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 January 31 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
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 January 31, 2017 close 12 stocks have left the long-only model, 16 have been added, and 17 have been rebalanced. This 33-stock theoretical long model portfolio assumes a 3.03% weight for each stock. The long model portfolios are composed of high-quality stocks.
Close Long Positions:
TC PipeLines, LP (NYSE:TCP)
Evercore Partners Inc. (NYSE:EVR)
Fifth Third Bancorp (NASDAQ:FITB)
Western Alliance Bancorporation (NYSE:WAL)
PrivateBancorp, Inc. (NASDAQ:PVTB)
JetBlue Airways Corporation (NASDAQ:JBLU)
ManpowerGroup Inc. (NYSE:MAN)
Northrop Grumman Corporation (NYSE:NOC)
EMCOR Group, Inc. (NYSE:EME)
Cirrus Logic, Inc. (NASDAQ:CRUS)
AK Steel Holding Corporation (NYSE:AKS)
Medical Properties Trust, Inc. (NYSE:MPW)
Hold/Rebalance Long Positions:
LCI Industries (NYSE:LCII)*
Ulta Beauty, Inc. (NASDAQ:ULTA)
Burlington Stores, Inc. (NYSE:BURL)
Apollo Global Management, LLC (NYSE:APO)
Essent Group Ltd. (NYSE:ESNT)
MarketAxess Holdings Inc. (NASDAQ:MKTX)
Home Bancshares, Inc. (Conway, AR) (NASDAQ:HOMB)
Cathay General Bancorp (NASDAQ:CATY)
TD Ameritrade Holding Corporation (NASDAQ:AMTD)
United Therapeutics Corporation (NASDAQ:UTHR)
Hawaiian Holdings, Inc. (NASDAQ:HA)
Copart, Inc. (NASDAQ:CPRT)
HP Inc. (NYSE:HPQ)
InterDigital, Inc. (NASDAQ:IDCC)
Applied Materials, Inc. (NASDAQ:AMAT)
Teradyne, Inc. (NYSE:TER)
Facebook, Inc. (NASDAQ:FB)
Open New Long Positions:
D.R. Horton, Inc. (NYSE:DHI)
Unum Group (NYSE:UNM)
The Blackstone Group L.P. (NYSE:BX)
Discover Financial Services (NYSE:DFS)
Bank of America Corporation (NYSE:BAC)
E*TRADE Financial Corporation (NASDAQ:ETFC)
Banco Santander, S.A. (NYSE:SAN)
East West Bancorp, Inc. (NASDAQ:EWBC)
Raymond James Financial, Inc. (RJD)
Washington Federal, Inc. (NASDAQ:WAFD)
Cullen/Frost Bankers, Inc. (NYSE:CFR)
First Republic Bank (NYSE:FRC)
Abbott Laboratories (NYSE:ABT)
Maxim Integrated Products, Inc.
Corning Incorporated (NYSE:GLW)
Steel Dynamics, Inc. (NASDAQ:STLD)
Short Sale Rebalancing Actions
As of the January 31, 2017 close, 7 stocks have left the short sale model portfolios, 6 have been added, and 17 have been rebalanced. This 22-stock theoretical model portfolio assumes an equal 4.35% weight for each stock.
This short sale model is composed of low-quality stocks, and only tends to work well during periods of high uncertainty or volatility in the market. Low-quality stocks do tend to outperform high-quality stocks during market rallies as the market prices in expectations for a sharp recovery in fundamentals.
Close Short Sale Positions:
Tribune Media Company (NYSE:TRCO)
Credit Suisse Group AG (NYSE:CS)
Endo International plc (NASDAQ:ENDP)
Navistar International Corporation (NYSE:NAV)
Cimpress N.V. (NASDAQ:CMPR)
Baidu, Inc. (NASDAQ:BIDU)
Pandora Media, Inc. (NYSE:P)
Hold/Rebalance Short Sale Positions:
CarMax Inc. (NYSE:KMX)
Honda Motor Co., Ltd. (NYSE:HMC)
Under Armour, Inc. (NYSE:UA)
Superior Energy Services, Inc. (NYSE:SPN)
CIT Group Inc. (NYSE:CIT)
Legg Mason, Inc. (NYSE:LM)
Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE)
ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)
Jacobs Engineering Group Inc. (NYSE:JEC)
Terex Corporation (NYSE:TEX)
Qorvo, Inc. (NASDAQ:QRVO)
Workday, Inc. (NYSE:WDAY)
Autodesk, Inc. (NASDAQ:ADSK)
Tableau Software, Inc. (NYSE:DATA)
CF Industries Holdings, Inc. (NYSE:CF)
United States Steel Corporation (NYSE:X)
Open New Short Sale Positions:
Hess Corporation (NYSE:HES)
Golar LNG Limited (NASDAQ:GLNG)
Tesaro, Inc. (NASDAQ:TSRO)
Stericycle, Inc. (NASDAQ:SRCL)
Joy Global Inc. (NYSE:JOY)
Potash Corporation of Saskatchewan Inc. (NYSE:POT)
Our favorite long idea for February 2017
Our favorite long idea is for January 2017 is Maxim Integrated Products, Inc (NASDAQ:MXIM).
The stock is on the edge of acceptable relative value, with strong operating momentum, and strong consensus estimate revision trends. Stocks ranked 3, 4, 5 on these respective metrics seem to have a higher chance of transforming into a pure growth stock from a growth-at-a-reasonable-price stock.
Nvidia (NASDAQ:NVDA) is the latest example of a stock ranked 3, 4, 5 that has moved into growth territory.
January 2017 returns
Low-quality stocks with depressed stock prices drastically outperformed high-quality stocks in January as markets continued to discount pro-business implications of a Donald Trump presidency.
The theoretical Core Long Model increased +2.83% in January 2017 versus a +1.79% increase in the S&P 500. Stocks in the theoretical Core Short Model increased by +2.91% for the equivalent inverse short sale loss of -2.91%. The Core Long/Short Model declined by -0.08% for the month (+2.83% -2.91% = -0.08%).
The theoretical Opportunistic Long Model also increased +2.83% for the month. Stocks in the theoretical Opportunistic Short Model increased +5.56% through January 4, 2017 and were assumed to have been replaced with 100% cash just prior to the close that day. The Opportunistic Short Model starts February 2017 allocated 100% with stocks.
(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 best and worst long ideas of January 2017
The best performing stock in the theoretical long model was MarketAxess Holdings Inc. (NASDAQ:MKTX) up +22.79% through January 26, when the position was assumed closed after reaching a price target the day before. MKTX finished the month up +27.45%.
The worst performing stock in the long model was AK Steel Holding Corp. (NYSE:AKS), down -20.86%. Unfortunately AKS was our favorite long idea last month -- it took a hit after a sell side rating downgrade.
The best and worst short sale ideas of January 2017
In the theoretical short model, the best performing stock was Under Armour, Inc. (NYSE:UA), which declined -23.64% for the month for an assumed short sale gain of +23.64%.
The worst performing short idea was Acadia Pharmaceuticals (NASDAQ:ACAD), which rose +19.94% for the month for an assumed short sale loss of -19.94%.
Our favorite short idea was CarMax Inc. (NYSE:KMX), which increased +3.86% for the month for an assumed short sale loss of -3.86%.
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 IN ANY STOCK 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.