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 September 10 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
We assume that just prior to the close as of September 8, 2017, 14 stocks have left the long-only model, 12 have been added, and 19 positions have been rebalanced. This 31-stock theoretical long model assumes a 3.23% weight for each stock. The long model portfolios are composed of high-quality stocks.
Close Long Positions:
Dollar General Corporation (DG)
KKR & Co. L.P. (KKR)
Morgan Stanley (MS)
East West Bancorp, Inc. (EWBC)
Home Bancshares, Inc. (Conway, AR) (HOMB)
The PNC Financial Services Group, Inc. (NYSE:PNC)
Bristol-Myers Squibb Company (NYSE:BMY)
Amgen Inc. (NASDAQ:AMGN)
ManpowerGroup Inc. (NYSE:MAN)
Graco Inc. (NYSE:GGG)
InterDigital, Inc. (NASDAQ:IDCC)
Stamps.com Inc. (NASDAQ:STMP)
Trinseo S.A. (NYSE:TSE)
Worthington Industries, Inc. (NYSE:WOR)
Yum! Brands, Inc. (YUM)
Evercore Inc. (NYSE:EVR)
First Horizon National Corporation (NYSE:FHN)
Cathay General Bancorp (NASDAQ:CATY)
Raymond James Financial, Inc. (NYSE:RJF)
SVB Financial Group (NASDAQ:SIVB)
Agilent Technologies, Inc. (NYSE:A)
Masimo Corporation (NASDAQ:MASI)
Celgene Corporation (NASDAQ:CELG)
MasTec, Inc. (NYSE:MTZ)
EMCOR Group, Inc. (NYSE:EME)
Valmont Industries, Inc. (NYSE:VMI)
Advanced Energy Industries, Inc. (NASDAQ:AEIS)
Vishay Intertechnology, Inc. (NYSE:VSH)
Facebook, Inc. (NASDAQ:FB)
Norbord Inc. (OTC:OSB)
Louisiana-Pacific Corporation (NYSE:LPX)
Cabot Corporation (NYSE:CBT)
United States Steel Corporation (NYSE:X)
Burlington Stores, Inc. (BURL)
Kohl's Corporation (NYSE:KSS)
LVMH Moët Hennessy Louis Vuitton S.E. (LVMU.Y)
Peabody Energy Corporation (NYSE:BTU)
Allison Transmission Holdings, Inc. (NYSE:ALSN)
Cirrus Logic, Inc. (NASDAQ:CRUS)
YY Inc. (NASDAQ:YY)
CDW Corporation (NASDAQ:CDW)
Alphabet Inc. (NASDAQ:GOOG)
Ansys, Inc. (NASDAQ:ANSS)
Arista Networks, Inc. (NYSE:ANET)
Teck Resources Limited (NYSE:TECK)
Short Sale Rebalancing Actions
Just prior to the September 8, 2017, close, we assume that 13 stocks have left the theoretical short-sale model portfolios, 11 have been added, and 9 have been rebalanced. This 20-stock theoretical model portfolio assumes a 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:
Vail Resorts, Inc. (MTN)
Penske Automotive Group, Inc. (NYSE:PAG)
Liberty Broadband Corporation (LBRD.A)
National Oilwell Varco, Inc. (NYSE:NOV)
Allergan plc (NYSE:AGN)
Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE)
Nektar Therapeutics (NASDAQ:NKTR)
The Medicines Company (NASDAQ:MDCO)
Ritchie Bros. Auctioneers Incorporated (NYSE:RBA)
Johnson Controls International plc (NYSE:JCI)
Cree, Inc. (NASDAQ:CREE)
Symantec Corporation (NASDAQ:SYMC)
Agrium Inc. (NYSE:AGU)
Hold/Rebalance Short Sale Positions:
Under Armour, Inc. (UAA)
MetLife, Inc. (NYSE:MET)
Kite Pharma, Inc. (NASDAQ:KITE)
Jacobs Engineering Group Inc. (NYSE:JEC)
ZTO Express (Cayman) Inc. (NYSE:ZTO)
Flowserve Corporation (NYSE:FLS)
Alliance Data Systems Corporation (NYSE:ADS)
PTC Inc. (NASDAQ:PTC)
The Mosaic Company (NYSE:MOS)
Open Short Sale Positions:
Adient plc (ADNT)
DISH Network Corporation (NASDAQ:DISH)
Voya Financial, Inc. (NYSE:VOYA)
Sage Therapeutics, Inc. (NASDAQ:SAGE)
Agios Pharmaceuticals, Inc. (NASDAQ:AGIO)
Penumbra, Inc. (NYSE:PEN)
Univar Inc. (NYSE:UNVR)
Fluor Corporation (NYSE:FLR)
MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI)
Integrated Device Technology, Inc. (NASDAQ:IDTI)
ViaSat, Inc. (NASDAQ:VSAT)
Our favorite idea for the balance of September 2017 is Yum! Brands Inc.
Our favorite long idea for September 2017 is Yum! Brands, Inc. (NYSE:YUM). YUM has been in the model portfolio since July 5. While we try to highlight our favorite ideas from new stocks to the model portfolio, none of them seem as compelling as YUM. This stock has held up well during bouts of recent volatility, and the forecast surge in ROIC is far greater relative to other model portfolio stocks.
August 2017 Returns
Once again, high-quality stocks significantly outperformed low-quality stocks in August. This benefited our long-short strategies for the month.
The theoretical Core Long Model portfolio finished August 2017 down -0.01%, versus the S&P 500 up +0.09% and the SPDR S&P 500 ETF (SPY) up +0.33%.
Stocks in the theoretical Core Short Model portfolio finished down -5.06% for the assumed inverse short sale gain of +5.06%.
The theoretical Core Long/Short Model portfolio finished up +5.05% (-0.01% +5.06% = 5.05%), ahead of the Barclay Equity Long/Short Index average of +1.24%. This index has collected return data on 165 hedge funds for August so far, compared to the return data it has collected from 409 hedge funds in July.
For the year through August 31, on a simple cumulative return basis, the Core Long Model is up +10.44% versus the S&P 500 up +10.07%.
The theoretical Opportunistic Long Model portfolio assumed a 100% cash position at the August 10 close, and will remain that way through at least September 15. Just prior to the close on September 15, it is expected to assume a 70% stock/30% cash position. The Opportunistic Long/Short Model finished August 2017 up +2.83%.
Theoretical long stock returns for August 2017
Our favorite long idea for August was Facebook, Inc. (FB). The stock finished the month up +1.61%. The best performing stock in the long model for August was Stamps.com Inc. (STMP), which reached its price target on August 3 and was assumed closed the next day for a return of +42.64%. The worst performing stock in the long model was MasTec, Inc. (MTZ), down -11.69% for the month.
On August 18 we published our deeper look into Dollar General Corp. (DG), which was in the model portfolio. We had suspected DG might be a good long-term idea because it held up very well during the August 10 market volatility. We learned that the company is in the process of digesting acquisitions and refurbishing stores, and has increased the compensation of its managers. Once it demonstrates operating efficiencies from all these measures, which most likely won't occur for at least two quarters, we think the stock could rapidly appreciate to the $80-86 level. Meanwhile, we expect little volatility in the stock either on the upside or on the downside. DG finished the month down -3.46%.
Theoretical short sale stock returns for August 2017
The best short sale idea for August was Nektar Therapeutics (NKTR), which declined -16.35% through August 11 when the position was assumed closed for the inverse short sale gain of +16.35%.
The worst short sale idea for August was Kite Pharma, Inc. (KITE). This stock position hit a stop loss on August 14 and was assumed closed the next day a short sale loss of -16.96%. This stock continued to move higher and finished the month up +64.18%. This is not the first time we have seen low-quality stock prices move higher following a stop loss trigger, so it is worth taking a special look of at these kind of stocks – low-quality stocks that exceed their short-sale stop loss levels - as potential long ideas.
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, 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: As a simple quantitative model based on fundamental rankings, the portfolio models do not take into account rumors or pending M&A transactions. Theoretical return data reflect simple cumulative returns (not compound returns) and do 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. 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.