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 April 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
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 April 28, 2017, we assume 18 stocks have left the long-only model, 16 have been added, and 17 positions have been rebalanced. This 33-stock theoretical long model assumes a 3.03% weight for each stock. The long model portfolios are composed of high-quality stocks.
Close Long Positions:
H&R Block, Inc. (NYSE:HRB)
Evercore Partners Inc. (NYSE:EVR)
Essent Group Ltd. (NYSE:ESNT)
Discover Financial Services (NYSE:DFS)
The Blackstone Group L.P. (NYSE:BX)
Bank of Hawaii Corporation (NYSE:BOH)
Home Bancshares, Inc. (Conway, AR) (NASDAQ:HOMB)
Cathay General Bancorp (NASDAQ:CATY)
ManpowerGroup Inc. (NYSE:MAN)
Copart, Inc. (NASDAQ:CPRT)
Stanley Black & Decker, Inc. (NYSE:SWK)
Applied Materials, Inc. (NASDAQ:AMAT)
Intuit Inc. (NASDAQ:INTU)
NCR Corporation (NYSE:NCR)
Logitech International SA (NASDAQ:LOGI)
Corning Incorporated (NYSE:GLW)
Trinseo S.A. (NYSE:TSE)
LaSalle Hotel Properties (NYSE:LHO)
Hold/Rebalance Long Positions:
Meredith Corporation (NYSE:MDP)
Burlington Stores, Inc. (NYSE:BURL)
Apollo Global Management, LLC (NYSE:APO)
East West Bancorp, Inc. (NASDAQ:EWBC)
Raymond James Financial, Inc. (NYSE:RJF)
Banco Santander, S.A. (NYSE:SAN)
Dycom Industries, Inc. (NYSE:DY)
Huntington Ingalls Industries, Inc. (NYSE:HII)
MasTec, Inc. (NYSE:MTZ)
HP Inc. (NYSE:HPQ)
Teradyne, Inc. (NYSE:TER)
Facebook, Inc. (NASDAQ:FB)
Steel Dynamics, Inc. (NASDAQ:STLD)
Nucor Corporation (NYSE:NUE)
Eagle Materials Inc. (NYSE:EXP)
CoreCivic, Inc. (NYSE:CXW)
RLJ Lodging Trust (NYSE:RLJ)
Open New Long Positions:
Ulta Beauty, Inc. (NASDAQ:ULTA)
McDonald's Corporation (NYSE:MCD)
KKR & Co. L.P. (NYSE:KKR)
Federated Investors, Inc. (NYSE:FII)
Morgan Stanley (NYSE:MS)
Nomura Holdings, Inc. (NYSE:NMR)
Bank of America Corporation (NYSE:BAC)
JPMorgan Chase & Co. (NYSE:JPM)
Cullen/Frost Bankers, Inc. (NYSE:CFR)
Masco Corporation (NYSE:MAS)
The Brink's Company (NYSE:BCO)
Valmont Industries, Inc. (NYSE:VMI)
Norbord Inc. (NYSE:OSB)
Cabot Corporation (NYSE:CBT)
Worthington Industries, Inc. (NYSE:WOR)
Short Sale Rebalancing Actions
Just prior to the April 28, 2017 close, we assume that 19 stocks have left the theoretical short-sale model portfolios, 8 have been added, and 12 have been rebalanced. This 20-stock theoretical model portfolio assumes an equal 5.00% 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:
Helen of Troy Limited (NASDAQ:HELE)
Mattel, Inc. (NASDAQ:MAT)
Ford Motor Company (NYSE:F)
Hess Corporation (NYSE:HES)
Golar LNG Limited (NASDAQ:GLNG)
CIT Group Inc. (NYSE:CIT)
bluebird bio, Inc. (NASDAQ:BLUE)
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)
Clovis Oncology, Inc. (NASDAQ:CLVS)
Jacobs Engineering Group Inc. (NYSE:JEC)
CEB Inc. (NYSE:CEB)
Sensata Technologies Holding N.V. (NYSE:ST)
Terex Corporation (NYSE:TEX)
Integrated Device Technology, Inc. (NASDAQ:IDTI)
Alliance Data Systems Corporation (NYSE:ADS)
Nutanix, Inc. (NASDAQ:NTNX)
NetScout Systems, Inc. (NASDAQ:NTCT)
Potash Corporation of Saskatchewan Inc. (NYSE:POT)
Weyerhaeuser Co. (NYSE:WY)
Hold/Rebalance Short Sale Positions:
Under Armour, Inc. (NYSE:UA)
Willis Towers Watson Public Limited Company (NASDAQ:WLTW)
American International Group, Inc. (NYSE:AIG)
Kite Pharma, Inc. (NASDAQ:KITE)
Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE)
Neurocrine Biosciences, Inc. (NASDAQ:NBIX)
ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)
ZTO Express (Cayman) Inc. (NYSE:ZTO)
Flowserve Corporation (NYSE:FLS)
Qorvo, Inc. (NASDAQ:QRVO)
Autodesk, Inc. (NASDAQ:ADSK)
Summit Materials, Inc. (NYSE:SUM)
Open New Short Sale Positions:
Boyd Gaming Corporation (NYSE:BYD)
John Wiley & Sons, Inc. (NYSE:JW.A)
PBF Energy Inc. (NYSE:PBF)
Encana Corporation (NYSE:ECA)
Penumbra, Inc. (NYSE:PEN)
The Medicines Company (NASDAQ:MDCO)
Nektar Therapeutics (NASDAQ:NKTR)
CF Industries Holdings, Inc. (NYSE:CF)
Our favorite long idea for May 2017
Our favorite long idea this month is McDonald's Corporation . As with many of our previously highlighted stocks, MCD shares the same profile of stocks that have in the past done very well for extended period of time. Consensus forecasts imply that ROIC is forecast to continue to improve throughout the year and the stock still trades at an attractive relative value despite the 8% surge in the stock price in April. Consensus estimate revisions are strong, which lends to the possibility for continued momentum to the upside.
Two other stocks stand out on the long side as well. These include Ulta Beauty, Inc. and Norbord Inc. .
April 2017 Returns
High-quality stocks significantly outperformed low-quality stocks in April. The Bull.com has provided a solid summary for the main factors driving global stock markets in April: "...U.S. and European earnings results, fluctuating oil prices, an outline of US President Trump's tax reform proposal and geopolitical issues in Syria and North Korea."
The theoretical Core Long Model, composed of high-quality stocks, increased +2.37% in April 2017 versus a +0.92% increase in the S&P 500. Stocks in the theoretical Core Short Model, composed of low-quality stocks, declined by -0.17% for the assumed equivalent inverse short sale gain of +0.17%. The Core Long/Short Model increased by 2.55% for the month (+2.37% +0.17% = 2.55%).
The theoretical Opportunistic long and short models shared identical stock weightings this month and performed in line with the Core models.
(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 model portfolio stocks of April 2017
Performance of our favorite long idea in April 2017
Our favorite long idea in April was Stanley Black & Decker, Inc. (NYSE:SWK), which gained +2.47% for the month.
The best and worst short model portfolio stocks of April 2017
In the theoretical short model, the best performing stock was Nutanix, Inc. (NASDAQ:NTNX), down - -19.07% for the month for the assumed inverse short sale gain of +19.07%. The worst performing short idea was Neurocrine Biosciences, Inc. (NASDAQ:NBIX), up +23.30% through April 13, 2017when it the positioned was assumed closed for the assumed inverse short sale loss.
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.
We favor reporting theoretical model portfolio returns data on a on a simple cumulative return basis, which simply means we add daily returns cumulatively. This facilitates the comparison of returns from one period with the returns of another period on a chart.
Since March 31, 2017 the S&P 500 has returned 119.56% on a simple cumulative return basis and 198.82% on a compounded return basis. Over the same period, the theoretical Core Long Model has returned 183.83% on a simple cumulative return basis and 414.86% on a compounded return basis.
Theoretical return data does not assume the impact of costs such as execution fees, margin fees, slippage, the availability of stocks for short selling, or any other kind of cost.
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.