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 July 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, these portfolio models do not take into account rumors or pending M&A transactions. For easier comparisons of one period to another, we track theoretical portfolio returns on a simple cumulative basis (no compounding).
Long Rebalancing Actions
Just prior to the close as of July 31, 2017, we assume 10 stocks have left the long-only model, 17 have been added, and 16 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
Vipshop Holdings Limited (VIPS)
Costco Wholesale Corporation (COST)
Apollo Global Management, LLC (APO)
Anthem, Inc. (ANTM)
The Brink's Company (BCO)
Donaldson Company, Inc. (DCI)
Intuit Inc. (INTU)
Teradyne, Inc. (TER)
CDW Corporation (CDW)
Ansys, Inc. (ANSS)
Dollar General Corporation (DG)
Yum! Brands, Inc. (YUM)
East West Bancorp, Inc. (EWBC)
Bristol-Myers Squibb Company (BMY)
Agilent Technologies, Inc. (A)
Masimo Corporation (MASI)
MasTec, Inc. (MTZ)
ManpowerGroup Inc. (MAN)
Graco Inc. (GGG)
InterDigital, Inc. (IDCC)
Advanced Energy Industries, Inc. (AEIS)
Norbord Inc. (OTC:OSB)
Trinseo S.A. (TSE)
Louisiana-Pacific Corporation (LPX)
Cabot Corporation (CBT)
Worthington Industries, Inc. (WOR)
KKR & Co. L.P. (KKR)
Evercore Partners Inc. (EVR)
First Horizon National Corporation (FHN)
Morgan Stanley (MS)
Cathay General Bancorp (CATY)
Raymond James Financial, Inc. (RJF)
Home Bancshares, Inc. (Conway, AR) (HOMB)
SVB Financial Group (SIVB)
The PNC Financial Services Group, Inc. (PNC)
Amgen Inc. (AMGN)
Celgene Corporation (CELG)
EMCOR Group, Inc. (EME)
Valmont Industries, Inc. (VMI)
Stamps.com Inc. (STMP)
Vishay Intertechnology, Inc. (VSH)
Facebook, Inc. (FB)
United States Steel Corporation (X)
Short Sale Rebalancing Actions
Just prior to the July 31, 2017 close, we assume that 7 stocks have left the theoretical short-sale model portfolios, 8 have been added, and 14 have been rebalanced. This 22-stock theoretical model portfolio assumes a 4.55% 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
Mattel, Inc. (MAT)
Willis Towers Watson Public Limited Company (WLTW)
CIT Group Inc. (CIT)
Incyte Corporation (INCY)
John Bean Technologies Corporation (JBT)
Snap Inc. (SNAP)
TIM Participações S.A. (TSU)
Hold/Rebalance Short Sale Positions
Under Armour, Inc. (UAA)
Liberty Broadband Corporation (LBRD.A)
MetLife, Inc. (MET)
Kite Pharma, Inc. (KITE)
Ultragenyx Pharmaceutical Inc. (RARE)
Nektar Therapeutics (NKTR)
The Medicines Company (MDCO)
Jacobs Engineering Group Inc. (JEC)
Ritchie Bros. Auctioneers Incorporated (RBA)
ZTO Express (Cayman) Inc. (ZTO)
Symantec Corporation (SYMC)
PTC Inc. (PTC)
Agrium Inc. (AGU)
The Mosaic Company (MOS)
Open Short Sale Positions
Vail Resorts, Inc. (MTN)
Penske Automotive Group, Inc. (PAG)
National Oilwell Varco, Inc. (NOV)
Allergan plc (AGN)
Johnson Controls International plc (JCI)
Flowserve Corporation (FLS)
Alliance Data Systems Corporation (ADS)
Cree, Inc. (CREE)
Our favorite idea for August 2017 is Facebook, Inc.
Facebook was our favorite idea for the November 30, 2016 update when the stock was at $118.42. Despite the 43% run-up to $169.25 today, we think it looks more attractive now from a simple quantitative perspective.
FB was ranked 3-3-5 back in November; today's ranking of 3-4-5. This indicates the company's operating momentum has improved, while relative value is still attractive and consensus estimates continue to be revised higher. The key assumption here is that ongoing positive consensus estimate revisions could be indicative of the likelihood for ongoing fundamental momentum. (We intend to review this stock in more detail once we complete an equity research consulting project for one of our institutional clients.)
The tables below is a truly a wonderful thing for portfolio managers to behold, clearly portraying the ongoing fundamental momentum being generated by this $492b market cap beast.
July 2017 Returns
High-quality stocks handily outperformed low-quality stocks in July 2017.
The theoretical Core Long Model portfolio finished July 2017 up +4.72% versus the +1.93% return of the S&P 500 and the +2.05% return of the SPDR S&P 500 ETF (SPY). Stocks in the theoretical Core Short Model portfolio finished up +1.62% for the assumed inverse short sale loss of -1.62%.The theoretical Core Long/Short Model portfolio finished up +3.10% (+4.72% -1.62% = +3.10%). At this time, preliminary July 2017 results for the Barclay Equity Long/Short Index are unavailable.
For the year to date, on a simple cumulative return basis, the Core Long Model is up +10.46% versus the S&P 500 up +9.97%.
The theoretical Opportunistic Long Model was assumed to move from a 30% cash and 70% stocks to 100% stocks just prior to the July 13 close. This long model finished the month up +3.98%. The Opportunistic Long/Short Model finished the month up +2.37% (+3.98% -1.62% = +2.37%).
(The Opportunistic Model uses the same basket of stocks as the Core Model, but employs an additional cash allocation strategy that is triggered by stock market volatility or significant portfolio losses or returns.)
As noted earlier, theoretical portfolio returns for July 3 and July 5 reflect an extension of the basket of stocks that were in place as of June 30.
The best and worst long ideas for July 2017
Last month we highlighted Donaldson Company, Inc. (DCI) and Costco Wholesale Corporation (COST) as our favorite long ideas. DCI finished the July 5-July 31 period up +3.51% and COST finished up a middling +0.31%.
The best performing stock in the theoretical long models was Vipshop Holdings Limited (VPS), up +19.19% for the July 5-July 31 period. The worst performing stock was InterDigital, Inc. (IDCC), down -6.24%.
On July 5 we chose Under Armour, Inc. (UAA) as our favorite short sale idea. This stock reached its price target on July 26 and the position was assumed closed at the end of trading the next day. The stock declined -12.29% over the July 5-July 27 period for an assumed inverse short sale gain of +12.29%.
For the second month in a row Snap Inc. (SNAP) was the best performing short sale idea, declining from July 5 through one day after its July 24 price target by -19.8% for the assumed inverse short sale gain of +19.8%. The worst performing short sale idea was Nektar Therapeutics (NKTR), which finished the July 5-July 25 period up +15.86% for the assumed inverse short sale loss of -15.86%.
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.
Except for extremely unusual circumstances, our long model portfolios are composed of high-quality stocks and our short model portfolios are composed of low-quality stocks.
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.
Returns for July 3 and 5, 2017, reflected an extension of the same basket of stocks that were in place as of June 30.
We favor reporting theoretical model portfolio returns data on a 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 123.23% on a simple cumulative return basis and 209.61% on a compound return basis. Over the same period, the theoretical Core Long Model has returned 186.57% on a simple cumulative return basis and 428.18% on a compound return basis.
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.