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 May 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
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
Just prior to the close as of May 31, 2017, we assume 16 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:
Meredith Corporation (NYSE:MDP)
Ulta Beauty, Inc. (NASDAQ:ULTA)
McDonald's Corporation (NYSE:MCD)
KKR & Co. L.P. (NYSE:KKR)
Federated Investors, Inc. (NYSE:FII)
Nomura Holdings, Inc. (NYSE:NMR)
Banco Santander, S.A. (NYSE:SAN)
Cullen/Frost Bankers, Inc. (NYSE:CFR)
Raymond James Financial, Inc. (NYSE:RJF)
Huntington Ingalls Industries, Inc. (NYSE:HII)
Dycom Industries, Inc. (NYSE:DY)
Valmont Industries, Inc. (NYSE:VMI)
HP Inc. (NYSE:HPQ)
Facebook, Inc. (NASDAQ:FB)
Eagle Materials Inc. (NYSE:EXP)
CoreCivic, Inc. (NYSE:CXW)
Hold/Rebalance Long Positions:
Burlington Stores, Inc. (NYSE:BURL)
Apollo Global Management, LLC (NYSE:APO)
Morgan Stanley (NYSE:MS)
Bank of America Corporation (NYSE:BAC)
East West Bancorp, Inc. (NASDAQ:EWBC)
JPMorgan Chase & Co. (NYSE:JPM)
Masco Corporation (NYSE:MAS)
The Brink's Company (NYSE:BCO)
MasTec, Inc. (NYSE:MTZ)
Teradyne, Inc. (NYSE:TER)
Norbord Inc. (OTC:OSB)
Steel Dynamics, Inc. (NASDAQ:STLD)
Nucor Corporation (NYSE:NUE)
Cabot Corporation (NYSE:CBT)
Worthington Industries, Inc. (NYSE:WOR)
RLJ Lodging Trust (NYSE:RLJ)
Open New Long Positions:
H&R Block, Inc. (NYSE:HRB)
Vipshop Holdings Limited (NYSE:VIPS)
The Blackstone Group L.P. (NYSE:BX)
Bristol-Myers Squibb Company (NYSE:BMY)
Anthem, Inc. (NYSE:ANTM)
Agilent Technologies, Inc. (NYSE:A)
InterDigital, Inc. (NASDAQ:IDCC)
Intuit Inc. (NASDAQ:INTU)
Advanced Energy Industries, Inc. (NASDAQ:AEIS)
Amkor Technology, Inc.
CDW Corporation (NASDAQ:CDW)
Teck Resources Limited (NYSE:TECK)
Trinseo S.A. (NYSE:TSE)
Telecom Italia S.p.A. (NYSE:TI)
Short Sale Rebalancing Actions
Just prior to the May 31, 2017 close, we assume that 14 stocks have left the theoretical short-sale model portfolios, 18 have been added, and 6 have been rebalanced. This 24-stock theoretical model portfolio assumes a 4.17% 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:
Boyd Gaming Corporation (NYSE:BYD)
PBF Energy Inc. (NYSE:PBF)
Encana Corporation (NYSE:ECA)
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)
Penumbra, Inc. (NYSE:PEN)
Flowserve Corporation (NYSE:FLS)
Qorvo, Inc. (NASDAQ:QRVO)
Summit Materials, Inc. (NYSE:SUM)
CF Industries Holdings, Inc. (NYSE:CF)
Hold/Rebalance Short Sale Positions:
John Wiley & Sons, Inc. (NYSE:JW.A)
Under Armour, Inc. (NYSE:UA)
The Medicines Company (NASDAQ:MDCO)
Nektar Therapeutics (NASDAQ:NKTR)
ZTO Express (Cayman) Inc. (NYSE:ZTO)
Autodesk, Inc. (NASDAQ:ADSK)
Open New Short Sale Positions:
Mattel, Inc. (NASDAQ:MAT)
Liberty Broadband Corporation (LBRD.A)
Hess Corporation (NYSE:HES)
CIT Group Inc. (NYSE:CIT)
Incyte Corporation (NASDAQ:INCY)
Jacobs Engineering Group Inc. (NYSE:JEC)
Genesee & Wyoming Inc. (NYSE:GWR)
Sensata Technologies Holding N.V. (NYSE:ST)
John Bean Technologies Corporation (NYSE:JBT)
Ritchie Bros. Auctioneers Incorporated (NYSE:RBA)
Splunk Inc. (NASDAQ:SPLK)
Guidewire Software, Inc. (NYSE:GWRE)
Snap Inc. (NYSE:SNAP)
Workday, Inc. (NYSE:WDAY)
PTC Inc. (NASDAQ:PTC)
Tableau Software, Inc. (NYSE:DATA)
Agrium Inc. (NYSE:AGU)
The Mosaic Company (NYSE:MOS)
Our favorite long idea for June 2017
Our favorite long idea this month is Amkor Technology, Inc. (NASDAQ:AMKR). We like AMKR primarily for its high positive consensus estimate revisions, an expected transition to positive economic profit by the end of 2017, and the associated expected surge in ROIC. The stock is trading at a very attractive relative value, which indicates the market does not buy into this ROIC momentum story. If investor sentiment changes due to positive news flow or another solid quarter, there is a lot of upside potential for this stock.
Another solid long stock idea is Louisiana-Pacific Corporation (NYSE:LPX). Operating momentum, as defined by improvements in ROIC, seem likely to continue for another few quarters. Relative value is decent enough to allow further upside, especially if consensus estimate revisions stay positive.
High-quality stocks significantly underperformed the S&P 500 in May, though were roughly in line with low-quality stock returns.
The theoretical Core Long Model, composed of high-quality stocks, declined -3.37% in May 2017 versus a +1.18% increase in the S&P 500. Stocks in the theoretical Core Short Model, composed of low-quality stocks, declined -3.11% for the assumed equivalent inverse short sale gain of +3.11%. The Core Long/Short Model declined by -0.26% for the month (-3.37% +3.11% = -0.26%).
The theoretical Opportunistic Long Model declined by -4.08% and the assumed short sale gain of the theoretical Core Short Model was +3.11%. The Opportunistic Long/Short Model declined by -0.97% (-4.08% +3.11% = -0.97%).
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 Opportunistic Long Model assumed a 100% cash position at the May 17, 2017 close.
The best and worst long model portfolio stocks for May 2017
Last month we chose McDonald's Corp. (NYSE:MCD) as our favorite long idea, and highlighted Ulta Beauty, Inc. (NASDAQ:ULTA) and Norbord Inc. (NYSE:OSB) as solid long ideas as well.
The best performing stock in the theoretical long models was Ulta Beauty, Inc., up +8.31% for the month. In second place was McDonald's Corp., with a +7.04% return after achieving its price target on May 24 with an assumed close the next day. Norbord declined -8.40% for the month.
The worst performing long idea was Dycom Industries Inc. (NYSE:DY) with a -20.32% return. (Dycom Industries was the best performing model portfolio stock in April 2017 with a +13.67% return).
The best and worst short sale model portfolio stocks for May 2017
In the theoretical short model, the best performing stock was Neurocrine Biosciences, Inc. (NASDAQ:NBIX), down -18.60% for the month with an assumed inverse short sale gain of +18.60%. (Neurocrine was the worst performing short sale model portfolio stock in April 2017 with an assumed short sale loss of -23.30%.) The worst performing short sale idea was Summit Materials, Inc. (NYSE:SUM), which was assumed stopped out at the May 4, 2017 close with an assumed short sale loss of -11.50%.
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 simple cumulative basis. Cumulatively adding daily returns allows for the easy comparison of returns from one period to another. Since March 31, 2009, the S&P 500 has returned 120.74% on a simple cumulative return basis and 202.28% on a compound return basis. Over the same period, the theoretical Core Long Model has returned 180.46% on a simple cumulative return basis and 397.38% 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, and no plans to initiate any positions within 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. We do our best to provide accurate information in this report, but do not guarantee its accuracy.