Thursday, June 27, 2013
Wednesday, June 26, 2013
Monday, June 10, 2013
Thursday, May 30, 2013
Tuesday, May 21, 2013
Volume 1
See below for examples of value in McKesson (long).
McKesson at $118 is undervalued by 35% in our analysis.
The RoE chart above is used to normalize earnings which are estimated to be $8.41 in 2014. Normalized earnings (MPEPS) are shown below vs actual earnings and dividends.
Using the normalized earnings, we calculate the history of relative Payback to the market, and, in McKesson's case, establish a normalized range of 90-130%.
Using this range we calculate the theoretical price range and compare that to the actual high low and close as shown here.
As mentioned, normalized earnings are $8.41 which gives a Reinvestment Return (growth) of 15.8%.
Implied earnings (IEPS) and growth (ImRR).
Reversing the process, we calculate the the stock is fairly priced if it earns normalized earnings of $7.12 and growth of 12.9%.Friday, May 17, 2013
Monday, May 13, 2013
Volume 12, Consumer Cyclical, Energy, Diversified Chemicals
Stocks that stand out on the long side in this issue are Starwood Hotels (HOT $67) and Monsanto ($107).
Wednesday, May 1, 2013
April 30th Screens for Value
The latest screens for good and bad values are shown below with the stocks distributed across their Sectors. Below the April 30th screens are the corresponding screens from a month ago. This will help in spotting changes in value which are a mainly a function of changes in price, or earnings.
A case in point is the reduction of Overvalued Technology stocks which was due mainly to substantially higher estimated earnings when 2014 was added.
A case in point is the reduction of Overvalued Technology stocks which was due mainly to substantially higher estimated earnings when 2014 was added.
Tuesday, April 30, 2013
Monday, April 29, 2013
Tuesday, April 23, 2013
Volume 9 : Machinery, Diversified, Brokers
The only one to stand out on the long side is Akamai Technologies (AKAM $34).
Monday, April 22, 2013
Volume 8 - Financial, Basic Materials & Drug stocks
Two stocks stand out: one for being undervalued and having had relatively good performance over the last month and the other with the opposite characteristics.
On the long side, Actavis (ACT $98), the third largest generic drug maker in the world, looks attractive. Estimated earnings and growth from reinvestment are $8.50 and 22% vs implied earnings of $7.21 and 18.8%.
On the short side is Forest Labs (FRX $36). For March 2015, estimated earnings are $1.30, normalized earnings are $2.72 giving a growth rate of 9.7%. The implied equivalents are $4.63 and 17%.
click here to open file
Robert L. Colby
Sunday, April 21, 2013
Volume 7
Due to poor performance in the Industrial and Technology Sectors and Industries, there are some great values in Volume 7.
Thursday, April 4, 2013
Value Line Technical Rank - a near "perfect" predictor of stock performance
Our recent posting "Monetary stimulus favors poor quality equities" was a reminder of Value Line's Technical Rank and its near "perfect" record of predicting relative performance in the recovery since January '09.
The only imperfection is that it is in the exact opposite order to what one would want to see in a ranking system where 1 is the best and 5 the worst.
These results are based on the linked one month relative returns on the 500 plus stocks that we cover. In addition to keeping our own monthly valuation data, we have kept some Value Line data on these stocks including their Timeliness, Safety and Technical Ranks.
Their definition of the Technical Rank is as follows:
The Value Line Timeliness ranking has a more mixed record.
Like the Technical description, there is no meaningful definition of what goes into the Timeliness equation.
These results are based on the linked one month relative returns on the 500 plus stocks that we cover. In addition to keeping our own monthly valuation data, we have kept some Value Line data on these stocks including their Timeliness, Safety and Technical Ranks.
Their definition of the Technical Rank is as follows:
The Value Line Technical Rank uses a proprietary formula to predict short-term (three to six month) future price returns relative to the Value Line universe. It is the result of an analysis which relates price trends of different durations for a stock during the past year to the relative price changes of the same stock over the succeeding three to six months. The Technical rank is best used as a secondary investment criterion. We do not recommend that it replace the Performance rank. As with the other ranks, the Technical rank goes from 1 (Highest) to 5 (Lowest.)
Robert L. Colby
Wednesday, April 3, 2013
March 31st 2013 performance results
This graph shows the performance of the screens for value over the last 8 1/2 years. The spread between the two had declined to 649 basis points per annum in favor of the Undervalued.
Relative to the S&P 500, the numbers are +5.4% and -1.1% pa. Relative to our universe the numbers are +2.6 vs -3.9%. In absolute terms, $100 is worth $221 vs $129.
The last quarter saw continued out performance by the Overvalued. They averaged +6.4% vs -3.0% relative, or +16.4 to +7.0% in absolute terms. All figures exclude income.
Robert L. Colby
Friday, March 29, 2013
Monetary stimulus favors poor quality equities
Mark Hulbert argues that the monetary easing since January 2009 has caused low quality stocks to outperform high quality stocks. This is illustrated in the first chart taken from his interesting article in the March 23rd Wall Street Journal.
Click here to read the WSJ article by Mark Hulbert, 3/23/13
Using Ford Equity Research data, he compared
the performance of the 20% lowest financial rated stocks to the highest. The 4 year gains are +273% vs +171% respectively, a very substantial divergence in favor of 'junk'. I calculate the difference in performance to be +37.1 % per annum vs +27.0%.
I would argue that the monetary easing more likely facilitated the rise in poorer quality stocks rather than causing it.
Core Equity Valuations has been keeping records of the valuation of over 500 equities monthly since September 2004. In addition to our valuation data, we have also retained in our database some Value Line data included their Safety Rank. Using that as our measure of financial quality, we get very similar results as those based on the Ford data.
However, looking at the same two series in the years leading up the recession and the recession itself, we get a more complete picture.
Between the end of 2004 to October 2007, below average Safety Rank stocks outperformed the highest Safety. However, from Oct '07 to Jan '09, something very dramatic occurs. The lowest ranked stocks declined an average of 76% while the highest ranked declined by only about 45%.
The next question to ask is: was the decline in low Safety stocks attributable to overvaluation in October '07?
The answer is not particularly. Using Valuation Return/Risk (VR)*, the median was -4% for the lowest ranked and 0% for the highest ranked stocks at the start of the major downturn.
But after the decline, in Dec '08, those VR numbers are +73% and -17% respectively. The former is an exceedingly high median number for any group of stocks, at any time.
Therefore, the conclusion is that the poorer quality stocks have done well in the recovery due primarily to their massive undervaluation at the beginning.
The monetary easing probably facilitated their recovery but it doesn't look like it caused it.
Finally the question is where are we today in terms of valuation. The answer is pretty neutral. The median VR for below average Safety Rank is +1% and +4% for the highest ranked.
Robert L. Colby
* Valuation Return/Risk is the price projection relative to the market based on the history of the each stock's history of relative valuation to the market and their return from growth and yield, both actual and projected.
Click here to read the WSJ article by Mark Hulbert, 3/23/13
Using Ford Equity Research data, he compared
the performance of the 20% lowest financial rated stocks to the highest. The 4 year gains are +273% vs +171% respectively, a very substantial divergence in favor of 'junk'. I calculate the difference in performance to be +37.1 % per annum vs +27.0%.
Core Equity Valuations has been keeping records of the valuation of over 500 equities monthly since September 2004. In addition to our valuation data, we have also retained in our database some Value Line data included their Safety Rank. Using that as our measure of financial quality, we get very similar results as those based on the Ford data.
Between the end of 2004 to October 2007, below average Safety Rank stocks outperformed the highest Safety. However, from Oct '07 to Jan '09, something very dramatic occurs. The lowest ranked stocks declined an average of 76% while the highest ranked declined by only about 45%.
The next question to ask is: was the decline in low Safety stocks attributable to overvaluation in October '07?
But after the decline, in Dec '08, those VR numbers are +73% and -17% respectively. The former is an exceedingly high median number for any group of stocks, at any time.
Therefore, the conclusion is that the poorer quality stocks have done well in the recovery due primarily to their massive undervaluation at the beginning.
The monetary easing probably facilitated their recovery but it doesn't look like it caused it.
Finally the question is where are we today in terms of valuation. The answer is pretty neutral. The median VR for below average Safety Rank is +1% and +4% for the highest ranked.
Robert L. Colby
* Valuation Return/Risk is the price projection relative to the market based on the history of the each stock's history of relative valuation to the market and their return from growth and yield, both actual and projected.
Monday, March 25, 2013
Wednesday, March 20, 2013
Caterpillar, a good example of an undervalued Industrial stock
A good example of the undervalued Industrial Sector (see below) is Caterpillar (CAT $87) -
As with any cyclical company (and CAT is very), any useful valuation analysis will start with a calculation of what 'normalized' earnings are, based on past and estimated earnings. The normalized earnings are calculated using the RoE without the benefit of future knowledge with the exception of including the estimated earnings.
This graph shows the EPS including estimates as well as the normalized MPEPS (green dots). This model discounts for cyclical change but cannot predict secular change.
This graph shows the history of CAT's relative Payback using normalized earnings. In the last 25 years, CAT has traded between 75 and 125% of the market's Payback.
This graph shows the calculated price range vs the actual Hi Lo Close on an annual basis. The projected price range for 2014 leaves the stock undervalued by 70%
This graph shows the calculated price range vs the actual Hi Lo Close on an annual basis. The projected price range for 2014 leaves the stock undervalued by 70%
Tuesday, March 19, 2013
Monday, March 18, 2013
Industrieal Sector - exceptional values
The Industrial Sector has some of the best values in the market today. Green indicates good value and orange, poor.
A good example is Caterpiller (CAT $87) - see above
Thursday, February 28, 2013
Volume 1
There are plenty of good values to be found in the Healthcare and Industrial Sectors -
to open file, click here
Wednesday, February 27, 2013
Thursday, February 14, 2013
Wednesday, February 6, 2013
January Summary
January Results
The S&P 500 was up 5.0% in January and the Undervalued list (12/31) was even with the market but the Overvalued list outperformed the S&P by 3.9%.
That prompted a closer look at the performance of the screens in up vs down markets.
In the 99 months of results to the end of 2012, 60 months the S&P 500 was up and 39 it was down.
Of the the 60 positive months, the Overvalued outperformed by 28 times (47%) while in the 39 down months, the Overvalued only outperformed 11 times or 28%. The cost of investing in value, as we calculate it, is more underperformance in up markets than in down markets which is the lesser of two evils.
Overall, the ratio is 61% in favor of the undervalued.
the worksheet with the data can be opened here
January 31st Undervalued list
INGR, PBCT & HRS are new this month, replacing TUP (+13% rel), PBY(+8), JBHT (+7) and DD (0)
January 31st Overvalued List
VLO and CINF are new this month replacing EIX (+2% relative), ANF (-1) AND TLAB(-5)
Wednesday, January 30, 2013
Thursday, January 24, 2013
Building Materials and Homebuilding Industries overvaluation and the role of the ETFs
A short article in this week's Barron's by Vito Racanelli (Jan 25 p. M5) prompted another look at two of the most expensive industries in our year end valuation.
Building Materials and Homebuilding were overvalued on average by 57% and 59% respectively and so far this month, they have outperformed the market.
D R Horton (DHR) is a good example of the extent to which the valuations are stretched beyond anything that their past history would support.
DHR's estimate is $0.95 for this year but its normalized earnings are $1.29, an RoE of 14%. (Expressed as MPEPS, it is shown on the right hand side of this graph.)
Using its history of relative valuation, DHR would need to earn a normalized RoE (not peak!) of 31% or $2.82 (IEPS) a share and have an annual growth rate of 32%. This has no precedence in the companies history except for a brief period in the early nineties when the company likely was very different than it is today. The consensus estimates for 2014 is $1.35 which doesn't come close to what is needed.
This graph shows the calculated price range vs the actual High, Low and Close.
The performance test for this analysis is good. The median return of the most expensive years is -7% pa relative to the S&P 500 while the median return for the most undervalued years is +35%.
Other stocks in this group, like LEN and KBH to name but two, are very similar to this picture.
One possible explanation that caught my eye in the Barron's piece, was the role played by ETF's which attract investment dollars to industries and sectors, presumably without the benefit of any valuation analysis.
This graph shows the dollar volume and its six month moving average of the purchases of the S&P Homebuilding ETF.
There was a surge in demand for this ETF starting in September of 2011. It is very likely that that is part of the reason for this extraordinary opportunity in overvaluation.
Building Materials and Homebuilding were overvalued on average by 57% and 59% respectively and so far this month, they have outperformed the market.
D R Horton (DHR) is a good example of the extent to which the valuations are stretched beyond anything that their past history would support.
Analysis of DHR
Using its history of relative valuation, DHR would need to earn a normalized RoE (not peak!) of 31% or $2.82 (IEPS) a share and have an annual growth rate of 32%. This has no precedence in the companies history except for a brief period in the early nineties when the company likely was very different than it is today. The consensus estimates for 2014 is $1.35 which doesn't come close to what is needed.
The performance test for this analysis is good. The median return of the most expensive years is -7% pa relative to the S&P 500 while the median return for the most undervalued years is +35%.
Other stocks in this group, like LEN and KBH to name but two, are very similar to this picture.
One possible explanation that caught my eye in the Barron's piece, was the role played by ETF's which attract investment dollars to industries and sectors, presumably without the benefit of any valuation analysis.
This graph shows the dollar volume and its six month moving average of the purchases of the S&P Homebuilding ETF.
There was a surge in demand for this ETF starting in September of 2011. It is very likely that that is part of the reason for this extraordinary opportunity in overvaluation.
Tuesday, January 22, 2013
Monday, January 21, 2013
Changes in the 12/31 Screens for value (UV and OV)
The undervalued (UV) and overvalued Screens of 12/31 showed a turnover of 4 to 6 stocks in each during the month of December. The changes were almost all driven by price.
Performance update and current screens for value
Performance
After 9 months of under performance, we may have reached a turning point.
The first graph shows the updated Undervalued (Long) screen's relative index compared to the overvalued (Short)*. They are shown relative to the CEV universe as it has outperformed the S&P by 24% over the period.
Since Sept '04, the annualized relative return has averaged +3.3 and -4.4% respectively for a spread of 7.6% (significantly more than the spread between the 25th and 75th percentile of US equity fund performance for comparable periods).
The last 2 months have shown a significant improvement in the Long performance. The same can be said for the Short lists which have leveled off.
This table shows the contribution by Sector and Industry to the December results alone.
A look at the current valuations below will provide a basis for deciding whether this is a significant turning point or not.
Absolute performance
In terms of absolute performance, the Long index gained 9.2% pa over the period vs 1.1% for the Short. $100 invested at the outset is now worth $207 vs $110. All returns exclude income.
* The undervalued are defined as 4th quartile in Valuation Return (VR) and 4th quartile in the EST/MPEPS ratio i.e where the estimate is higher than the normalized earnings used for the valuation. The overvalue are the opposite i.e. quartiles 1 & 1.
Current Valuations
This table summarizes the investment characteristics of the current (12/31/12) Long and Short lists. The undervalued are dominated by Industrial and Technology stocks. Both Sectors performed well in December. The biggest weighting in the overvalued list is in Consumer Cyclical stocks which also outperformed the market.
Other investment characteristics include:
1) the Undervalued have a significantly higher Reinvestment Return (RR- 13.9 vs 9.9),
2) Paybacks are much lower for the Undervalued and
3) the Market Cap is more than 4x the average of the Overvalued.
The stocks in the two lists are:
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