Weekly Long/Short Focus List as of March 26, 2010
Our highlighted stocks continue to anticipate major ratings and estimate changes by a number of sell side shops, as illustrated in our March 17 report, "Goldman Sachs and Nostradamus versus Simple Quantitative Models and Common Sense."
Four Weeks Early on Scotts Miracle-Gro
For example, on March 23, 2010, Scotts Miracle-Gro (SMG), which has been a top performer in our monthly model portfolio and our monthly focus portfolio, was recently upgraded by Bank of America/Merrill Lynch with a target price moving to $53 from $45.
Four Days Early on Companhia Siderurgica Nacional
And once again, our friends at Goldman Sachs downgraded a stock a few days after we highlighted it as a possible sell. On March 21, we published a report that suggested Companhia Siderurgica Nacional (SID) as a good Weekly Focus Short idea. Four days later on March 25, Goldman Sachs downgraded the stock to Neutral. Never mind that it was one of the worst performing short ideas for the week (up 3.47% for the week). We continue to be impressed with ourselves for consistently anticipating Goldman Sachs' major ratings changes.
While Our Self-Proclaimed Ingenious and International Reputation Continues to Grow, We are Far From Perfect
As we have noted on numerous occasions, "low-quality" stocks have been outperforming "high-quality" stocks recently. This is because many stocks have turned the corner fundamentally, and as a result seem to simply be reverting at least partially back to their longer-term means and seeing huge gains as a result.
Recent specific examples of upgrades of "low-quality" stocks include Liberty Media Corporation (LINTA) and FPL Group, Inc. (FPL). Then again, given our impressive track record, who are these sell side firms to argue against us? We should look at these ratings changes more closely and see if our increasingly inflated ego is well deserved. Meanwhile, our diversified model portfolio has side-stepped this issue with a prescient net-long weighting since the February 26 close.
New Weekly Focus List Ideas Include WDR and FLEX on the Long Side, BRFS and CHA on the Short Side
As of Friday's close, March 26, 2010, there are only four stocks on the weekly long/short focus list - two longs and two shorts. On the long side these include Waddell & Reed Financial Inc. (WDR) and Flextronics International Ltd. (FLEX). On the short side these include Brasil Foods S.A. (BRFS) and China Telecom Corp. Ltd. (CHA).
These ideas are generated in a similar way to the Ascendere Long/Short Model Portfolio, which rebalances roughly 80-100 stocks on a monthly basis. Unlike our monthly model portfolio, we have not backtested the factors in our weekly focus list, but we would not be sharing these ideas unless we thought they could show some promise. Weekly focus list stocks outperformed three weeks ago, but have disappointed over the last two weeks.
As a means to generate ideas for deeper work into long-term investments, to signal monthly rebalancing of a model portfolio, and to anticipate ratings changes by major Wall Street firms, we have certainly demonstrated a high level of significance.
Focus List -- Weekly Long Ideas Disappoint
The focus list underperformed the S&P 500 all week.
Jefferies Group (JEF) declined 5.82%, Berkshire Hathaway (BRK.B) declined 0.93% and Watson Wyatt Worldwide Inc (TW) rose 2.16%. This compares to the S&P 500 rise of 0.58%. Goldman downgraded Capital Markets stocks last on March 19, and they marked JEF in particular a Sell. Anyone surfing the Internet that day could have avoided purchasing JEF as a focus list idea and saved themselves a 5.82% decline. This is a great example of how it is important to use quantitative strategies but not 100% rely upon them.
(Note: A better benchmark would be composed of all stocks and ADRs that trade on major U.S. exchanges with a market cap of $2.5b. Let us know when we have the time to make one).
Focus List -- Weekly Short Ideas Underperform S&P 500
Though we cannot say that our shorts offset the very poor long ideas, at least they underperformed the S&P 500 for the week.
The best performing weekly focus short idea was Fibria Celulose SA, down 4.31% for the week. FPL Group Inc. and Southern Company (SO) also showed negative returns for the week. We note that sell side firm Atlantic Securities upgraded FPL to neutral on the March 24.
Companhia Siderurgica Nacional was the worst short idea for the week, moving up 3.47%. But our friends at Goldman Sachs, who we enjoy comparing our self-proclaimed internationally renowned ingenuity too, downgraded SID to Neutral from Buy while raising a price target to $46 from $43, according to StreetInsider.com.
New Long Ideas for the Week
Four new stocks move on the list this week as of the close, March 26, 2010. Carlos Slim, the richest man in the world, may be happy to learn that he is possibly on his way to becoming the richest sentient being in the universe as one of his largest holdings, America Movil (AMX), could be primed to move higher once again. And the folks at Progressive Corp. (PGR) may be happy to see their stock on a positive focus list after spending some effort at making amusing television commercials. But only Waddell & Reed Financial Inc. and Flextronics International Ltd. sport all the metrics we are looking for.
New Short and Contrarian Long Ideas for the Week
There are nine new short ideas to look at this week, but only two of them that meet stringent requirements of ugliness: Brasil Foods S.A. (BRFS) and China Telecom Corp. Ltd. (CHA). We note that "low-quality" stocks, especially those with decent balance sheets which have shown any semblance of improvement, have been doing extremely well as long ideas recently. Further work is required, but maybe some of these could prove to be better labeled as "contrarian long". We point to recent action in Abercrombie & Fitch (ANF) for example.
When Spending 5 Minutes to Analyze a Stock, You Need to Make Sure Price Action Supports the Numbers
A closer look confirms our suspicion that China Telecom is a good short idea, fundamentally at least. It looks like the company fundamentals are deteriorating across the board.
And while we are not technical analysts, fundamental analysts that ignore price action do so very often to their folly. A stock price going in the wrong direction could indicate that there is a key piece of information that an analyst is missing. For example, it could be as simple as a pending upgrade action - note the run-up in Starbucks (SBUX) just prior to the UBS upgrade on March 16.
Perhaps some technical analysts might agree that ~$50 is a resistance point for CHA. We would welcome a technical analyst's comments here. Our opinion is that if there is a broad market selloff, this stock could be primed to move down significantly more.
Off the "Buy List"
Panera Bread (PNRA) and Fifth Third Bancorp (FITB) have been bounding on and off the long idea list for the last few weeks. As we mentioned earlier, Jefferies Group Inc. was a focus list long idea last week, but analyst revisions have moved sharply lower for the company after Goldman Sachs and probably a few other analysts downgraded the group.
Off the "Sell List"
A number of stocks move off the sell list this week due to a surge in positive analyst revisions. For example, we noted on a few occasions that some smart people were betting on a resurgence in Carnival (CUK is the ADR that tracks the London stock price). It looks like they could finally be right. Fibria Celulose SA (FBR), a nicely performing short idea on last week's focus list, is off the list as well.
Earlier in this report we were heralding our prescient call for placing Companhia Siderurgica Nacional on a focus short idea list, just prior to a Goldman downgrade of the stock. But now our quant strategy is cautioning us against this idea as a sell. Either Goldman is betting against the rest of the Street here, or their report was held up by bureaucratic editorial and compliance issues before it was released, since average analyst revisions rankings have also moved up for this company.
Ascendere Long/Short Model Portfolio Continues to Hold its Own
For the month to date, the Ascendere Long/Short Model Portfolio continues to show a positive performance, but has lagged the market. The portfolio is net long, which has offset positive double-digit percentage changes of some "low-quality" stocks in the short portfolio.
An indicator we developed that helps us set the proper long/short weightings has been holding flat in recent days. It is far from bearish territory and it will have to be many days before we even begin considering changing our net long weighting. We have begun commenting on the daily performance of the model portfolio. While daily price moves are tangential to our work, we recognize it is the primary focus of a number of our readers. Daily observations of moves in the model portfolio can provide a good idea as to what is working through a "high-quality/low-quality" lens, and timely insight into long/short weighting changes by a proprietary indicator we developed.
Readers can download a .pdf of the latest Ascendere Long/Short Model Portfolio list, as well as a look at back-of-the-envelope model portfolio performance attribution. Look for a new monthly model portfolio update later this week.
View Ascendere Associates LLC Long/Short Stock Ideas: As of March 26, 2010 on Scribd here.