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 February 28 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
Just prior to the close as of February 28, 2017, 13 stocks have left the long-only model, 16 have been added, and 20 have been rebalanced. This 36-stock theoretical long model assumes a 2.78% weight for each stock. The long model portfolios are composed of high-quality stocks.
It is unusual to have more than 30 stocks in the long-model theoretical portfolio; this month's total of 36 is up from last month's 33.
Close Long Positions:
Ulta Beauty, Inc. (NASDAQ:ULTA)
Unum Group (NYSE:UNM)
Bank of America Corporation (NYSE:BAC)
E*TRADE Financial Corporation (NASDAQ:ETFC)
MarketAxess Holdings Inc. (NASDAQ:MKTX)
Raymond James Financial, Inc. (NYSE:RJF)
Washington Federal, Inc. (NASDAQ:WAFD)
Cullen/Frost Bankers, Inc. (NYSE:CFR)
First Republic Bank (NYSE:FRC)
United Therapeutics Corporation (NASDAQ:UTHR)
Abbott Laboratories (NYSE:ABT)
Hawaiian Holdings, Inc. (NASDAQ:HA)
InterDigital, Inc. (NASDAQ:IDCC)
Hold/Rebalance Long Positions:
LCI Industries (NYSE:LCII)
D.R. Horton, Inc. (NYSE:DHI)
Burlington Stores, Inc. (NYSE:BURL)
Apollo Global Management, LLC (NYSE:APO)
Essent Group Ltd. (NYSE:ESNT)
The Blackstone Group L.P. (NYSE:BX)
Discover Financial Services (NYSE:DFS)
Home Bancshares, Inc. (Conway, AR) (NASDAQ:HOMB)
Banco Santander, S.A. (NYSE:SAN)
Cathay General Bancorp (NASDAQ:CATY)
East West Bancorp, Inc. (NASDAQ:EWBC)
TD Ameritrade Holding Corporation (NASDAQ:AMTD)
Copart, Inc. (NASDAQ:CPRT)
HP Inc. (NYSE:HPQ)
Applied Materials, Inc. (NASDAQ:AMAT)
Teradyne, Inc. (NYSE:TER)
Maxim Integrated Products, Inc. (NASDAQ:MXIM)
Corning Incorporated (NYSE:GLW)
Facebook, Inc. (NASDAQ:FB)
Steel Dynamics, Inc. (NASDAQ:STLD)
Open New Long Positions:
Bank of Hawaii Corporation (NYSE:BOH)
Huntington Ingalls Industries, Inc. (NYSE:HII)
Delta Air Lines, Inc. (NYSE:DAL)
MasTec, Inc. (NYSE:MTZ)
ManpowerGroup Inc. (NYSE:MAN)
Cirrus Logic, Inc.
Intuit Inc. (NASDAQ:INTU)
NCR Corporation (NYSE:NCR)
Cliffs Natural Resources Inc. (NYSE:CLF)
Trinseo S.A. (NYSE:TSE)
Eagle Materials Inc. (NYSE:EXP)
Nucor Corporation (NYSE:NUE)
Host Hotels & Resorts, Inc. (NYSE:HST)
CoreCivic, Inc. (NYSE:CXW)
RLJ Lodging Trust (NYSE:RLJ)
LaSalle Hotel Properties (NYSE:LHO)
Short Sale Rebalancing Actions
Just prior to the February 28, 2017 close, 10 stocks have left the theoretical short-sale model portfolios, 18 have been added, and 13 have been rebalanced. This 31-stock theoretical model portfolio assumes an equal 3.23% 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:
Honda Motor Co., Ltd. (NYSE:HMC)
Superior Energy Services, Inc. (NYSE:SPN)
Legg Mason, Inc. (NYSE:LM)
ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)
Joy Global Inc. (NYSE:JOY)
Autodesk, Inc. (NASDAQ:ADSK)
Tableau Software, Inc. (NYSE:DATA)
CF Industries Holdings, Inc. (NYSE:CF)
United States Steel Corporation (NYSE:X)
Hold/Rebalance Short Sale Positions:
CarMax Inc. (NYSE:KMX)
Under Armour, Inc. (NYSE:UA)
Hess Corporation (NYSE:HES)
Golar LNG Limited (NASDAQ:GLNG)
CIT Group Inc. (NYSE:CIT)
Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE)
Tesaro, Inc. (NASDAQ:TSRO)
Jacobs Engineering Group Inc. (NYSE:JEC)
Stericycle, Inc. (NASDAQ:SRCL)
Terex Corporation (NYSE:TEX)
Qorvo, Inc. (NASDAQ:QRVO)
Workday, Inc. (NYSE:WDAY)
Potash Corporation of Saskatchewan Inc. (NYSE:POT)
Open New Short Sale Positions:
Helen of Troy Limited (NASDAQ:HELE)
Wolverine World Wide, Inc. (NYSE:WWW)
Mattel, Inc. (NASDAQ:MAT)
Tribune Media Company (NYSE:TRCO)
PBF Energy Inc. (NYSE:PBF)
SM Energy Company (NYSE:SM)
Hilltop Holdings Inc. (NYSE:HTH)
Willis Towers Watson Public Limited Company (NASDAQ:WLTW)
American International Group, Inc. (NYSE:AIG)
GW Pharmaceuticals plc (NASDAQ:GWPH)
bluebird bio, Inc. (NASDAQ:BLUE)
Neurocrine Biosciences, Inc. (NASDAQ:NBIX)
Flowserve Corporation (NYSE:FLS)
Caterpillar Inc. (NYSE:CAT)
Integrated Device Technology, Inc. (NASDAQ:IDTI)
Alliance Data Systems Corporation (NYSE:ADS)
Summit Materials, Inc. (NYSE:SUM)
Weyerhaeuser Co. (NYSE:WY)
Our favorite long idea for March 2017
Our favorite long idea this month is Cirrus Logic, Inc. We like CRUS due to its attractive relative value and very strong operating momentum. Consensus estimates imply the ROIC has already peaked and will start declining in the quarters ahead. However, very often stocks with such strong momentum coupled with positive consensus estimate revisions tend to continue with their fundamental momentum for some time, driving upside "surprise." We will review this stock in more detail in the days ahead.
Maxim Integrated Products continues to look attractive, as does Teradyne, Inc., and Applied Materials, Inc.
Three other semiconductor-related stocks, not currently in the long model, also look compelling. These are $2.5b market cap Advanced Energy Industries (NASDAQ:AEIS), $14b market cap KLA-Tencor Corp. (NASDAQ:KLAC) and $77b market cap Texas Instruments (NYSE:TXN). KLAC and TXN are good ideas for large-cap investors looking for dividend yield. We will review these stocks in more detail later this month.
February 2017 returns
Low-quality stocks continued to surge in February, presumably in response to continued expectations for business-friendly policies from the new White House administration.
The theoretical Core Long Model, composed of high quality stocks, increased 2.39% in February 2017 versus a +3.66% increase in the S&P 500. Stocks in the theoretical Core Sort Model, composed of low-quality stocks, increased by +4.07% for the equivalent inverse short sale loss of -4.07%.
The theoretical Core Long/Short Model declined by -1.68% for the month (+2.39% -4.07% = -1.68%).
The theoretical Opportunistic Long Model also increased +2.39% for the month. Stocks in the theoretical Opportunistic Short Model increased +5.56% through February 21, 2017 and were assumed to have been replaced with 100% cash just prior to the close that day.
The theoretical Opportunistic Long/Short Model declined by -3.16%, hurt by the short model assuming a 100% cash position just prior to the February 21 market close.
(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 February 2017
The best performing stock in the theoretical long model was Hewlett-Packard Co., up +17.28% through February 24 when the position was assumed closed after reaching a price target the day before. HPQ finished the month up 15.42%. The worst performing stock in the long model was TD Ameritrade Holding Corp., down -15.28%.
Our favorite long idea for February was Maxim Integrated Products, Inc., which declined -0.40% for the month.
The best and worst short sale ideas of February 2017
In the theoretical short model, the best performing stock was CF Industries Holdings Inc. (NYSE:CF), which declined -10.22% for the month for the assumed inverse short sale gain of +10.22%. The worst performing short idea was United States Steel Corp. (NYSE:X), which rose +20.26% before being stopped out on February 14.
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.