We were unable to publish our report as of August 31, 2016 but continued tracking model portfolio returns and our favorite long ideas in real time.
An abbreviated version of our report, "28 Stocks for October 2016" is now available, and the full version of the October report will follow shortly.
Every month, we construct a theoretical long/short portfolio of stocks that demonstrate solid relative value with potential for ongoing cash flow growth and ROIC expansion.
For the third consecutive month, returns of high-quality stocks outperformed low-quality stocks.
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. These criteria are explained in more detail in our September 2015 report. Intraday price target alerts and returns are posted on our Seeking Alpha blog.
Long rebalancing actions as of August 31, 2016
As of the August 31, 2016 close, the theoretical long models assumed 5 stock positions were closed, 12 were added and 12 were rebalanced. Each stock in the 24-stock theoretical long portfolio assumed an equal weight of 4.17%.
American Eagle Outfitters, Inc. (NYSE:AEO)
Gentex Corp. (NASDAQ:GNTX)
Federated Investors, Inc. (NYSE:FII)
First Horizon National Corporation (NYSE:FHN)
Amgen Inc. (NASDAQ:AMGN)
Dycom Industries Inc. (NYSE:DY)
Texas Instruments Inc. (NYSE:TXN)
NetEase, Inc. (NASDAQ:NTES)
Logitech International SA (NASDAQ:LOGI)
Citrix Systems, Inc. (NASDAQ:CTXS)
Lam Research Corporation (NASDAQ:LRCX)
Alphabet Inc. (NASDAQ:GOOG)
Vipshop Holdings Limited (NYSE:VIPS)
Drew Industries Incorporated (DW)
Papa John's International Inc. (NASDAQ:PZZA)
Lowe's Companies, Inc. (NYSE:LOW)
ULTA Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)
Sysco Corporation (NYSE:SYY)
Apollo Global Management, LLC (NYSE:APO)
Principal Financial Group Inc. (NYSE:PFG)
Hawaiian Holdings Inc. (NASDAQ:HA)
EMCOR Group Inc. (NYSE:EME)
Applied Materials, Inc. (NASDAQ:AMAT)
Lexington Realty Trust (NYSE:LXP)
Short rebalancing actions as of August 31, 2016
As of the August 31, 2016 close, the theoretical short models assumed 11 stock positions were closed, 12 were added and 10 were rebalanced. Each stock in this 22-stock theoretical long portfolio assumed an equal weight of 4.55%.
Enable Midstream Partners, LP (NYSE:ENBL)
Helmerich & Payne, Inc. (NYSE:HP)
Weyerhaeuser Co. (NYSE:WY)
LivaNova PLC (NASDAQ:LIVN)
Ligand Pharmaceuticals Incorporated (NASDAQ:LGND)
Generac Holdings Inc. (NYSE:GNRC)
Copa Holdings SA (NYSE:CPA)
Joy Global, Inc. (NYSE:JOY)
Microchip Technology Inc. (NASDAQ:MCHP)
Autodesk, Inc. (NASDAQ:ADSK)
Freeport-McMoRan Inc. (NYSE:FCX)
Under Armour, Inc. (NYSE:UA)
Wynn Resorts Ltd. (NASDAQ:WYNN)
Melco Crown Entertainment Limited (MPEL)
Netflix, Inc. (NASDAQ:NFLX)
Ctrip.com International Ltd. (NASDAQ:CTRP)
Tesla Motors, Inc. (NASDAQ:TSLA)
Deutsche Bank AG (NYSE:DB)
Tesaro, Inc. (NASDAQ:TSRO)
ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)
Colfax Corporation (NYSE:CFX)
Open Short Sale
Tribune Media Company (NYSE:TRCO)
Archer-Daniels-Midland Company (NYSE:ADM)
Superior Energy Services, Inc. (NYSE:SPN)
The Blackstone Group L.P. (NYSE:BX)
Credit Suisse Group AG (NYSE:CS)
Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE)
Jacobs Engineering Group Inc. (NYSE:JEC)
Caterpillar Inc. (NYSE:CAT)
Workday, Inc. (NYSE:WDAY)
PTC Inc. (NASDAQ:PTC)
Tableau Software, Inc. (NYSE:DATA)
FMC Corp. (NYSE:FMC)
Our favorite two long ideas for August 31, 2016 were Drew Industries Inc. and Applied Materials Inc.
Returns for August 2016
August 2016 was the fourth consecutive month high-quality stock returns outperformed low-quality stock returns in our theoretical model portfolio.
During August, the theoretical Core Long Model increased 0.80% versus a -0.11% return for the S&P 500 over the same period.
Stocks in the theoretical Core Short Model increased on average by +0.23% for the equivalent short sale loss of -0.23%. The Core Long/Short Model portfolio improved 0.57% (+0.80% -0.23% = +0.57%).
During August, the theoretical Opportunistic Long Model portfolio returned +0.13% for the month ended August 31, 2016.
The theoretical Opportunistic Short Model portfolio posted a short sale loss of -0.23%. The Opportunistic Long/Short Model declined by -0.11%. (+0.13% -0.23% = -0.11%).
The theoretical Opportunistic Long Model maintained a 70% stock / 30% cash weighting through just prior to the close of August 19, 2016, where upon it assumed a 100% stock weighting. This 70/30 weighting was assumed in place since just prior to the July 25, 2016 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 model portfolio stocks for August 2016
The best performing stock in the long model was Eaton Vance for a +5.87% theoretical return, and the worst performing stock in the long model was Dycom Industries Inc. down -13.75%.
In the short model, the best performing stock was Ligand Pharmaceuticals down -23.41% for the equivalent theoretical short sale gain, and the worst performing stock was LivaNova plc which appreciated +15.31% for the equivalent theoretical short sale loss.
Performance of our favorite ideas
As of July 31, 2016 we had two favorite long ideas: Texas Instruments, Inc. and Citrix Systems, Inc. . These stocks finished August down -0.30% and -2.17%, respectively.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ANY STOCK, OR A SHORT POSITION IN ANY STOCK over the next 72 hours.
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. Please see additional disclaimers and disclosures at the back of this report.