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 November 30 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.
As a simple quantitative model based on fundamental rankings, the portfolio models do not take into account rumors or pending M&A transactions.
Long Rebalancing Actions
As of the November 30, 2016 close, 11 stocks have left the long-only model, 16 have been added, and 12 have rebalanced. The 28-stock theoretical long model assumes a 3.57% weight for each stock. The long models are composed of high-quality stocks.
Close Long Positions
American Eagle Outfitters, Inc. (NYSE:AEO)
Lear Corporation (NYSE:LEA)
Vipshop Holdings Limited (NYSE:VIPS)
Lowe's Companies, Inc. (NYSE:LOW)
CalAtlantic Group, Inc. (NYSE:CAA)
ING Groep N.V. (NYSE:ING)
Regions Financial Corporation (NYSE:RF)
Masimo Corporation (NASDAQ:MASI)
NetEase, Inc. (NASDAQ:NTES)
VeriSign, Inc. (NASDAQ:VRSN)
Vantiv, Inc. (NYSE:VNTV)
Hold/Rebalance Long Positions
Apollo Global Management, LLC (NYSE:APO)
Unum Group (NYSE:UNM)
First Republic Bank (NYSE:FRC)
United Therapeutics Corporation (NASDAQ:UTHR)
ManpowerGroup Inc. (NYSE:MAN)
Northrop Grumman Corporation (NYSE:NOC)
Copart, Inc. (NASDAQ:CPRT)
Texas Instruments Incorporated (NYSE:TXN)
Cirrus Logic, Inc. (NASDAQ:CRUS)
Logitech International SA (NASDAQ:LOGI)
Applied Materials, Inc. (NASDAQ:AMAT)
Teradyne, Inc. (NYSE:TER)
Open Long Positions
Drew Industries Incorporated (NYSE:DW)
Gentex Corporation (NASDAQ:GNTX)
Burlington Stores, Inc. (NYSE:BURL)
Essent Group Ltd. (NYSE:ESNT)
Evercore Partners Inc. (NYSE:EVR)
Fifth Third Bancorp (NASDAQ:FITB)
Bank of Hawaii Corporation (NYSE:BOH)
Home BancShares, Inc. (NASDAQ:HOMB)
Cathay General Bancorp (NASDAQ:CATY)
State Street Corporation (NYSE:STT)
Hawaiian Holdings, Inc. (NASDAQ:HA)
A. O. Smith Corporation (NYSE:AOS)
EMCOR Group, Inc. (NYSE:EME)
HP Inc. (NYSE:HPQ)
InterDigital, Inc. (NASDAQ:IDCC)
Facebook, Inc. (NASDAQ:FB)
Short Rebalancing Actions
As of the November 30, 2016 close, 16 stocks have left the short-only models, 14 have been added and 11 have been rebalanced. This 25-stock theoretical model assumes an equal 4.00% weight for each stock. This short model is composed of low-quality stocks and only tends to work well during periods of high uncertainty or volatility in the market.
During November 2016, many low-quality stocks rallied as the market priced in expectations for a sharp recovery in fundamentals related to the pro-business stance that Donald Trump is expected to take after his January 20, 2017 inauguration.
Close Short Sale Positions
Liberty Global plc (LBTY.A)
Penske Automotive Group, Inc. (NYSE:PAG)
Newell Brands Inc. (NYSE:NWL)
Ctrip.com International Ltd. (NASDAQ:CTRP)
Archer Daniels Midland Company (NYSE:ADM)
Continental Resources, Inc. (NYSE:CLR)
Marathon Oil Corporation (NYSE:MRO)
National Oilwell Varco, Inc. (NYSE:NOV)
WPX Energy, Inc. (NYSE:WPX)
CIT Group Inc. (NYSE:CIT)
Tesaro, Inc. (NASDAQ:TSRO)
Blackbaud, Inc. (NASDAQ:BLKB)
Cimpress N.V. (NASDAQ:CMPR)
NXP Semiconductors NV (NASDAQ:NXPI)
FMC Corporation (NYSE:FMC)
Hold/Rebalance Short Positions
Under Armour, Inc. (NYSE:UA)
Tribune Media Company (NYSE:TRCO)
Lions Gate Entertainment Corp. (NYSE:LGF)
ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)
Sensata Technologies Holding NV (NYSE:ST)
Flowserve Corporation (NYSE:FLS)
Joy Global Inc. (NYSE:JOY)
Fortinet, Inc. (NASDAQ:FTNT)
Tableau Software, Inc. (NYSE:DATA)
Pandora Media, Inc. (NYSE:P)
United States Steel Corporation (NYSE:X)
Open Short Sale Positions
Wynn Resorts, Limited (NASDAQ:WYNN)
Canadian Natural Resources Limited (NYSE:CNQ)
Credit Suisse Group AG (NYSE:CS)
Legg Mason, Inc. (NYSE:LM)
Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE)
Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY)
Endo International plc (NASDAQ:ENDP)
Agios Pharmaceuticals, Inc. (NASDAQ:AGIO)
Avis Budget Group, Inc. (NASDAQ:CAR)
Jacobs Engineering Group Inc. (NYSE:JEC)
Terex Corporation (NYSE:TEX)
Caterpillar Inc. (NYSE:CAT)
Qorvo, Inc. (NASDAQ:QRVO)
Autodesk, Inc. (NASDAQ:ADSK)
Our favorite long idea and favorite short idea for December 2016
Our favorite long idea is for December 2016 is Facebook, Inc. Into showing decent relative value and a recent historical trend of operating momentum, forecast gains in operating profit and ROIC look extremely compelling.
Returns for November 2016
During November 2016, many low-quality stocks drastically outperformed high-quality stocks as the market priced in expectations for a sharp recovery in fundamentals related to the pro-business stance that Donald Trump is expected to take after his January 20, 2017 inauguration.
The theoretical Core Long Model increased +4.00% in November 2016 versus a +3.41% increase in the S&P 500. Stocks in the theoretical Core Short Model increased on average +7.80% for the equivalent short sale loss of -7.80%. The Core Long/Short Model declined -3.80% (+4.00% -7.80% = -3.80%).
The theoretical Opportunistic Long Model portfolio increased +4.52% for the month while the Opportunistic Short Model portfolio generated a theoretical loss of -5.55%. The Opportunistic Long/Short Model increased declined -1.03% (+4.52% -5.55% = -1.03%).
(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.
The theoretical Opportunistic Long Model assumed a 30% cash position through the first three trading days of November and has assumed a 100% stock position since the November 3, 2016 close.
The best and worst long stock ideas for November 2016
The best performing stock in the long model was Regions Financial Corp. up +16.25% through November 11, when the position was assumed closed and replaced with cash after hitting a price target the day before. The worst performing stock in the long model was Vipshop Holdings Limited down -17.92%.
The best and worst short sale stock ideas for November 2016
In the short model, the best performing stock was Tableau Software, Inc. down -6.60%. The worst performing stock in the theoretical short model was United States Steel Corp. up 27.82% through November 10, when the position was assumed closed and replaced with cash after hitting a stop loss the prior day.
Performance of our favorite ideas
Last month our favorite long idea was Vantiv, Inc., which declined a disappointing-3.31% for the month.
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. The best investors will use this model portfolio as guidance, and not the end all. At the same time, the model does well enough on its own, often beating the indices with ease (though not this past month). 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 POSITION 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.