Scott Martindale

Long/short equity, growth at reasonable price, research analyst, portfolio strategy
Scott Martindale
Long/short equity, growth at reasonable price, research analyst, portfolio strategy
Contributor since: 2009
Company: Sabrient Systems / Gradient Analytics
Follow up: Dark-Liquidity has corrected the pricing errors on the 2014 portfolios.
Just a few comments. First, let me say that the Dark-Liquidity web site has some obvious pricing errors on the link cited above for the 2014 portfolio (e.g., ACT is not zero but in fact acquired AGN and took that ticker, and all prices appear to be current instead of year-end 12/31/14, and don't take splits into account, e.g., MPC). I have sent a message to that website about correcting this, so thanks for pointing it out. However, the main Stock Picks tab (http://bit.ly/1kpufgq) is accurate and shows a 2014 performance of 22.7% (not 7.38%).
Secondly, my sector article (which I try to write every week but sometimes skip a week) is picked up by a variety of websites, so the Seeking Alpha comment section is a not a forum that is regularly monitored, nor is it intended for discussion about unit trusts that track various specialty portfolios issued by First Trust. Advisors are welcome to submit such questions directly to First Trust, and anyone is invited to submit questions to support@sabrient.com and we will try to address your questions.
No doubt, some of the various portfolios have struggled recently in this haphazard market, but others simply have obvious disadvantages, like the Weak Treasury series, since rates have been falling until recently (i.e., Treasuries have been strong). But our Dividend portfolios that you left out have greatly outperformed their global dividend benchmark. The 2014 Forward Looking Value (which another commenter calls Summer Baker) launched with a 20% Energy sector allocation last summer and when oil prices cratered it got put into a big hole, but it has crawled back to overtake its benchmark on a total return basis with another few months remaining until maturity. In 2013, both the January Baker's Dozen and the June Forward Looking Value portfolios ultimately returned around 50% gross total returns through maturity (approximately doubling their benchmarks).
Again, because Seeking Alpha is not regularly monitored by our support team, your best bet is to submit questions and comments to support@sabrient.com.
I have been called worse....Thanks for all your comments, whether supportive or critical, pro or con. After all, that's what makes a market.
The Fed is dovish and will only make that first fed funds rate hike if the economic data is strong enough to support it. So, a rate hike should be taken as a positive sign for the overall economy. However, I don't think we are there yet, and of course Yellen does not want the dollar to strengthen much more. Also, keep in mind that QE is not "gone." Maturing bonds continue to be reinvested as a way to keep longer-term rates depressed. They just aren't adding new monies.
We will not be posting the list to the public for a while. However, the stock list will be revealed when the UIT launches on 1/14. You can buy the full report with our selection rationale at http://bit.ly/17fNR1Q, or you can visit the First Trust web site to view the fact card for the UIT.
Thanks for all your great comments, insights, and questions. I truly appreciate the courteous interactions, including phrases like, "I stand corrected," "No problem," and "You are welcome," which has become so rare in today's anonymous online discussions. Thank you for that. Let me just add regarding the question about Vanguard ETFs, they are indeed in our rankings of 524 equity ETFs, but they don't score particularly highly compared to the others I mention instead. Our rankings are based purely on aggregation of the fundamentals-based Outlook scores for the underlying stocks, without regard to trading volume, or expense ratios, or other important characteristics to ETF selection.
You are right in that there already has been gridlock with the Republicans controlling the House. And now that they also control the Senate, the President might be using his veto pen more often. The general theory about the benefits of gridlock are twofold: 1) Fewer bills get passed. New laws and regulations often have the negative impact of putting constraints on business, the economy, and/or individual initiative -- so, fewer bills mean fewer constraints on growth. 2) Businesses hate uncertainty and often withhold new capital investment because of it. The threat of new laws creates uncertainty -- so gridlock can relieve such worry about hiring and making long-term capital investment in things that might become constrained or limited at some point. Of course, these points are debatable, and not all new laws place undue constraints on the economy, but on balance that's the general theory about the benefits of gridlock.
For now, the Fed will continue to reinvest the proceeds of maturing securities. It likely won’t start shrinking the balance sheet until after it starts raising the short-term Fed Funds Rate, which is not expected to happen until mid-2015 at the soonest. So, yes, this will still have a "QE impact" on the market, at least until it begins the tightening process. But even then, there is no hard-and-fast timetable on how quickly the balance sheet must be unwound, and the Fed might choose to slowdown or even reverse its tightening if it perceives a detrimental impact on the economy. Here is one article on the topic:
http://buswk.co/1xfygdk
Rob, my weekly article appears on several sites, including Sabrient blog, Seeking Alpha, Investing.com, and others, and it goes out as an email newsletter to subscribers who have signed up for it, so I don't regularly monitor comments on all sites. Best bet for getting a timely response from us is to submit questions through our web site. Keep in mind, the purpose of my weekly article is not to provide a report card on Sabrient's various portfolios, but to offer up trading ideas to the general investing public, and that means describing what's working rather than what's not working.
But to be absolutely clear, we do not own a crystal ball and occasionally some of our stock selections do not perform well, as you pointed out (like TX and MRVL). And some perform great for us for a long while, but then later have a hiccup that changes everything (like OCN).
We certainly appreciate that you are pulling for us. Our core approach employs a GARP (growth at a reasonable price) quantitative model to generate a short list of stocks from the broader universe, followed by a qualitative fundamental review process, and finalized with a qualitative forensic accounting (earnings quality and insider behavior) review by our subsidiary Gradient to throw out the higher-risk names that might not be evident in the quant data. The model employs no momentum factors or timing triggers. Our annual Baker's Dozen (top picks list) has finished well ahead of the overall market each year over the past five years since we launched it in Jan 2009. It tripled the SP500 return in 2012 and doubled it in 2013, and the first series of our Forward Looking Value (launched in June 2013) also doubled the SPY over the ensuing 12 months. Moreover, of the 44 total positions between those two portfolios last year, only 3 were negative after 12 months. As I write this on Wed Aug 13, our 2014 Baker's Dozen is up +9.9% while the SPY is up +7.7% over the same 7-month timeframe (Jan 13 launch), so it's doing okay.
The Weak Treasury portfolios employ a different selection approach that is focused on outperformance during rising interest rates and steepening yield curve (for those who seek to position themselves for such a climate taking hold as the Fed tapers their market manipulation), but in fact the climate has been the exact opposite, as the 10-year Treasury continues to strengthen (interest rates falling) and inflation remains low. If you are a regular reader of my weekly article, you know that I have been in the camp that has expected long-term rates to remain low as global forces push capital into the relative safety of U.S. Treasuries, despite Fed tapering. These Weak Treasury portfolios are heavily invested in Financial (about twice the exposure of the broader market), followed by Tech and Industrial. Although Tech has done well in the prevailing market, Financial and Industrial have not kept up, which is somewhat unusual historically during bullish market conditions. Thus the underperformance.
However, our core GARP approach employed in our other portfolios has worked quite well for us and is what we consider to be a sustainable all-weather approach for the future. Of course, no alpha strategy outperforms its benchmark all the time in all market conditions, so some investors might prefer either a trend-following approach or simple passive investment in a broad market index.
Thanks for your comment. Regarding BIDU, it scores a mid-range 51 (out of 100) in our GARP rank and a 4 (out of 5) in our Earnings Quality Rank. Also, a low Value score of 2 (out of 100), but high Growth and Momentum scores of 99 and 80, respectively. So, it displays strong growth prospects, good earnings quality, and obvious momentum, but that momentum has led to perhaps an overly high valuation. As you suggest, technical consolidation, and preferably a little pullback to test support, would make a better entry point from my standpoint.
Thanks for your continued support. The SectorCast model includes no technical indicators, but the sentiment indicators can be valuable for making short-term adjustments even though the longer-term outlook has been consistently bullish.
Do you windsurf The Gorge?
As it says in the disclosure at the top, I have no positions in any stocks mentioned.
Strictly from the standpoint of Sabrient's unbiased rules-based quant models, QCOR carries a 79 Value score, a perfect 100 Growth score, and a 94 Momentum score, and it carries a Strong Buy rating from our ratings algorithm. Moreover, it resides in the highest (best, or lowest risk) quintile of our Earnings Quality Rank, and it ranks #17 out of over 2700 eligible stocks in the GARP model that serves as the foundation of our high-performing annual "Baker's Dozen" portfolio (which has a +100% total return over the past two years), boasting a strong composite score of 87.5 (out of 100). Also, from a technical perspective, the stock has pulled back to the uptrend line where it seems to be finding buyable support.
The Sabrient Ratings Algorithm (SRA) has been around since 2003. The Earnings Quality Rank (EQR) has only been in production since January 2013, so it is not included in SRA. We intend to launch a project later this year to incorporate EQR into SRA.
However, note that EQR is already a factor in the Outlook Rank, which is the key score in our SectorCast model.
I actually wrote and submitted this article on Sunday. SA didn't get it published until Tuesday, unfortunately. You can find more timely postings on the Sabrient blog.
I have been writing these articles every week for several years, so I would encourage you to look back through my articles to see the various sector scores on various dates. You will see that at times, top-bottom spreads in Bull and/or Bear scores were much wider, sometimes ranging from 70's to 30's.The tighter scores we have been seeing are reflective of high equity correlations. Thanks for reading!
Thanks for your interest in the Baker's Dozen. You probably noticed the big 3% jump today (Thursday) in the portfolio, led by 15% gain in IACI, despite the market being flat to down.
In prior years, the portfolio has stayed somewhat under the radar, with a relatively small contingent of subscribers, although each year the strong performance has attracted more and more attention, of course. Keep in mind that in order to be included in the unit investment trust (UIT) that tracks the portfolio, each stock must display a history of sufficient daily trading volume such that impacts like this are minimized. The UIT has a 30-day sales period, so funds are invested over time rather than all at once.
You won't find micro caps in the portfolio. The smallest firm in the current portfolio upon launch on Jan 11 was EPL at about $900M mkt cap, and you can see in the historical chart that there were no notable price spikes in EPL around launch. All the other stocks were considered mid or large caps. More importantly, we aim for a minimum daily dollar volume (P*Vol) of at least $5M/day.
Follow up note: I wrote this article on Wed night when SNPS was down afterhours, but it recovered quickly on Thu despite troubling earnings quality trends. However, another recent Gradient Analytics report last month addressed earnings quality issues at ULTA, which is down big time (about 20% today) after disappointing last night.
Thanks for sharing, Bill. I wanted to point out that Sabrient Systems' fundamentals-based quant models also have long favored OCN. We publish an annual "Baker's Dozen" portfolio of top stocks for the year, and OCN has been in the 13-stock portfolio both this year and last year. Last's year's portfolio was up +43% overall, with OCN contributing +135%, and this year's is up +31% so far since Jan 11 launch (with all 13 stocks solidly positive), with OCN contributing +52%.
I employ the US sector iShares rather than Sector SPDRS primarily for two reasons. First, iShares divides the equity universe into 10 sectors rather than 9, with Technology and Telecom separated, which I prefer. And second, the number and diversity of constitutents in each ETF is greater, which gives me more choices when drilling down to the top- or bottom-ranked stocks within each. Sector SPDRs are subsets of the S&P 500 large cap index, while sector iShares track the various Dow Jones US industry indexes, which include companies with lower capitalizations.
AAPL looks like a good bet within Sabrient's various quant models. It carries an Outlook score of 94, Value 96, Growth 92, and Earnings Quality 82. Only its Momentum score is low at 36 (no surprise).
FFIV also looks good with an Outlook score of 70, Value 70, Growth 93, Momentum 12, and Earnings Quality 96.
On the other hand, NEM carries much lower scores, including an Outlook score of 56, Value 73, Growth 25, Momentum 9, and Earnings Quality 17. Not quite as good.
JJC is an exchange-traded note (ETN) tied to copper futures contracts, and as such it is not included in Sabrient's SectorCast rankings, which creates bottom-up aggregate profiles of ETFs based on the underlying equity scores. What I can say is that from a chart perspective, JJC has fallen hard this month and today it is threatening to close below its 200-day simple moving average. On the other hand, its oscillators have become oversold and price should be getting ready to at least stabilize and perhaps bounce back. Whether it's only a dead cat bounce remains to be seen. From a fundamental perspective, the iShares Basic Materials ETF (IYM), which includes copper miners, continues to rank low in the Sabrient rankings, primarily driven by modest low-term growth projections and net downgrades from the Wall Street analyst community.
Thanks, La Marque, for the kind words. I invite you to sign up for email delivery of my weekly article through the Sabrient.com web site ... and tell your friends!
Thanks for your interest, Eric. Sabrient's fundamentals-based Outlook rank went live in March 2008 after extensive testing and development showed that it had an outstanding ability to layer predicted performance over an entire universe of stocks (not just the tails, as is typical for most multifactor filters). Because of this, we felt it was our best model to use for aggregrating scores of individual stocks to create bottom-up profiles of stock baskets, such as sectors, industries, and ETFs. Testing at that time showed a top-2 minus bottom-2 sector performance spread of roughly 12% per year.

The Outlook rank continued to perform exceptionally well through much of 2010, but during 2011 it began to be impacted (like most quant models) by the inordinately high correlations among equities (perhaps driven by the big macro events leading to asset allocation swings at the expense of traditional stock-picking). Implied correlations approached 85% in the fall of 2011. This "risk-on/risk-off" behavior often led to "junk stocks" outperforming. Because the Outlook rank generally rewards higher-quality GARP stocks with conservative accounting practices, its performance lagged in such an environment.

Nevertheless, quality eventually rises to the top. As equity correlations have receded, the performance of the fundamentals-based Outlook model has shown signs over recent months that it is returning to its former glory.
Ray, the last section of my article talks about one approach to a sector rotation strategy using ETFs based upon Sabrient's fundamentals-based SectorCast model. An "enhanced" sector rotation version would take the additional step of trading the highest ranked stocks within the highest ranked sectors (rather than the ETFs), and perhaps employing options (both for leverage and for limiting risk). Finally, if one is open to more frequent trading and position monitoring, one could use the rankings to create a watchlist and then use a technical overlay for entry/exits.
Although Guggenheim chooses to categorize NFO as a mid-cap blend fund, in fact the underlying Sabrient Insider Sentiment Index (SBRIN) is really an all-cap index that selects stocks from across a broad eligible universe. Current holdings include Apple (AAPL). So, a more appropriate benchmark for comparison is the iShares Russell 3000 Index Fund (IWV), which NFO has outperformed by closer to 30%.
Thanks for all your good and challenging comments. To me, bulls are those accumulating long positions and bears are those accumulating short positions or distributing/liquidating long positions. The intraday traders are merely providing liquidity. With this combination of low volume and low volatility, the accumulators of longs have been creeping the market higher, mostly unchallenged YTD, but I believe we'll need to see increased volume coupled with a thrust off of short-term oversold technicals to push through current resistance levels.
I don't have a TV at the office, so I don't know what the TV personalities have to say. I scan a host of blogs for independent insights and thought-provoking ideas. I do read some mainstream end-of-day market summaries to learn what they say are the consensus "drivers of the day." In any case, I believe that fundamentals drive the market in the longer-term and technicals drive it shorter-term. That's why the market will often shrug off bad news quickly when the chart says it "wants" to rally.
So long as the world remains awash in fiat currency, U.S. stock market fundamentals on balance look pretty good. The commentators can always come up with a reason-of-the-day for market behavior, when in fact the market simply has been in rally mode in which only a major external event could stop it.
But again, we now find it trying to test resistance yet again, and I just don't know if there is enough power right now to push through. That doesn't necessarily imply that a massive selloff is in store, with bulls deciding its time to give up on any chance of further gains and protect profits. But a stronger test of conviction might be needed to attract more cash at these levels.
I can appreciate the view that the market (and the economy) has become a house-of-cards due to collapse. Such massive manipulation of the free market just seems wrong. It might well turn out that we have chosen to avoid enduring a little discomfort now in exchange for severe pain in the future. No, the eventual unwinding of the balance sheets probably won't be pretty. I just don't see any indications that such a scenario is imminent.
Bull and Bear scores can give a quite different perspective than beta. Bull and Bear only look at "key" market days of unusual strength or weakness over the prior 40 days. Beta measures a stock's price volatility on average relative to the overall market, both up and down, whereas Bull and Bear give a perspective on up-market behavior separate from down-market behavior, and only on "key" days over the recent past.
For example, SYNA has a good combination of Bull and Bear (56 and 63) and its beta is 1.2. SLXP has has a good combination of Bull and Bear (60 and 57) and its beta is 0.8. PROJ has high Bull, low Bear (72, 20) and its beta is 1.1, while SANM also has high Bull, low Bear (77, 25) and its beta is 3.1.
You might think that the strongest correlation with beta would be in high Bear, low Bull, which would be indicative of a defensive, low-beta stock. For example, NAII (Bull 44, Bear 86) has a beta of 0.5. However, NETL (Bull 28, Bear 81) has a beta of 1.3.
Bull and Bear scores are simply Sabrient's unique way of identifying which stocks have been leading rallies and/or serving as safe havens over the recent past, with the expectation that such behavior might continue over the near term. Note that the Bear score is the basis for the Sabrient Defensive Equity Index (which is tracked by exchange-traded fund DEF).
From a purely quant perspective in Sabrient's models, AAPL remains a StrongBuy with a perfect 100 Growth Score. It also boasts a 96 Momentum Score, which considers price, earnings, and group momentum factors. And it has a solid forensic accounting score (i.e., no red flags indicating questionable or "aggressive" practices -- no surprise given the tremendous cash position). From my personal perspective, my teenage daughters and every one of their friends own at least one Apple product -- usually several. Apple's innovation, branding, customer service, and customer loyalty are unsurpassed. I am still a PC & BlackBerry user myself, but I constantly feel the pressure from the Apple juggernaut.
Sabrient's quant algorithms like WLT. It carries a StrongBuy rating with a Growth score of 90 and Momentum score (earnings, price, and group momo) of 98, along with a decent forward-looking Outlook score of 80. Our algos also like ARLP and BTU in the coal space. The top Value score goes to ANR, although it currently carries a Hold rating.
Given all of the mysterious practices that led to the financial crisis, it's no wonder that investment vehicles available to the public that employ terms like "swaps," "derivatives," and "counterparties" attract headlines and paranoia. Thanks for providing some helpful light on the subject.
CRM has been ranked at the bottom of Sabrient's proprietary Company Outlook rank, which is a forward-looking and quality-oriented rank that considers things like current & projected valuation, historical & projected growth, dynamics of Wall Street analysts’ consensus revisions, accounting/governance practices. It is also rated Strong Sell in our quant ratings algo. It is a short position in both the Sabrient Select Opportunity model portfolio and the Sabrient Investor's (H)Edge long/short model portfolio.