Evening Update: Core Long Model Finishes December Up +2.00% And Full-Year 2017 Up +28.79%

Dec. 29, 2017 9:14 PM ETFLS, MU, PTLA, X
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Long/Short Equity, Growth At A Reasonable Price

Contributor Since 2009

J. Stephen Castellano founded the equity research and financial modeling consulting firm Ascendere Associates in 2009, building upon a diversified 20-year career in sell side and buy side equity research. His roles included coverage of the steel industry at PaineWebber and telecom services at Warburg Dillon Read (the predecessors to UBS), where he worked closely with institutional sales people, traders and investment bankers. In addition, he provided analytical support for numerous independent valuation, consulting and investment banking studies, including for mergers, secondary offerings and IPOs. At Ascendere Associates, in addition to developing equity research for family offices and other clients, he has consulted for a wide range of startups, established businesses, and global consulting firms. Mr. Castellano holds a B.A. in English from Oberlin College, an MBA from the F.W. Olin School of Business at Babson College, and has passed the first two levels of the CFA exam.

This is an update to our model portfolio report, 35 Stocks for December 2017

New Actions Required

  • Long model: A model portfolio rebalancing note, and our three highlighted long ideas for January 2018, went out to Research Marketplace subscribers prior to the market close today.

Sell Side Upgrades and Downgrades Today

  • None.

Also of Note

Return Data for December 2017

  • On a compound basis for the month of December 2017, the Core Long Modelwas up +2.00%. This compares to the S&P 500 up +1.05%, the Nasdaq up +0.43%, and the Russell 2000 down -0.56%.
  • The Core Long/Short Model was down -5.64%.
  • The Opportunistic Long/Short Model, which assumed a 100% cash position in the short sale basket just prior to the close on December 8, is down -3.74% MTD.

Return Data for Full Year 2017

  • On a compound basis for the full year 2017, the Core Long Model was up +28.79%. This compares to the S&P 500 up +19.50%, the Nasdaq up +28.24%, and the Russell 2000 up +13.14%.
  • The Core Long/Short Model was up +18.50%.
  • The Opportunistic Long/Short Model was up +7.81%.

Core Long/Opportunistic Short

We have noticed that the combining the Core Long Model with the Opportunistic Short Sale Model has outperformed the other long/short models in seven out of the last nine years. This version of the model has done well by staying long stocks during volatile periods, and locking in short sale gains and capping short sale losses during volatile periods. It remains to be seen if this version of the model will similarly outperform in a down-trending or sideways market.

  • The Core Long/Opportunistic Short Model was up +15.93% for the year.

Base Long/Base Short

The Base models can sometimes contain up to 100 stocks. These are more interesting to track in terms of general trends for high-quality stocks and low-quality stocks. The Core and Opportunistic models are derived from the Base Models.

  • The Base Long Model portfolio was up +1.49% for the month and +26.45% for the year.
  • The Base Long/Short Model portfolio was down -2.33% for the month and up +17.04% for the year.

Presaging Major Sell Side Analyst Actions in December 2017

  • MTD ten stocks in the long model have received 24 positive price target revisions, and six stocks have received seven ratings upgrades from sell side firms, led by Micron Technology (MUwith ten price target revisions and U.S. Steel (X) with two ratings upgrades.
  • MTD two stocks in the short sale model have received two negative price target revisions, and four stocks have received six ratings downgrades led by Flowserve (FLSwith two downgrades.

December 2017 Model Portfolio Stock Returns

Stock Selection Criteria

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

We rebalance our model portfolios every month and have been tracking long-only and long/short unaudited theoretical daily returns since March 31, 2009. This theoretical return data does not make any assumption for costs such as execution fees, margin, slippage, or any other type of cost.

This return data, including more than two years of rolling 12-month return data for each model portfolio report that we have collected so far, is available on request.

Please read about some key risks associated with the model portfolio strategies and associated equity research, as well as our disclosures and disclaimers below and on our welcome note.

Tables below have been updated to include December 2017 data.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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. 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. We do our best to provide accurate information in this report, but do not guarantee its accuracy.

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