73

9.51

JPMorgan Chase & Co. JPM 0724 – Money Center Banks United States

0.98

7.39

First National Bank Alaska FBAK 0727 – Regional Banks United States

0.81

6.61

Old National Bancorp ONB 0727 – Regional Banks United States

0.81

7

Sandy Spring Bancorp Inc. SASR 0727 – Regional Banks United States

0.81

7.28

TowneBank TOWN 0727 – Regional Banks United States

0.81

7.52

Fidelity Southern Corporation LION 0727 – Regional Banks United States

0.81

10.35

Central Pacific Financial Corp CPF 0727 – Regional Banks United States

0.81

21.18

Cascade Bancorp CACB 0727 – Regional Banks United States

0.81

22.18

LCNB Corp. LCNB 0727 – Regional Banks United States

0.82

6.69

S & T Bancorp Inc STBA 0727 – Regional Banks United States

0.83

7.38

Great Southern Bancorp, Inc. GSBC 0727 – Regional Banks United States

0.83

8.55

ESB Financial Corporation ESBF 0727 – Regional Banks United States

0.84

6.88

WesBanco, Inc. WSBC 0727 – Regional Banks United States

0.84

7.15

Trustmark Corp TRMK 0727 – Regional Banks United States

0.84

7.28

KeyCorp KEY 0727 – Regional Banks United States

0.84

7.3

MidWestOne Financial Group, In MOFG 0727 – Regional Banks United States

0.84

8.77

Bar Harbor Bankshares BHB 0727 – Regional Banks United States

0.84

9.1

Seacoast Banking Corporation o SBCF 0727 – Regional Banks United States

0.84

21.31

First Bancorp Inc FNLC 0727 – Regional Banks United States

0.85

7.39

Mercantile Bank Corp. MBWM 0727 – Regional Banks United States

0.85

9.45

Heritage Financial Group Inc HBOS 0727 – Regional Banks United States

0.86

7.23

MainSource Financial Group Inc MSFG 0727 – Regional Banks United States

0.86

7.33

Norwood Financial Corporation NWFL 0727 – Regional Banks United States

0.86

7.9

Fulton Financial Corp FULT 0727 – Regional Banks United States

0.87

6.82

Pulaski Financial Corp PULB 0727 – Regional Banks United States

0.88

6.85

Washington Federal Inc. WAFD 0727 – Regional Banks United States

0.88

6.87

International Bancshares Corp IBOC 0727 – Regional Banks United States

0.89

7.93

Lakeland Bancorp, Inc. LBAI 0727 – Regional Banks United States

0.9

6.84

Northrim BanCorp, Inc. NRIM 0727 – Regional Banks United States

0.9

7.67

BCB Bancorp, Inc. BCBP 0727 – Regional Banks United States

0.9

7.91

ACNB Corporation ACNB 0727 – Regional Banks United States

0.9

8.14

Intermountain Community Bancor IMCB 0727 – Regional Banks United States

0.9

9.74

First Financial Corp THFF 0727 – Regional Banks United States

0.91

7.44

Farmers & Merchants Bancorp In FMAO 0727 – Regional Banks United States

0.91

7.8

Southeastern Bank Financial Co SBFC 0727 – Regional Banks United States

0.91

11.29

Isabella Bank Corp ISBA 0727 – Regional Banks United States

0.92

6.95

First Merchants Corporation FRME 0727 – Regional Banks United States

0.93

6.76

Wintrust Financial Corp WTFC 0727 – Regional Banks United States

0.93

7.12

First Citizens BancShares Inc. FCNCA 0727 – Regional Banks United States

0.94

7.57

Firstbank Corporation FBMI 0727 – Regional Banks United States

0.94

8.03

Century Bancorp, Inc. CNBKA 0727 – Regional Banks United States

0.95

10.72

Central Valley Community Banco CVCY 0727 – Regional Banks United States

0.96

6.62

PNC Financial Services Group I PNC 0727 – Regional Banks United States

0.96

8.94

American National BankShares I AMNB 0727 – Regional Banks United States

0.96

9.01

Capital One Financial Corp. COF 0727 – Regional Banks United States

0.97

9.95

Provident Financial Services, PFS 0727 – Regional Banks United States

0.99

6.92

NASB Financial, Inc. NASB 0727 – Regional Banks United States

0.99

11

Flagstar Bancorp Inc FBC 0727 – Regional Banks United States

1.01

21.87

First Defiance Financial FDEF 0727 – Regional Banks United States

1.02

8.35

MidSouth Bancorp, Inc. MSL 0727 – Regional Banks United States

1.03

6.96

C&F Financial Corp CFFI 0727 – Regional Banks United States

1.04

13.4

First Community Bancshares Inc FCBC 0727 – Regional Banks United States

1.05

7.25

Provident Financial Holdings, PROV 0727 – Regional Banks United States

1.05

8.78

Chemung Financial Corp. CHMG 0727 – Regional Banks United States

1.06

6.7

Territorial Bancorp Inc TBNK 0727 – Regional Banks United States

1.08

7.23

Berkshire Hills Bancorp, Inc. BHLB 0727 – Regional Banks United States

1.09

6.61

Regions Financial Corporation RF 0727 – Regional Banks United States

1.09

7.73

Old Second Bancorp Inc. OSBC 0727 – Regional Banks United States

1.1

113.32

Farmers Capital Bank Corp FFKT 0727 – Regional Banks United States

1.14

7.7

Premier Financial Bancorp, Inc PFBI 0727 – Regional Banks United States

1.18

10.46

FIRST FINANCIAL NORTHWEST, INC FFNW 0727 – Regional Banks United States

1.18

14.46

Intervest Bancshares Corp IBCA 0727 – Regional Banks United States

1.19

8.37

MBT Financial Corp. MBTF 0727 – Regional Banks United States

1.23

28.89

New Hampshire Thrift Bancshare NHTB 0727 – Regional Banks United States

1.26

7.66

MVB Financial Corp MVBF 0727 – Regional Banks United States

1.29

10.03

Citigroup Inc C 0727 – Regional Banks United States

1.3

8.73

Susquehanna Bancshares Inc SUSQ 0727 – Regional Banks United States

1.31

8.42

QCR Holdings, Inc. QCRH 0727 – Regional Banks United States

1.44

12.41

First Niagara Financial Group FNFG 0727 – Regional Banks United States

1.45

8.28

First Citizens Bancorporation, FCBN 0727 – Regional Banks United States

1.5

9.95

Farmers & Merchants Bank (Long FMBL 0909 – Business Services United States

0.98

8.05

Kelly Services, Inc. KELYA 0909 – Business Services United States

1.02

7.21

Lakes Entertainment, Inc. LACO 0912 – Casinos & Gaming United States

1.01

14.29

Black Box Corporation BBOX 0915 – Communications Services United States

1.38

7.36

Iridium Communications Inc. IRDM 0915 – Communications Services United States

1.72

10.16

Courier Corporation CRRC 0927 – Printing & Publishing United States

0.86

6.72

CSS Industries Inc CSS 0927 – Printing & Publishing United States

1.08

7.53

Blackstone Mortgage Trust Inc BXMT 0933 – Real Estate Operations United States

0.87

145.18

New York Mortgage Trust Inc NYMT 0933 – Real Estate Operations United States

0.88

14.44

PennyMac Mortgage Investment T PMT 0933 – Real Estate Operations United States

0.89

13.15

Starwood Property Trust, Inc. STWD 0933 – Real Estate Operations United States

0.94

7.84

Capstead Mortgage Corporation CMO 0933 – Real Estate Operations United States

0.99

7.31

Dynex Capital Inc DX 0933 – Real Estate Operations United States

1.02

12.82

Two Harbors Investment Corp TWO 0933 – Real Estate Operations United States

1.04

16.24

American Capital Agency Corp. AGNC 0933 – Real Estate Operations United States

1.05

14.81

Apollo Commercial Real Est. Fi ARI 0933 – Real Estate Operations United States

1.09

7.4

MFA Financial, Inc. MFA 0933 – Real Estate Operations United States

1.09

9.89

Anworth Mortgage Asset Corpora ANH 0933 – Real Estate Operations United States

1.1

9.07

Resource Capital Corp. RSO 0933 – Real Estate Operations United States

1.16

9.91

Rent-A-Center Inc RCII 0939 – Rental & Leasing United States

0.97

8.84

Willis Lease Finance Corporati WLFC 0939 – Rental & Leasing United States

1.31

9.51

Biglari Holdings Inc BH 0942 – Restaurants United States

0.83

23.81

Rick’s Cabaret Int’l, Inc RICK 0942 – Restaurants United States

0.92

8.66

PCM Inc PCMI 0948 – Retail (Catalog & Mail Order) United States

1.09

7.11

Trans World Entertainment Corp TWMC 0963 – Retail (Specialty Non-Apparel) United States

1.68

7.37

TravelCenters of America LLC TA 0963 – Retail (Specialty Non-Apparel) United States

1.76

7.55

Tech Data Corp TECD 0966 – Retail (Technology) United States

0.87

7.43

hhgregg, Inc. HGG 0966 – Retail (Technology) United States

1.32

6.67

Ingram Micro Inc. IM 1015 – Computer Peripherals United States

0.84

6.68

Key Tronic Corporation KTCC 1015 – Computer Peripherals United States

0.93

9.42

Xerox Corp XRX 1018 – Computer Services United States

0.89

8.31

VOXX International Corp VOXX 1024 – Electronic Instruments & Controls United States

1.57

10.96

OmniVision Technologies, Inc. OVTI 1033 – Semiconductors United States

0.91

8.46

Benchmark Electronics, Inc. BHE 1033 – Semiconductors United States

1

9

JetBlue Airways Corporation JBLU 1106 – Airline United States

0.85

6.84

Republic Airways Holdings Inc. RJET 1106 – Airline United States

1.42

12.1

SkyWest, Inc. SKYW 1106 – Airline United States

2.19

8.93

Atlas Air Worldwide Holdings, AAWW 1109 – Misc. Transportation United States

1.49

10.44

International Shipholding Corp ISH 1118 – Water Transportation United States

1.67

7.41

Gas Natural Inc EGAS 1206 – Natural Gas Utilities United States

0.89

6.75

What are my surprises here?

  • My but there are a lot of foreign companies in this list, far more as a percentage than the 3575 total companies I started with. ?It seems that foreign companies are cheap.
  • Now, that said, accounting standards are tighter in the US than elsewhere, and particularly, be careful on Chinese companies. ?Many of them are scams.
  • There are a lot of financial companies listed. ?I would note that earnings quality for financial companies is often poor, so don’t go “hog wild” buying financial companies.

All that said, this could be a good list for starting due diligence, and I will use at least some of this in my next selection of companies for my clients.

What’s that, you say? ?Do I and my clients own any of these firms? ?Yes we do. ?Of the 38 stocks in my portfolio, 11 of them pass this screen, and here is the summary:

Full Disclosure: Long?ENH, SNP, GTS, LUKOY, BP, ESV, RGA, AIZ, NWLI, IM, XRX

Industry Ranks February 2014

Industry Ranks February 2014

Industry Ranks 6_1521_image002

My main industry model is illustrated in the graphic. Green industries are cold. Red industries are hot. If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted?? Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted. Yes, things are bad, but are they all that bad? Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled ?Dig through.?

You might notice that? I have no industries from the red zone. That is because the market is so high. I only want to play in cold industries. They won?t get so badly hit in a decline, and they might have some positive surprises.

If you use any of this, choose what you use off of your own trading style. If you trade frequently, stay in the red zone. Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion. I generally play in the green zone because I hold stocks for 3 years on average.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh? Why change if things are working well? I?m not saying to change if things are working well. I?m saying don?t change if things are working badly. Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes. Maximum pain drives changes for most people, which is why average investors don?t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then. This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year. It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology stocks here, some industrials, some consumer stocks, particularly those that are strongly capitalized.

I?m looking for undervalued industries. I?m not saying that there is always a bull market out there, and I will find it for you. But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive. I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting. The red zone is pretty cyclical at present. I will be very happy hanging out in dull stocks for a while.

That said, some dull companies are fetching some pricey valuations these days, particularly those with above average dividends. This is an overbought area of the market, and it is just a matter of time before the flight to relative safety reverses.

The Red Zone has a Lot of Financials; be wary of those. I have been paring back my insurers, but I have been adding to P&C reinsurers.? What I find fascinating about the red momentum zone now, is that it is loaded with cyclical companies.

In the green zone, I picked almost all of the industries. If the companies are sufficiently well-capitalized, and the valuation is low, it can still be an rewarding place to do due diligence.

Will cyclical companies continue to do well?? Will the economy continue to limp along, or might it be better or worse?

But what would the model suggest?

Ah, there I have something for you, and so long as Value Line does not object, I will provide that for you. I looked for companies in the industries listed, but in the top 5 of 9 balance sheet safety categories, and with returns estimated over 12%/year over the next 3-5 years. The latter category does the value/growth tradeoff automatically. I don?t care if returns come from mean reversion or growth.

But anyway, as a bonus here are the names that are candidates for purchase given this screen. Remember, this is a launching pad for due diligence, not hot names to buy.

I?ve loosened my criteria a little because the market is so high, but I figure I will toss out lot when I do my quarterly evaluation of the companies that I hold for clients and me.

Industry Ranks 6_19997_image002

On Investment Ideas, Redux

On Investment Ideas, Redux

Would I disclose proprietary ideas of mine?? I’ve done it before.? Why would I do it?? Because it would take a lot to make the ideas usable.? Remember my commentary from when I was a bond manager: I was far more open with my brokers than most managers, but I never gave them the critical bits.

So a reader asked me:

Any chance you could expand on what quantitative metrics you are using to compare potential investments? Could you also name a few of the 77 13fs you track? Thanks

I will go above and beyond here.? You will get the names of all 78 — here they are:

  • Abrams
  • Akre
  • Altai
  • Ancient Art
  • Appaloosa
  • Atlantic
  • Bares
  • Baupost
  • Blue Ridge
  • Brave Warrior
  • Bridgewater
  • BRK
  • Capital Growth
  • Centaur
  • Centerbridge
  • Chieftain
  • Chou
  • Coatue
  • Dodge & Cox
  • Dreman
  • Eagle Capital
  • Eagle Value
  • Edinburgh
  • Fairfax
  • Farallon
  • Fiduciary
  • Force
  • FPA
  • Gates
  • Glenview
  • Goldentree
  • Greenhaven
  • Greenlight
  • H Partners
  • Hawkshaw
  • Hayman
  • Hodges
  • Hound
  • Hovde
  • Icahn
  • Intl Value
  • Invesco
  • Jana
  • JAT
  • Jensen
  • Joho
  • Lane Five
  • Leucadia
  • Lone Pine
  • M3F
  • Markel
  • Matrix
  • Maverick
  • MHR
  • Montag
  • MSD
  • Pabrai
  • Parnassus
  • Passport
  • Pennant
  • Perry
  • Pershing Square
  • Pickens
  • Price
  • Sageview
  • Scout
  • Soros
  • Southeastern
  • SQ Advisors
  • Third Point
  • Tiger Global
  • Tweedy Browne
  • ValueAct
  • Viking Global
  • Weitz
  • West Coast
  • Wintergreen
  • Yacktman

What I won’t tell you is what I do with their data, because it is different from what most do.? But you can play with it.

Then you asked about factors.? Here are my factors:

  • Price change over the last year
  • Price change over the last three years
  • Insider buying
  • Price-to-earnings, both current and forward
  • Price-to-book
  • Price-to-sales
  • Price-to-free cash flow
  • Price-to-sales
  • Dividend yield
  • Neglect (Market cap / Trading volume)
  • Net Operating Assets
  • Stock price volatility over the last three years
  • Asset growth over the last three years
  • Sales growth over the last three years
  • Quality (gross margins / assets)

Now that I have “bared all,” I haven’t really bared all, because there is a lot that goes into the preparation and analysis of the data that can’t be grasped from what I have revealed here.? To go into that would take more time than I can spend.? That’s one reason why as a corporate bond manager, I would share more data with my brokers than most would do, because I knew that the last 20% that I reserved was the real gold.? That I would not share.

Beyond that, there are my industry rotation models, which I share 4-6x per year, and then my qualitative reasoning, which makes me reject a lot of ideas that pass my quantitative screens.

That’s what I do.? It’s not perfect, and my qualitative reasoning has its faults as well.? I encourage you to develop your own theories of value, as Ken Fisher encouraged me to do back in early 2000.? Develop your edge, with knowledge that you have that few others do.? I’ll give you an example.

I understand most areas in insurance.? I don’t get everything right, but it does give me an edge, because insurance accounting and competition is a “black box” to most investors.? Insurance has been one of the best performing industries over time, but many avoid it because of its complexity and stodginess.

Behind the hard to understand earnings volatility, there is sometimes a generally profitable franchise that will make decent money in the long run.? But few get that, and that is an “edge” of mine.? Develop your own edge.

That’s all for now.? Invest wisely, and be wary, because the market for risk assets is high, and what if the Fed stops supporting it?? Make sure your portfolio has a margin of safety.

Industry Ranks November 2013

Industry Ranks November 2013

Industry Ranks 6_1521_image002

 

My main industry model is illustrated in the graphic. Green industries are cold. Red industries are hot. If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted?? Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted. Yes, things are bad, but are they all that bad? Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled ?Dig through.?

You might notice that? I have no industries from the red zone. That is because the market is so high. I only want to play in cold industries. They won?t get so badly hit in a decline, and they might have some positive surprises.

If you use any of this, choose what you use off of your own trading style. If you trade frequently, stay in the red zone. Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion. I generally play in the green zone because I hold stocks for 3 years on average.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh? Why change if things are working well? I?m not saying to change if things are working well. I?m saying don?t change if things are working badly. Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes. Maximum pain drives changes for most people, which is why average investors don?t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then. This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year. It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology stocks here, some industrials, some consumer stocks, particularly those that are strongly capitalized.

I?m looking for undervalued industries. I?m not saying that there is always a bull market out there, and I will find it for you. But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive. I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting. The red zone is pretty cyclical at present. I will be very happy hanging out in dull stocks for a while.

That said, some dull companies are fetching some pricey valuations these days, particularly those with above average dividends. This is an overbought area of the market, and it is just a matter of time before the flight to relative safety reverses.

The Red Zone has a Lot of Financials; be wary of those. I have been paring back my insurers, but I have been adding to P&C reinsurers.? What I find fascinating about the red momentum zone now, is that it is loaded with cyclical companies.

In the green zone, I picked almost all of the industries. If the companies are sufficiently well-capitalized, and the valuation is low, it can still be an rewarding place to do due diligence.

Will cyclical companies continue to do well?? Will the economy continue to limp along, or might it be better or worse?

But what would the model suggest?

Ah, there I have something for you, and so long as Value Line does not object, I will provide that for you. I looked for companies in the industries listed, but in the top 5 of 9 balance sheet safety categories, and with returns estimated over 12%/year over the next 3-5 years. The latter category does the value/growth tradeoff automatically. I don?t care if returns come from mean reversion or growth.

But anyway, as a bonus here are the names that are candidates for purchase given this screen. Remember, this is a launching pad for due diligence, not hot names to buy.

I?ve loosened my criteria a little because the market is so high, but I figure I will toss out lot when I do my quarterly evaluation of the companies that I hold for clients and me.

Industry Ranks 6_19997_image002

Full Disclosure: Long SYMC, DOX

A Different Look at Industry Attractiveness

A Different Look at Industry Attractiveness

While doing some work today, I ran across this resource from Morningstar. Morningstar values stocks by projecting the free cash flows of the companies, and discounting those free cash at a rate that reflects the riskiness of the company.? Free cash flows are the amount of cash you can take from a corporation over a period, an leave it equally well off as it was at the beginning of the period.? Some analysts summarize it as:

  • Earnings then add back
  • Interest, Taxation, Depreciation, Amortization, and subtract
  • Maintenance Capital Expenditure

When you see firms talk about their non-GAAP earnings, this is what some are trying to approximate, showing the true earnings power of the assets.

They project the free cash flows in three phases:

  • Phase 1, the analyst projects the next five years
  • Phase 3, every company is the same, growing at the same rate with no competitive advantage
  • Phase 2 grades from Phase 1 to Phase 3, with wide moat companies having a transition period of 20 years, narrow moat companies 15 years, and “no moat” companies a lesser amount.

What does Morningstar use for its free cash flow discount rates?? They started with CAPM, and moved to something more simple, where companies are divided into four buckets, with rates of 8, 10, 12, and 14%.? I’m no fan of CAPM, but it would be a lot smarter to have a system that reflected:

  • the bond yields of the companies, if any, and
  • the relative riskiness of the enterprise without reference to the market as a whole.? The implied volatility of the stock could play a role.

At the end, Morningstar calculates the ratio of the current market price to the discounted value of the free cash flows per share.? If it is greater than one, is is overvalued.? If it less than one, undervalued.

Morningstar does the calculation company by company, but then aggregates the results by super sector, sector, industry, aize of moat, fair value uncertainty, and equity index.

What I particularly found interesting were the aggregations by industry.? I decided to look at the industries that? were overvalued and undervalued by at least 15%.? Here they are:

Undervalued

  • Aluminum
  • Asian Banks
  • Coal
  • Gold
  • Latin American Banks
  • Pollution & Treatment Controls
  • Steel

Overvalued

  • Auto & Truck Dealerships
  • Auto Parts
  • Broadcasting ? Radio
  • Business Services
  • Computer Systems
  • Electronics Distribution
  • Financial Exchanges
  • Footwear & Accessories
  • Home Furnishings & Fixtures
  • Insurance Brokers
  • Internet Content & Information
  • Long-Term Care Facilities
  • Luxury Goods
  • Marketing Services
  • Medical Distribution
  • Regional US Banks
  • Regulated Gas Utilities
  • REIT – Hotel & Motel
  • Scientific & Technical Instruments
  • Semiconductor Memory
  • Solar
  • Trucking

Morningstar as 147 industries, of which only two did not have fair value estimates.? Seven industries were undervalued (5%), 22 industries were undervalued (15%).? The undervalued industries were mostly cyclical in nature, while the overvalued industries were not, supporting the idea of this Wall Street Journal article, which argues that cyclical stocks are looking relatively cheap.? It is possible to overpay for certainty, just as it is possible to overlever companies with reliable cash flow.

At this point you might be asking, “Okay, this is nice, but what companies does this imply I should buy or sell?”? Can’t tell you for sure, but I can show you this.? This table is interesting enough, but what you can get are the companies behind each industry group if you click on them.? Note that Morningstar is global in its orientation, so many of the companies that it uses are not US-domiciled.? Some may have nonsponsored ADRs that trade infrequently.

My main point is that you can look at the underlying companies of each industry for buy or sell ideas of of their own discount or premium to fair value.? Morningstar’s fair value analysis is not perfect, but it is a straw blowing in the? wind, and is adequate for some relative value judgments.

Industry Ranks August 2013

Industry Ranks August 2013

Industry Ranks 6_1521_image002

My main industry model is illustrated in the graphic. Green industries are cold. Red industries are hot. If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted?? Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted. Yes, things are bad, but are they all that bad? Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled ?Dig through.?

You might notice that this time, I have no industries from the red zone.? That is because the market is so high.? I only want to play in cold industries.? They won?t get so badly hit in a decline, and they might have some positive surprises.

If you use any of this, choose what you use off of your own trading style. If you trade frequently, stay in the red zone. Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion.? I generally play in the green zone because I hold stocks for 3 years on average.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh? Why change if things are working well? I?m not saying to change if things are working well. I?m saying don?t change if things are working badly. Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes. Maximum pain drives changes for most people, which is why average investors don?t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then. This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year. It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology names here, some telecom related, some basic materials names, particularly those that are strongly capitalized.

I?m looking for undervalued industries. I?m not saying that there is always a bull market out there, and I will find it for you. But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive. I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting. The red zone is pretty cyclical at present. I will be very happy hanging out in dull stocks for a while.

That said, some dull companies are fetching some pricey valuations these days, particularly those with above average dividends.? This is an overbought area of the market, and it is just a matter of time before the flight to relative safety reverses.

The Red Zone has a Lot of Financials; be wary of those.? I?m considering paring back my insurers.

What I find fascinating about the red momentum zone now, is that it is loaded with noncyclical companies. That said, it has been recently noted in a few places how cyclicals are trading at a discount to noncyclicals at present.

In the green zone, I picked most of the industries. If the companies are sufficiently well-capitalized, and the valuation is low, it can still be an rewarding place to do due diligence.

That said, it is tough when noncyclical companies are relatively expensive to cyclicals in a weak economy. Choose your poison: high valuations, or growth that may disappoint.

But what would the model suggest?

Ah, there I have something for you, and so long as Value Line does not object, I will provide that for you. I looked for companies in the industries listed, but in the top 5 of 9 balance sheet safety categories, an with returns estimated over 15%/year over the next 3-5 years. The latter category does the value/growth tradeoff automatically. I don?t care if returns come from mean reversion or growth.

But anyway, as a bonus here are the names that are candidates for purchase given this screen. Remember, this is a launching pad for due diligence, not hot names to buy.

I’ve loosened my criteria a little because the market is so high, but I figure I will toss out? lot when i do my quarterly evaluation of the companies that I hold for clients and me.

 

 

 

Industry Ranks 6_19997_image002

The Rules, Part XLV

The Rules, Part XLV

Market rents are typically fixed in size.? When a strategy to exploit a particular market inefficiency gets too big, returns to the rent disappear, or even go negative prospectively, even if they appear exceedingly productive retrospectively.

If you have read me for any decent amount of time, you know I am big on economic and financial cycles, and how they can’t be eliminated.? There are two groups that think the cycles can be eliminated:

  • Politicians and Central Bankers who think they can create permanent prosperity, when all they really create is an increase in overall debt.
  • Efficient market theorists who think there are no strategies that beat the market.

It is the second group that I am dealing with this evening.? Market strategies trend.? If we have had outperformance from value investing this year,? the odds are good that we will have it next year, unless it has gone on for too many years (5+).

Ideas in investing tend to streak, get overinvested, then die.? This is one reason why I don’t believe articles about the death of various investment concepts.? We need to think about investment ecologically.? There are no permanently valid investment factors to beat the market.? There are many investment factors that beat the market over time, but not while many are pursuing them.? Imitation drives returns, and then over-imitation kills them.

That means we should be wary when a strategy has been working too well for too long.? It also means we should be skeptical when any strategy with a strong thesis behind it is declared “dead.”? That may be the very time to consider it, or maybe wait a year or two.? Many strategies are forgotten; after a time of failure it is time to remember them.

Part of this stems from the biases of institutional investors.? They think that their winnowing down of the investable universe through screening will always produce a good crop of candidates in which to invest.? But that’s not true.? Talented investors think more broadly, and are willing to consider investments that don’t fit within common screens.

The thing is: strategies go in cycles.? They are born at a time when no one loves them.? They gain currency from the good returns of those who adopt them, leading to a frenzy where many adopt the strategy, and returns are great, but now companies that fit the strategy are overvalued.? The process goes into the reverse gear where the strategy is garbage, until enough parties abandon it and the prices of stocks that would be a part of the strategy are attractive.

So when you hear:

  • Value is dead
  • Growth is dead
  • Large caps are dead
  • Small caps are dead (rare)
  • Momentum is dead
  • Low volatility is dead.
  • Quality is dead.
  • Low Quality is dead.
  • XXX industry or sector is dead.

Be skeptical, and begin edging into companies that you like in the “doomed” strategy.? Make sure they have strong balance sheets and competitive positions.? That will protect you if the trend persists.

One more note: this doesn’t work in reverse.? A strategy that has been working for a little while will likely streak.? Resist the trend when it is old, not when it is young.

Finally, remember: there are only tendencies, not laws: markets exist to surprise you.? There are theories that work in the market over time, but they do not work year after year, the results come in lumps, unlike the projections of the financial planners.

And I close by saying to all of my readers — is this not how the market works?? There is momentum, but it sometimes fails dramatically.? Ideas streak, and then collapse far faster.? I say be aware of what has been rewarded and what has not.? Sell stuff that has been rewarded too long, and that which has been recently trashed.? Buy the stuff that has come into favor, and strong companies that have been unduly trashed.

Distinguishing Alpha from Noise

Distinguishing Alpha from Noise

I read a paper today that I thought was pretty interesting — A Consultant?s Perspective on Distinguishing Alpha from Noise. [8 pages PDF]? I have been on both sides of the table in my life.? I have hired managers, and I have tried to sell my equity management services.

In general, managers that thought would offer value would venture off the beaten path.? They might own some well-known names, but they would own far more that would make me say, “Who is that?”? The companies would be less known because they are smaller, foreign, have a control investor, etc.

Those portfolios would look a lot different than an index fund.? They would be more concentrated by sector, industry and company.? They would have a process that analyzes what the market is misvaluing, whether by sector, industry, or company.? They would stick to their discipline through thick and thin, realizing that all anomalies in the market go in and out of favor.

The process would specify what anomalies of the market, or what information advantages the fund would attempt to exploit.? But once you specify that, you stick to that as your strategy.? There is no room for tossing an asset in “because it looks good.”

There is a balance in good strategies that allows for minor modifications around core principles.? All good strategies have to adapt, but there has to be a strategic core from which the strategy will never vary.? Absent that core, the strategy will give in to fear and greed — buying high and selling low.

Quoting from the paper:

I am amazed at all the managers that make an assertion of the type “In the long run X always wins”, where X could be dividend yield, earnings growth, quality of management, a quantitative factor or mix of factors, etc., yet are unable cite a reason why X should be systematically under-priced by the market.

My view is twofold.? There are some ugly situations involving financial stress that most investors don’t want to take on.? There are also less glamorous companies that few want to buy.? Those can be excellent investments.? My second point is tougher to make, but industries go in and out of favor.? So do market factors.? Buy that which is safe, and out-of-favor.

Now, for managers, I would recommend keeping a trading journal, where you record why you think your investment hypothesis will succeed.? If your investments succeed for reasons that you specified in advance, that is an indication of skill.? There is a lot of what is called “luck” in investing.? If you are beating the market, and it is not for reasons that you specified in advance, you do not have skill, you have luck, and luck strongly tends to mean revert.

My view comes down to this: I like to see a long track record of outperformance, an unusual portfolio, and a strategy that convinces me that you have discipline, and a constructive way of finding undervalued assets. ? Absent that, I will probably think that you are a pretender than an outperformer.? There are always some that outperform for a short time, and then underperform as the underlying economics shift.? Markets are volatile enough that there are always some with three-year track records that are stunning, and very lucky.

Separating luck from skill — that is the toughest aspect of investing.? But it is needed because there are so many investment managers touting skill, and what do they really offer?

On Researching Industries

On Researching Industries

From a reader:

Hi David,

I’ve been a classic “bottom-up” investment advisor for a few years now, but I agree with your assessment that industries, in general, are under-analyzed by the masses.

What is the best way to learn about a particular industry? Are you aware of any comprehensive publication that sheds light on both the qualitative characteristics of an industry and the appropriate valuation methods?

Thanks!

There are several ways to learn industries.? I’ll try to explain:

1) You can choose a bunch of companies in an industry, email the investor relations area, and ask for packet equivalent to what they send buy-side analysts.? I’ve done that at various points in time for industries I wanted to learn.? Compare and contrast.? Who is doing well, badly and why?? In the mid-90s, I did this for the trucking industry, and learned a ton of information.? I also talked with some trucker friends of mine who gave me on the ground data.

2) You can read industry publications.? When I was a buy-side analyst for the insurance industry, I read those regularly.? They exist for almost every significant industry.

3) You can go to industry meetings.? Almost every industry has meetings where they discuss industry conditions.? Just don’t be too pushy in trying to get information.? Be interested in the industry as a whole, and don’t try to gain material nonpublic information.

4) Value Line & Morningstar both provide industry analyses.? So do most major investment banks.? You can review those and compare and contrast.

5) You can use the quality screen to look at what industries have a rising ratio of gross profits from operations, versus a falling ratio of gross profits from operations.? Here is a chart from the last seven years:

PRICINGPOWER_8574_image002

The colored field reading “Chg” is the difference between the average of years 1-3 and years 5-7.? Profits are noisy, that’s why I did an average.

Gross profits from operations as a fraction of assets [GP/A] is a good measure of the quality of an industry, and whether their sustainable competitive advantage is is improving or declining.

Now, when I look at a measure like that, I do one of two things:

  1. I buy cheap companies with strong balance sheets among those industries where GP/A has fallen hard, and buy them, knowing that they are survivors, and will rebound.
  2. I buy moderately strong companies in industries where GP/A has been improving, and after research, the trend is not well understood.? It helps if the industry is dull, and few people follow it.

That’s what I do.? Whatever you do, size it to your own abilities, or the abilities of your firm.? Beyond that, look at cheapness of a company relative to normalized earnings, i.e., average earnings over a full market cycle.

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