In this report, we highlight stocks that demonstrate solid growth prospects at a reasonable price (GARP) and provide an update of last month's report and our July 4 rebalancing note. For older reports, you can visit this link.
Our criteria for selecting stocks in these model portfolio strategies, which heavily weight proxies for cash flow growth and ROIC, include the following:
- Relative Value
- Operating Momentum
- Consensus Estimate Revision Momentum
- Fundamental Quality
The highest ranked stocks are selected for our long-model portfolios and the lowest ranked stocks are selected for our short model portfolios. These criteria are explained in more detail in our September 2015 report. Intraday price target alerts and returns are posted on our Seeking Alpha blog.
As noted in our July 4 note, 11 stocks have left the long-only model, 11 have been added, and 10 have been assumed rebalanced as of the July 1, 2016 close.
21 Long Stock Ideas for July 2016
New Long Ideas
- Marriott International, Inc. (NYSE:MAR)
- The Interpublic Group of Companies, Inc. (NYSE:IPG)
- Credicorp Ltd. (NYSE:BAP)
- First Horizon National Corporation (NYSE:FHN)
- Eaton Vance Corp. (NYSE:EV)
- Northern Trust Corporation (NASDAQ:NTRS)
- SunTrust Banks, Inc. (NYSE:STI)
- Cincinnati Financial Corp. (NASDAQ:CINF)
- EMCOR Group Inc. (NYSE:EME)
- Logitech International SA (NASDAQ:LOGI)
- NICE Ltd. (NASDAQ:NICE)
Rebalanced Long Ideas
- American Eagle Outfitters, Inc. (NYSE:AEO)
- Lowe's Companies, Inc. (NYSE:LOW)
- ULTA Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)
- Federated Investors, Inc. (NYSE:FII)
- McKesson Corporation (NYSE:MCK)
- Mettler-Toledo International Inc. (NYSE:MTD)
- Dycom Industries Inc. (NYSE:DY)
- Manhattan Associates, Inc. (NASDAQ:MANH)
- NetEase, Inc. (NASDAQ:NTES)
- Lam Research Corporation (NASDAQ:LRCX)
Our favorite idea continues to be McKesson Corporation
None of the additions to our long model portfolio particularly stand out, so we are maintaining McKesson as our favorite. Our models (developed in part with the help of XBRL Analyst) continue to indicate that economic profit and ROIC are likely to continue their improvement and it still trades at a reasonable relative value. Back in 2010 McKesson was, in our opinion, one of the best healthcare stocks to own.
22 Short Sale Stock Ideas for July 2016
Our list of short ideas is composed of low-quality stocks. When the market anticipates an improving economy from low price levels, low-quality stocks will at times outperform high-quality stocks as the expected improvements in fundamentals are discounted from a relatively more depressed price level. We've seen this play out this past March and April of 2016
As with last month, the majority of the companies in this list for July 2016 will likely show a recovery in ROIC over the next year. As a result, many of these stocks will likely only work well as short sale ideas in the short term during periods of heightened market uncertainty or volatility.
The "controversial" theoretical short position in Tesla Motors (NASDAQ:TSLA) that was assumed added as of March 31, 2016 closing price of $229.77 and removed as of the July 1, 2016 closing price of $216.50 was handled fairly well by the model.
Stocks that tend to work well within our model framework historically seem to continue to do so. Therefore we would give particular weight to TSLA if it ever falls within our model portfolio framework again.
New Short Sale Ideas
- Under Armour, Inc. (NYSE:UA)
- Ctrip.com International Ltd. (NASDAQ:CTRP)
- Helmerich & Payne, Inc. (NYSE:HP)
- Weyerhaeuser Co. (NYSE:WY)
- Deutsche Bank AG (NYSE:DB)
- Legg Mason Inc. (NYSE:LM)
- Ligand Pharmaceuticals Incorporated (NASDAQ:LGND)
- Tesaro, Inc. (NASDAQ:TSRO)
- Galapagos NV (NASDAQ:GLPG)
- Olin Corp. (NYSE:OLN)
- Teck Resources Limited (TCK)
Rebalanced Short Sale Ideas
- Melco Crown Entertainment Limited (NASDAQ:MPEL)
- Netflix, Inc. (NASDAQ:NFLX)
- EnLink Midstream, LLC (NYSE:ENLC)
- Halliburton Company (NYSE:HAL)
- Baker Hughes Incorporated (NYSE:BHI)
- ConocoPhillips (NYSE:COP)
- Superior Energy Services, Inc. (NYSE:SPN)
- Celgene Corporation (NASDAQ:CELG)
- ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)
- Yahoo! Inc. (NASDAQ:YHOO)
Our favorite new short idea is Teck Resources Limited
Teck Resources Limited is one of the very few companies on our list which will likely show ongoing declines in ROIC over the next year. As a result, we would focus on TCK as a potential short idea.
June 2016 Model Portfolio Report Commentary
Once again high-quality stock returns outperformed low-quality stock returns for theoretical model portfolio returns, June 1 to July 1, 2016.
The theoretical Core Long Model increased +1.07% for the June 1 - July 1 period versus a +0.33% return of the S&P 500 over the same period.
The theoretical Core Short Model posted a short sale gain of +4.43% for the same period, with the majority of stock price targets being reached on June 24 and June 27.
Volatility related to the United Kingdom's June 23 vote to exit the European Union created enough volatility for the theoretical Opportunistic Long Model portfolio to assume a 100% cash position at the June 24 close. This long model will maintain this 100% cash position for at least 20 trading days. This model posted a -2.00% loss for the June 1 - July 1, 2016 period.
The Opportunistic Short Model portfolio assumed a 100% cash position at the June 27 close upon reaching a portfolio return target. This short model has assumed the reopening of short sale positions at the July 1, 2016 close. This model posted a short sale gain of +8.73% for the same period.
(Both the theoretical "Core" and "Opportunistic" portfolios use the same basket of stocks but the Opportunistic model moves to 70% and 100% cash allocations during periods of high volatility or when portfolio return targets are met.)
As indicated in the chart above, the theoretical Core Long/Short Model increased by +5.50% (1.07% +4.43% = 5.50%) and the Opportunistic Long/Short Model increased by +6.73% (-2.00% +8.73% = 6.73%).
The next two charts reflect the theoretical simple cumulative returns of the long-only and long/short models since their March 31, 2009 inception.
The best model portfolio stocks, June 1 to July 1, 2016
The best performing stock in the long model was Ultrapar Holdings Inc. (NYSE:UGP), which was assumed closed a day after reaching its price target on June 23 for an assumed 10.12% return. The worst was Federated Investors Inc. down -11.17%.
In the short model, the best performing stock was Melco Crown Entertainment Ltd. , which assumed a theoretical short sale gain of +16.66% the next trading day after reaching a price target on June 24. The worst performer was Superior Energy Services Inc. for a theoretical short sale loss of -10.15%.
Last month our favorite long idea was McKesson Corp , which finished the month up +2.71%. Our favorite short idea was Southwestern Energy Co. (NYSE:SWN), which finished the month with an assumed short sale gain of +4.83%.
Our favorite pair trade idea last month was long Tallgrass Energy Partners (NYSE:TEP) /short Southwestern Energy Company , which provided a theoretical return of +9.16% (long TEP +4.33% / short SWN +4.83% = +9.16%).
Long running advice regarding the use of our model portfolio report
Wayne Gretzky said it best - "skate to where the puck is going to be, not where it has been." Quantitative screens like the one in this report show where a stock has been and assume the trajectory is fixed. Of course, this is not always the case.
For example, we continue to believe that there is a good chance that NFLX and CELG may severely disappoint short sellers that hold their positions for any extended period of time.
The best investors will use this model portfolio as guidance, and not the end all. With a little effort, we hope that active fundamental portfolio managers will do even better.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OR SHORT POSITIONS IN ANY OF THE STOCKS MENTIONED over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: There are limitations inherent in our theoretical model results, particularly with the fact that such results do not represent actual trading and they may not reflect the impact material economic and market factors might have had on our decision making if we were actually managing client money. I receive compensation from FinDynamics if you make a purchase of XBRL Analyst using the link provided in this report. We do our best to provide accurate information but we do not guarantee the accuracy of information in this report.