Tag Archives: John Reese

Dividend Stocks Offering More Than Just Dividends

In his latest piece for NASDAQ.com, Validea CEO John Reese takes a look at some dividend stocks that also offer solid fundamentals.

In the article, Reese looks at Patrick O’Shaughnessy’s latest research on dividend payers, which shows that high yielding stocks no longer trade at the discount to the market that they traditionally have. According to Reese, the fact that this valuation advantage no longer exists means that investors need to look much more closely at the fundamentals of a company and cannot rely on dividend alone. As Reese puts it, “Rushing blindly into high-dividend stocks simply because they have a high yield is not good investing. Sometimes, the dividend yield will be high because the price of the stock is very low, and low for good reason (i.e., the firm is a dog and its shares are going nowhere). And, after all, what’s the point of getting a high dividend payment if the stock costs you money by performing poorly?”

Using his guru models from Validea.com, Reese identifies 4 dividend payers that also exhibit solid fundamentals that may be worth consideration. To read the full article, click here.

Hidden Risk in Index Funds

In his bi-weekly Hot List newsletter, Validea CEO John Reese offers his take on the markets and investment strategy. In the latest issue, John looks at the weaknesses of market cap weighted indices are constructed and why selecting stocks based on fundamentals may be a better approach for long-term investors.  An excerpt is below. To subscribe to the Validea Hot List, click here.

“Many index funds may not quite be the great diversification tools that they appear to be, even though they may hold hundreds or thousands of stocks. Take the 5 largest stock index funds, which combined have more than $675 billion in assets under management. Three are 500-stock funds that resemble the S&P 500, while the other two have about 3,000 stocks each. All of them have the same top 10 holdings, according to data from MarketWatch and Morningstar. And, on average, those 10 stocks make up 15.5% of the 5 funds’ holdings. An investor who puts a chunk of his or her portfolio into one of those index funds because they do not feel confident making big bets on individual stocks thus ends up making some pretty big bets on individual stocks — often without realizing it.

VALX - Banner Dark Blue LightningIn fact, if you take a look at the holdings of the biggest index funds in terms of assets — it’s one that tracks the S&P 500 — you get an idea of how much of an impact the “big guys” have on market-weighted indices. The 255 lowest weighted stocks in that index have portfolio weightings ranging from 0.1% to 0.01%. Combined, those 255 stocks make up a little over 14% of the portfolio — less than the 14.6% of the portfolio that is taken up by just the 8 most heavily weighted stocks. (Fund information comes from ETF.com.)

Perhaps you’re thinking that the big guys should be weighted more heavily. Many S&P index fund investors are looking to get representative slice of the US economy, and a company like Apple obviously makes up a much bigger portion of the economy than a company like Diamond Offshore Drilling, which is tied for the lowest weight in the index with a weight of 0.01%. That’s true. But even considering that, the index is tilted much more heavily toward the big guys than you would think. While it had about 100 times as much in 2014 earnings and about 85 times as much in trailing 12-month sales as Diamond, Apple is weighted 368 times more heavily than the offshore drilling company in the index. Now, in this particular case, I happen to think that Apple is a better stock than Diamond — the tech giant has had a spot in the Hot List at various times this year. But that won’t always be the case, and the nature of a market-weighted index fund creates a situation where you can be making a big bet on a bad stock.

In addition, I think the prevalence of S&P 500-tracking index funds may well be opening up long-term opportunities for fundamental investment strategies like the Hot List. Historically, smaller stocks have had a long history of outperformance, as I have often noted here, with one big reason being that they are less visible and less followed than bigger stocks. That means you can find some great small stocks flying under the radar. Now, with so many people piling into index funds that heavily weight the biggest firms, the small stock under-the-radar advantage should be even greater. That’s because as more and more money goes into these large stocks via index funds, many may become more highly valued than their fundamentals merit — index fund investors aren’t looking at the valuation of every one of the index’s holdings before they buy the fund.

Smaller stocks not in the big index funds, conversely, could become even more overlooked than usual, creating big-time bargains in that space. Investors who focus on fundamentals and are willing to invest in smaller stocks should thus be able to reap the benefits over the long term. And smaller, lesser-known stocks that are not in the S&P are the types of companies that the Hot List usually keys on. If you remember, I’ve written previously about the portfolio’s high “active share”, which is a measure of how much a portfolio differs from the index it tracks. Research has shown that portfolios with high active share tend to have a better chance of beating the index. The Hot List often has very few holdings that are members of its benchmark, the S&P 500; prior to today’s rebalancing, just one of its stocks (Apple) was a member of the index. Rather than going after those large stocks that everyone knows about and which are part of the major indices, the portfolio goes into areas of the market that get less attention, where mispricings of quality stocks are more likely to occur.

All of this isn’t to say that you should avoid index funds. I’m not even saying that you should avoid market-weighted index funds. For some investors, a market-weighted index fund may be a great fit for a portion of their portfolio. But the point here is that you need to really know what you are investing in, and how it works. During difficult times, like those we’ve seen in the past month, it can be tempting to throw up your hands, forgo stock-picking altogether and pile into an index fund. But if you don’t know what you’re getting into, you could find yourself with some unexpected problems — and you could miss out on a lot of excellent opportunities.”

Streaking Serving Sector Still Serving Up Values

In his latest column for Seeking Alpha, Validea CEO John Reese says the US service sector has been on a remarkable run. And, he says good buys remain in the sector.

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Peter Lynch And High-Dividend Stocks

Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the Peter Lynch-inspired strategy, which has averaged annual returns of 11.2% since its July 2003 inception vs. 6.4% for the S&P 500. Below is an excerpt from the newsletter, along with several recent top-scoring stock ideas from the Lynch-based investment strategy.

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A Ted Williams Approach To Value Investing

In his latest piece for Forbes.com, Validea CEO John Reese looks at how investors can learn from legendary Red Sox star Ted Williams.
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How To Keep Your Brain From Ruining Your Returns

In his latest column for Seeking Alpha, Validea CEO John Reese says that all investors — even Warren Buffett — are going to make mistakes and pick losing stocks. The real key to success, he says, is whether you can adopt the right mindset to get you through the inevitable ups and downs.
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Industry Rankings: Conglomerates Top Growth Index

Every day, Validea uses John Reese’s Guru Strategy investing models to rank dozens of industries using a myriad of financial and fundamental data. The rankings include a value index, a growth index, and an overall index that takes both growth and value factors into account. Here’s a look at some of the current top-rated industries using the growth index.

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