The Stanley-Laman Group's Macro Views For 2016

by: William Stanley

Summary

2015 has been a Stocks Picker Market - Expect trend to continue and be more so in 2016.

Market Conditions and disparity in values will require Both Long and Short Strategies.

Recapitalization of Energy Stocks and ensuing Debt Market Stress could lead to Major Correction.

We believe that market conditions will be extremely challenging for investors over the next 12 months and recommend that investors consider a Market Neutral or (Zero Beta) portfolio for the following reasons:

Many stocks are overvalued and will either trend lower or tread water over the next year.

Markets have entered a long-term period where performance will diverge, with superior companies being rewarded and the broad market indices showing low single digit returns.

Recent volatility over the past 5 months will accelerate with the heightened geopolitical risk and disjointed nature of the global recovery.

Europe and Emerging Markets will continue to play catch-up with the U.S., but the upward trajectory won't be straight.

Interest rate risk will continue to be a theme and hold both bond and bond surrogate returns down.

Real estate and most hard asset alternative investments will follow the general market and move sideways.

These conditions are amongst the most challenging and perplexing for individual investors as it is difficult to gather alpha or find return if few asset classes are moving up.

Certain Market Neutral or Zero Beta strategies, however, are designed to prosper under these conditions. Most notably is one in which the manager purchases stocks that they believe will increase in value, while they simultaneously hold an equal number of stocks that are sold short, believing those to be overvalued and heading lower.

As a firm, we believe that stock selection is vital. Our selection process is based on the Ad-Star® System, which is our proprietary financial analytics model. We have used Ad-Star® for the past ten years ((i)) to identify lesser known companies early in their growth cycles and (ii) to avoid those companies that lack the fundamentals to support steep valuations.

Below are examples of companies we acquired before they received wide coverage from the street and subsequently became staple holdings for many growth managers:

Purchase

Purchase

Sell

Sell

Current

Period

Company

Date

Price

Date

Price

Price

Divs.

Return

Ctrip.com Int'l

10/11/06

$11.45

08/28/15

$69.47

$0.122

507.2%

F5 Networks

03/09/09

$18.857

Held

--

$108.41

--

474.9%

IPG Photonics

04/14/10

$17.306

08/27/15

$84.74

$0.65

393.4%

Nevertheless, we have not been exempt from selecting stocks that have declined in value. Examples of those include the following:

Purchase

Purchase

Sell

Sell

Period

Company

Date

Price

Date

Price

Divs.

Return

EZCorp Inc.

2/24/10

19.767

2/25/14

12.512

--

-36.7%

Cliffs Nat. Resources

10/5/11

56.041

2/20/14

21.522

$3.185

-55.9%

Our adeptness at identifying companies such as the "winners" listed above, has earned us multiple performance awards, measured against our institutional peer universe including:

Award

Rating Group

Peer Universe

SLG Portfolio

Yrs.

Ending

Best EM Equity Fund

AI Hedge Fund

Emerging Markets

IOP

3

10/31/15

Bull Bear Master

PSN Informa

Global Equity

Div. & Value

3

6/30/13

#2 Overall Return

Barclay Hedge

Emerging Markets

IOP

1

12/31/14

Bull Bear Master

PSN Informa

Global Equity

Div. & Value

3

3/31/13

Top Gun

PSN Informa

Global Equity

High Growth

5

9/30/12

Top Gun

PSN Informa

EM Equity

IOP

1

3/31/13

Bull Bear Master

PSN Informa

Global Equity

Div. & Value

3

6/30/14

In short, our view is to consider rotating Core Assets into a Market Neutral strategy and adding an Alpha Growth strategy that is driven by stock selection.

The preceding represents the views and opinions of The Stanley-Laman Group, Ltd., a Registered Investment Advisor serving individual and institutional investors and is not intended to be investment advice suitable for all investment objectives. The investment strategies above involve the risk of loss of principal and are not intended to be an investment recommendation or an offer to buy or sell securities. Investors are advised to consult with qualified investment professionals relative to their individual circumstance and objectives.

• Returns are subject to investment risk and past performance may not be indicative of future results.

• Examples referenced may not be representative of best and worst individual stock performers by manager.

Disclosure: I am/we are long IPGP, FFIV.

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.