In a “Number Cruncher” column for Canada’s Globe and Mail, Ian McGugan takes a look at some overlooked bargain-priced stocks using Validea.com’s Joseph Piotroski-inspired strategy.
“Piotroski, a professor at Stanford University, has discovered that applying a battery of accounting tests to a portfolio of value stocks can improve returns by eliminating ones that are financially too weak to recover and spotlighting ones with improving fundamentals,” McGugan writes, explaining that Validea’s Piotroski-inspired model targets stocks in the top 20% of the market based on their book/market ratios (which is the same as stocks with the lowest price/book ratios). Then it applies a variety of accounting-based fundamental tests, looking at such variables as return on assets, cash flow from operations, and current ratio.
McGugan offers a handful of stocks that get high marks from Validea’s Piotroski-based model, with some trading in the U.S. and some trading in Canada. Among them: Resolute Forest Products, which gets a 90% score from the model. To read the full article, click here.
One widely held belief about the stock market involves the notion that individual investors have been fleeing stocks like the plague recently. But according to a new report from Vanguard Group, that’s not the case, Jason Zweig reports on The Wall Street Journal’s Total Return blog.
Vanguard takes an annual survey of 3 million-plus Americans who take part in retirement investing plans that the firm administers. In 2011, the new study shows, the percentage of those investors’ retirement funds that were invested in stocks fell by 3 percentage points from 2010, and was 8 points lower than it was in 2007, Zweig says. Nevertheless, the percentage invested in equities was still 65%.
“While the financial commentariat would have you believe that retail investors have been yanking their last farthings out of the stock market, the folks in Vanguard’s huge sample of retirement savers still have two-thirds of their money riding on stocks,” Zweig says, adding that those same investors were putting an even higher percentage of their 2011 contributions — 71% — into stocks. “If this is ‘the death of equities,’ the funeral seems extraordinarily well-attended,” Zweig says.
The retirement investors have, however, dramatically scaled back on the amount of money they are putting into diversified stock funds, Zweig says, and they’ve also cut back on their allocation to their own company stock. Instead, they are putting more money into target-date funds that invest in stocks, bonds, and cash.
“Retirement investors have been selling funds that invest exclusively in stocks and moving the proceeds (along with their new money) into target-date funds that invest partly in stocks,” Zweig says. “The net result is an essentially unchanged allocation to equities — perhaps at a lower level of anxiety, since target-date funds have a ballast of bonds and cash that keep them from pitching as violently in stock-market selloffs.”
David Winters, whose fund is in the top 7% of funds in its class over the past five years, according to Morningstar, says “things will get better” in the U.S., and he’s finding several bargains in the stock market. “Selective stocks are very cheap,” Winters tells Bloomberg. He says that after a recent trip to Asia, he’s high on consumer stocks, and he also talks about a mining stock he’s particularly high on.
According to a new study, Warren Buffett has been able to produce exceptional stock market returns over the long haul not because of value investing, but instead by focusing on “boring” stocks, MSN Money’s Michael Brush writes.
The study, performed by Andrea Frazzini and Lasse H. Pedersen, found that “to do better in the market, use a little leverage, or borrowed money, in your account and load up on quality, low-beta stocks,” Brush writes. “Low beta means a stock goes up less than the market when it’s soaring, and down less than the market when it falls. This suggests the stock is safe. Staid. Boring. But high in quality and consistently profitable.”
Brush adds, however, that “Buffett’s obsession with quality in companies is really an outgrowth of his value orientation. … The best value investors find broken companies with good prospects to rebound once they’re repaired. To protect against getting wiped out in the process, value investors look for a margin of safety, to assure the stock won’t go to zero if the company fails to fix its problems fast enough. Buffett is perhaps the best at finding the right cheap stocks, because his checklist of things to look for that signal a margin of safety is better than the checklists used by most other investors.”
In examining that checklist, Brush turned to several Buffett experts, including Validea, whose Buffett-inspired portfolio has more than doubled the S&P 500 since its inception more than eight years ago. Validea’s Buffett model uses several variables to find quality stocks, including earnings predictability (a stock should have a decade-long track record of increasing earnings per share) and return on equity and return on capital (which should average at least 15% and 12%, respectively, over the past three and ten years). He also looks at a couple stocks that currently get high marks from Validea’s Buffett model, including Coca-Cola and IBM. To read the full article, click here.
Wells Capital Management’s James Paulsen says Europe’s woes will create volatility for the U.S. market, but won’t derail it. Paulsen tells Bloomberg that the sensitivity of financial markets to the Europe debt news is “decaying”. He says he thinks the U.S. market will be driven more by what’s happening in the emerging market world and in the U.S. itself. Paulsen says the U.S. economy has slowed, but that it’s not dead, and wonders if investors have loaded up too much on “safe haven” type stocks amid all the Europe fears.
Housing guru Robert Shiller says the latest home price data is good news, and he expects prices to continue to rise through the summer months. Shiller tells FOX Business Network that he’s not sure what will happen beyond the summer, however, and that he is concerned that the worst isn’t over for housing. He talks about homebuyer psychology, and why he thinks buyers have been hesitant to jump into the market.
While many investors are fleeing the continent, some top fund managers are finding value in Europe.
At the 2012 Morningstar Investment Conference, Longleaf Partners’ O. Mason Hawkins said that P/E ratios in Europe seem very low, particularly when the low-interest-rate environment is factored in, according to Morningstar. FPA’s Steven Romick, meanwhile, says it seems investors are assuming that Europe will never rebound and are ignoring the earnings power of many European firms.
Hawkins and Romick also both discuss why they think record-high profit margins won’t revert all the way back to the mean, thanks to structural changes in the business world. Hawkins also says that he thinks that a stronger economy will help keep earnings strong when margins do erode. He and Romick disagree on interest rates and the damage they pose to equity markets, however. Hawkins thinks rates won’t be increased until the economy strengthens significantly, and that that economic improvement will lessen the impact of rising rates. Romick, however, thinks the Federal Reserve could raise rates without economic improvement, if Treasury investors begin to sour on low rates and take their money to other investments.
Bob Doll says he thinks stocks are cheap right now, and that some pretty bad scenarios are already baked into their prices. Doll tells CNBC that his target for year-end for the S&P 500 remains 1,350, and that investors need to be “very picky” regarding the price they pay for their stocks in the current environment.
While the financial headlines have been dominated by day-to-day fears recently, James O’Shaughnessy says that making investment decisions based on short-term factors is a very dangerous game.
“All of the available research demonstrates that reacting to short-term conditions is the worst way for a long-term investor to act,” O’Shaughnessy writes in commentary on his firm’s website. He notes that, according to one survey, almost double the percentage of investors feared a stock market crash in February 2009 — just before the market bottomed — as did in 2007, when the market was near its peak. “The point is simple but deadly — we are our own worst enemies when it comes to decision-making,” he says. “Whether it is bad news or good, we tend to extrapolate what has happened recently far into the future. This common human tendency prevents investors from taking advantage of what can often be great buying opportunities.”
O’Shaughnessy says the media falls prey to recency bias, too, which lately has led to fear-filled headlines that lack long-term perspective. “Reporters are no different,” he says. “The market decline leads them to highlight all of the negative fore-casts and stories without giving a clear or balanced reporting of how all of the prognosticators have done with all of their forecasts. For the press, if it bleeds, it leads.”
O’Shaughnessy says that the way to deal with all of this is to develop a good investment plan and stick with it. He notes that his Enhanced Dividend strategy has returned about 20% since the beginning of September 2008 — a period that has been one of the most tumultuous in memory. “But,” he says, “investors can only enjoy those gains if they have a plan and stick with it.” The plan doesn’t have to be complex, he says, but investors have to have the discipline to stick with it when times get tough in order to reap the benefits.
As for Europe, O’Shaughnessy says the continent’s financial crisis has made European stocks “dirt cheap” compared to U.S. stocks. He says that many of his European holdings get a large portion of their revenues outside of Europe, and that most are non-financials.
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today.