We continue to look for ways of finding stocks that have long-term value and can provide stability in the treacherous financial waters we are currently navigating.
Dan Caplinger of the Motley Fool puts together a couple of filters to find value companies with strong fundamental businesses. His filter started with value stocks -- S&P 500 stocks that had attractive valuations of 12 times AND they had to have returns on capital of at least 20%.
A combination of value along with efficient operation is attractive to me and Dan further separated them into three groups:
Stocks that makes Dan's recommended list
- Intel (INTC): Microprocessor manufacturer wanting to expand into mobile applications
- Freeport-McMoRan Copper & Gold (FCX): Mineral mining
- Joy Global (JOY): Mining equipment
- CF Industries (CF): Fertilizers
- Cummins (CMI): Diesel and natural gas engines
Those noted but need better market conditions to rebound
- Microsoft (MSFT): Partner to Intel in PC's also wanting into mobile apps
- Lockheed Martin (LMT): Security and aerospace
- Western Union (WU): Money movement
One to avoid
Apollo Group (APOL): For-profit educators. The industry has taken criticism lately for questionable practices of some.
I am going to build a selection of each of the sets and compare them with our reference ETF portfolio.
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | (ICF) iShares Cohen & Steers Realty Majors |
| CASH | CASH |
| FIXED INCOME | (TIP) iShares Barclays TIPS Bond |
| Emerging Market | (VWO) Vanguard Emerging Markets Stock ETF |
| US EQUITY | (DVY) iShares Dow Jones Select Dividend Index |
| US EQUITY | (VIG) Vanguard Dividend Appreciation ETF |
| INTERNATIONAL EQUITY | (IDV) iShares Dow Jones Intl Select Div Idx |
| High Yield Bond | (HYG) iShares iBoxx $ High Yield Corporate Bd |
| INTERNATIONAL BONDS | (EMB) iShares JPMorgan USD Emerg Markets Bond |
- 5 Value Stocks With Profit-Producing Power -- Total of $10K invested equally in each stock
- 3 Value Stocks With Profit-Producing Power -- But Wait -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
| Portfolio/Fund Name | 1 Week Return* | YTD Return** | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | -1.0% | 1.4% | 8.2% | 76.8% | 13.0% | 119.1% | 7.3% | 56.6% |
| 5 Value Stocks With Profit-Producing Power | 1.5% | 7.1% | 1.1% | 2.8% | 28.1% | 81.0% | 14.1% | 28.8% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | -0.9% | 2.6% | 1.5% | 10.2% | 11.1% | 101.2% | 1.6% | 6.5% |
| 3 Value Stocks With Profit-Producing Power -- But Wait | -0.1% | 5.3% | 8.4% | 39.0% | 6.0% | 31.3% | 0.2% | -1.3% |
| APOL | - | -41.8% | -26.8% | -38.3% | -19.9% | -35.8% | -8.2% | -12.6% |
*: NOT annualized **YTD: Year to Date
Working up from the bottom of the list:
- It's easy to see why avoiding the Apollo Group is a good idea. It shows that these metrics can conceal a company that it is better to avoid.
- The three stocks with potential show some reasonable short-term results but the five-year outlook isn't good. It isn't clear to me whether this is a sign of bad times in the past and better days ahead. I wouldn't bet on that from Microsoft and Lockheed Martin as both of them are facing challenges ahead and it isn't clear that strong growth is realistic.
- The benchmarks sandwich the six value stocks that Dan recommended and they have turned in decent long-term results but the short term has been more challenging. The volatility numbers show that there is significant risk associated with the growth.
Three-Month Chart
One-Year Chart
Three-Year Chart
Five-Year Chart
The graphical data gives me the clearest tradeoff -- you can see significant but choppy growth. This is a selection that is worth pursuing but it needs more analysis of each of the companies. I also think that there may be a better combination of companies that would reduce volatility by spreading across more market sectors.
This is a good start but more analysis is required to find a balanced selection.
Disclosure: I am long INTC.
Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
