Stock Screens in a Can April 29, 2009
Posted by Jack Hough in : Uncategorized , comments closedPassive investors pooh-pooh the idea of stock screening, or searching the vast universe of stocks for ones with promising attributes like modest valuations and fat dividend yields. They believe stock pickers can’t consistently beat the market, so there’s little point in hunting for winners. Better to own shares of an index fund that seeks to mimic the market as a whole.
And yet, passive investors are screening whether they know it or not. No index tracks all stocks. All make choices. For example, the S&P 500, by far the most widely tracked stock index, selects the 500 American companies that cost the most in terms of the sum value of their outstanding shares.
Index funds make excellent sense for most investors. Their fees are typically low, their taxes are minimal and they’re blessedly easy. As the man selling rotisserie ovens on television says, "Just set it and forget it." The question is, since the index fund buyer is running an automated stock screen anyhow, might they be better off screening for something other than expensiveness?
That’s just what so-called fundamental indexes seek to offer. They range from simple to complex. On the simple side, WisdomTree (WSDT) offers exchange-traded funds that redefine company size as the amount of earnings produced or dividends paid, not the market price investors are paying at the moment. Its Earnings 500 fund (EPS) therefore has a lower price/earnings ratio than the S&P 500 index, while its Large Cap Dividend fund (DLN) has a bigger dividend yield (3.7% compared with the S&P 500‘s 2.6%, after taking into account recent dividend cuts).
More complicated is the Dynamic Market Portfolio (PWC), sort of a full stock-screen-in-a-can offered by Invesco’s Powershares. It periodically scans the 2,000 largest companies for the 100 most attractive based on 25 attributes. Powershares won’t say what these are exactly, but only that they have to do with company fundamentals, stock valuation, timeliness and risk.
Perhaps in between these approaches are the RAFI (Research Associates Fundamental Index) ETFs, also run by Powershares (Schwab offers the mutual fund versions). The RAFI approach, developed by Robert Arnott, former editor of the prestigious Financial Analysts Journal, weights companies by four measures of economic importance: cash flow, sales, book value and dividends.
So how are the one-step stock screens doing? Mostly, they haven't impressed of late. Perhaps that's because while stocks with skimpy valuations usually outperform in a down market, they’ve sharply underperformed during the extreme downturn of the past year. Those modest prices usually signal company flaws, and in a bad enough economy, some otherwise manageable flaws can sink companies.
I’ve only highlighted U.S. funds, but there are international choices, too. WisdomTree says 13 of its 14 international funds have beaten their benchmarks since inception. It’s a young company, though, so that’s only a couple of years -- we’ll see.
All told, recent returns might not be representative of future ones, as the fine print usually says, only this time it’s meant hopefully. Cheap stocks have taken such a beating over the past year that value itself might be something of a value now, and fundamental indexes might be due to outperform.
| Fund | Ticker | Inception Date | Return 1-Year (Benchmark) % | Return Since Inception (Benchmark) % |
|---|---|---|---|---|
| Returns through March 31, 2009 Benchmark: S&P 500 index (no fees subtracted) |
||||
| PowerShares Dynamic Market Portfolio | PWC | April 30, 1999 | -35.3 (-38.1) | 2.3 (-0.4) |
| Powershares FTSE RAFI US 100 Portfolio | PRF | Dec. 18, 2001 | -43.0 (-38.1) | -13.5 (-11.0) |
| Wisdom Tree Earnings 500 | EPS | Feb. 22, 2003 | -37.8 (-38.1) | -22.7 (-23.1) |
| WisdomTree LargeCap Dividend | DLN | June 15, 2002 | -41.3 (-38.1) | -35.9 (-32.3) |
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5 Stocks to Profit From Future Technology April 28, 2009
Posted by Jack Hough in : Uncategorized , comments closedGreen clay facial masks make women look frightening for 15 minutes but lovely after. Research spending has much the same effect on a company’s profit statement. Embrace shares of companies whose allure is temporarily masked by development expenses, and the result later on might be glowing returns.
To see why, consider how a company reports spending for its electricity bill versus how it reports the purchase of a new delivery truck. Utility charges are ordinary operating expenses, so they’re subtracted from profits right away. A delivery truck costs plenty upfront but will pay for itself over several years. If such costs were deducted from profits all at once, the result would be losses in years companies made big investments and big profits in years they didn’t. To smooth results, accountants call trucks and the like capital investments, and deduct their costs from earnings little by little over the projected useful life of the goods, a process called depreciation.
Research spending, like that delivery truck, will produce profits in coming years. One study looked at 8,313 cases between 1951 and 2001 where companies that already spent plenty on research started spending more. Profit margins for these companies increased one to three percentage points faster than those of peers over the next five years, and shares outperformed by five percentage points a year. Yet in the past, when research spending was treated as a capital investment, some companies abused the system by labeling every imaginable cost as research, so accounting standards today require that all research spending be treated as ordinary operating expenses. The result is that the more companies spend today to ensure rich profits tomorrow, the worse their shares look in the meantime—and the bigger the opportunity for informed investors.
The companies below spent plenty on research and development over the past year, and spent more in the past two quarters than the same quarters a year earlier. They also have low stock market values relative to their past four quarters’ worth of research and development spending—low P/R&D ratios if you like. One study of stock performance over 20 years ended 1995 found that companies with low P/R&D ratios beat the market by an average of six percentage points a year.
Increased research spending is an especially welcome sign during the current earnings season. Companies are beating profit estimates more often than sales estimates, suggesting many are using short-term cost cuts to boost numbers. Earlier this month I reported on why upside earnings surprises fueled by, among other things, slashed R&D spending foretell lousy long-term returns. Better to favor companies that are investing enthusiastically, even at the near-term expense of Wall Street’s applause.
Electronic Arts (ERTS) shares are one-third the price they traded at in October 2007. Fiscal third-quarter profit, reported February, missed estimates by a bundle, and management lowered guidance to a level that one analyst described as setting the bar so low they could trip over it. Management admits mistakes—among them, not coming up with enough hits for Nintendo’s popular Wii game console. But analysts say reviews for the company’s recent releases are promising, and it has a strong lineup of new releases for coming quarters. Electronic Arts is slashing operating expenses, but has spent generously on product development. It’s debt-free and sits on cash equal to more than one-third of its stock market value. Fourth-quarter results are expected to be announced May 5.
Rofin-Sinar (RSTI) makes industrial lasers, including high-power ones for cutting and welding and precision ones for marking and perforating. Orders collapsed late last year. Sales for the company’s fiscal year ending Sept. 30 are expected to plunge 30%. Yet Rofin remains profitable and has negligible debt, and in its first-ever meeting with Wall Street analysts last month said some pockets of its business are showing signs of a recovery. Shares are up 20% since early March, but are still half the price they fetched a year ago.
Have a look if you like at details on these and other screen survivors below.
| Company | Ticker | Industry | Share Price | Market Value ($mil.) | R&D Growth Past Year (%) | Price / R&D Ratio |
|---|---|---|---|---|---|---|
| Electronic Arts | ERTS | Video games | $19.97 | 6,427 | 23 | 5 |
| Mylan | MYL | Drugs | 14.28 | 4,351 | 129 | 14 |
| Nvidia | NVDA | Graphics chips | 11.43 | 6,200 | 24 | 7 |
| Rofin-Sinar Technologies | RSTI | Industriaol lasers | 19.29 | 558 | 34 | 14 |
| Websense | WBSN | Internet software | 16.11 | 725 | 34 | 14 |
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5 Tech Funds Beating the Broad Market April 24, 2009
Posted by Jack Hough in : Uncategorized , comments closedOver the past 10 days, Google (GOOG), Apple (AAPL) and Amazon.com (AMZN) reported recession-defying profit gains, while Yahoo (YHOO) and Microsoft (MSFT) said they had taken sizable hits. To say the least, earning season in tech land has resulted in a mixed bag of results, making it that much more difficult for investors to predict what's in store the rest of 2009.
Nevertheless, throughout the earnings season the tech sector has been one of the few bright spots of the mutual fund world. According to Lipper, the mutual fund data tracking company, the average technology fund is up 12.8% this year (through Thursday's close) vs. a 4.9% loss for S&P 500 index funds. Some of those gains were due to the frenzy surrounding IBM (IBM) and Oracle's (ORCL) competing bids to buy Sun Microsystems (JAVA). IBM walked away and Oracle won the prize -- at a cost of $7.4 billion. But decent earnings also helped boost the sector. Indeed, tech has performed well coming out of previous economic downturns and some investors are betting history will repeat itself in 2009 and 2010.
“We are seeing some strong buy signals,” says David Hefty, chief executive officer of Cornerstone Wealth Management in Auburn, Ind.
Tech's outperformance is the main reason why we are devoting this week's screen to it. We feel compelled to give readers some insights into what's behind the sector's gains --and whether it will last. There are 125 funds and share classes in what Lipper calls its Science & Technology category. We knocked out 99 that charged a sales load. The funds also had to sport track records that put them in the top half of their peer group over the trailing three- and five-year time periods. We were left with just five funds, one of the smallest lists of the year.
We debated whether to include a 5-year tenure criterion. The thinking goes advisors are more comfortable knowing an experienced manager is running what could be a risky investment. But a reader emailed us this week to challenge the assertion that tenure has any profound impact on performance -- and he had spreadsheets to back up his argument. Given our own results — and those of academic studies — it appears he's right (and we give him kudos for doing his own homework). Had we included the five-year tenure criteria, Buffalo Science & Technology (BUFTX) would have been the only fund to make the cut.
A word of caution: Investing in a sector fund can be a precarious proposition. And anybody who has invested in tech in the past knows its fortunes can turn -- quickly. When we polled a few managers about how to play the sector this week we received a range of answers. Chuck Akre, manager of top-rated FBR Focus (FBRVX) has traditionally held very few tech stocks in his portfolio, but says he is close to buying one tech company that could end up comprising a substantial position in the fund. Cornerstone's Hefty says his clients’ equity portfolios now have a 6% exposure to tech. The takeaway: The experts are building small, tactical positions in the sector. You should, too.
There's a very simple reason to tread carefully. There are no clear signs tech's outperformance will last. Forrester Research (FORR) recently estimated U.S. business and government IT purchases will fall 3.1% in 2009. That's down from the 1.6% increase it had earlier predicted. And during their earnings conference calls, many chief executive officers cautioned against predicting what the second half of 2009 would look like. Forrester, meanwhile, says it's anticipating growth in IT spending to pick up in the fourth quarter and gain momentum next year.
There are plenty of ways for investors to gain exposure to tech. Exchange traded funds offer cheap fees and trading flexibility. Don't forget, though, most broadly focused, actively managed funds will have ample exposure to the sector. Even a plain vanilla S&P 500 index fund has almost 20% of its holdings in tech. But if you want to make a bigger bet on the sector, check out one of the funds below. Each is beating the broad market in 2009 and they did so in the year after the last bear market, too.
The Criteria: The funds on our table are members of Lipper's Science & Technology category. They are open to new money, charge less than a 1.5% annual expense ratio and require a minimum investment under $5,000. Their performance track records during the trailing three- and five-year periods put them in the top half of the category. We did not include load funds.
| Ticker | Name | Assets (Millions) | YTD Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) |
|---|---|---|---|---|---|---|
| Source: Lipper Note: Data as of April 23, 2009 |
||||||
| BUFTX | Buffalo Science & Technology | 102.5 | 11.14 | -8.52 | -1.29 | 1.02 |
| FSCSX | Fidelity Select Software & Computer Services | 537.8 | 9.70 | -3.77 | -0.34 | 0.86 |
| OBTCX | Old Mutual Columbus Circle Technology & Communications | 87.4 | 13.67 | -7.50 | -0.83 | 1.46 |
| RYIIX | Rydex Internet | 61.8 | 22.39 | -8.40 | -3.48 | 1.38 |
| PRSCX | T. Rowe Price Science & Technology | 1498.3 | 18.66 | -8.95 | -3.59 | 1.00 |
- Fund Type = Science & Technology
- Annualized 3-Year Return (%) = Display Only
- Rank in Classification (%) (3 year performance) <= 50
- Annualized 5-Year Return (%) = Display Only
- Rank in Classification (%) (5 year performance) <= 50
- Expense Ratio <= 1.5%
- Load Fund (type) = No Load
- Minimum Initial Investment <= $5,000
- Open to New Investors = Yes
- Total Net Assets ($ millions) >= 50
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5 Stocks With Rising Dividends April 22, 2009
Posted by Jack Hough in : Uncategorized , comments closedDividends look unreliable lately, unless we compare them with just about everything else. In the first quarter of 2009, more members of the 500 index cut payments than in any other quarter since Standard & Poor’s began keeping records in 1955. Overall, dividends shrank by 16% from a year earlier. That’s nothing next to the profit plunge that made dividend cuts necessary. Last year, earnings for the 500 index fell 40%.
That other means of returning company profits to shareholders -- stock repurchases -- hasn’t proved nearly as reliable. In the fourth quarter of 2008, spending on repurchases plummeted 66% versus a year earlier. Companies usually announce fixed dividend rates but spend varied amounts to buy back shares. When stockholders reinvest their dividends, they buy more shares during downturns than at peaks, thereby buying low. Companies that favor share repurchases over dividends, it’s beginning to seem, buy high when profits are fat, and clutch cash when profits shrink.
Fortunately, plenty of companies are still increasing their dividend payments. In ordinary years, that’s a sign of financial strength and management confidence in continued prosperity. This year, dividend increases are perhaps also a sign that companies can be relied on in a difficult economy. Below are listed five S&P 500 members that have either introduced or boosted payments this month.
Coach (COH) shares jumped 15% Tuesday when the handbag maker beat Wall Street’s profit estimates for its third fiscal quarter and initiated a dividend. The yield works out to about 1.4%. Sales are still slipping, but the pace has slowed and management says business in North America is stabilizing. The company plans to increase the number of bags it offers for less than $300 in coming quarters in reaction to newfound frugality among shoppers. Shares go for 11 times forecast earnings.
Procter & Gamble (PG) recently increased its yearly dividend rate to $1.76 from $1.60, for a current yield of 3.4%. Sales for the personal products maker are seen falling 4% in its fiscal year ending June 30, since customers have traded down to less expensive products and stores have sold off inventory. But profits are forecast to increase, helped in part by falling commodity prices, and last year’s retail de-stock should provide for a sales-boosting restock once conditions improve.
Like many discount retailers, TJX Companies (TJX), which operates T.J. Maxx and Marshalls stores, isn’t struggling. Its recent sales are flat, and profits are beating expectations. Shares don’t carry much of a discount, at 15 times earnings, but a recent dividend boost puts the yield at 1.7%.
People’s United Financial (PBCT) is a bank, but don’t hold that against it. It has better asset quality than peers and plenty of excess capital. Its recent dividend increase was as small as they come -- to 61 cents a year from 60. Still, it speaks volumes compared with some big-name banks that have forsaken payments altogether in recent months.
Finally, Southern Company (SO) just raised its dividend for an eighth consecutive year. Current yield: 5.8%. Profits for the Altanta-based electric utility are expected to rise modestly this year and next. Fresh quarterly results are scheduled to be announced April 29.
| Company | Ticker | Industry | Share Price | New (Former) Annual Dividend ($) | Yield (%) | P/E |
|---|---|---|---|---|---|---|
| Data as of April 21, 2009 Source: Reuters Research | ||||||
| Coach Inc | COH | fashion accessories | $20.92 | 0.30 (0.00) | 1.4 | 11 |
| People's United Financial | PBCT | savings and loan | 16.58 | 0.61 (0.60) | 3.7 | 52 |
| Procter and Gamble | PG | personal products | 51.37 | 1.76 (1.60) | 3.4 | 12 |
| Southern Co | SO | utilities | 30.04 | 1.75 (1.68) | 5.6 | 13 |
| TJX Companies | TJX | department stores | 28.12 | 0.48 (0.44) | 1.7 | 15 |
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Six Stocks Priced for Takeovers April 21, 2009
Posted by Jack Hough in : Uncategorized , comments closedAt one point in the first quarter, U.S. stock prices reached their lowest level since 1996. Company takeover activity should have soared -- buy low, right? It’s not like potential suitors couldn’t afford to shop. Cash hoarding among companies is near record levels. (For details, see “The Money, Hand It Over” in the forthcoming issue of SmartMoney Magazine.)
Of course, companies didn’t buy low. The dollar amount of transactions increased versus a year ago only because of two giant drug deals -- Pfizer’s (PFE) $68 billion purchase of Wyeth and Merck’s (MRK) $41 billion acquisition of Schering-Plough. The number of transactions plunged 30%. Poor timing perhaps helps explain why studies have long shown that in the average company takeover, the buyer squanders stockholder money, and that the more cash they’re sitting on at the time of the deal, the more they tend to lose. Now, with stocks up about 25% from their March low, deal announcements seem slightly more plentiful. Monday alone brought at least five of them, including Oracle’s (ORCL) agreement to buy Sun Microsystems (JAVA) for $7.4 billion.
Whether stocks soar, swoon or stall for the rest of the year, it might pay to snap up shares of companies that look like takeover candidates today. If buyout offers materialize, shareholders of the pursued often (but not always) cash in nicely. If no offers appear, shareholders can still make money, since many of the attributes that make a company a takeover target are ones that make it a worthwhile stock. Chief among these are a skimpy valuation and an ability to generate plenty of excess cash.
The list below is made up of just such companies. They have low enterprise values (the cost to buy all of a company’s shares and pay off its debt, while using its cash) relative to their Ebitda (earnings before interest, taxes, depreciation and amortization — a gauge of underlying profit potential). They also have low share prices relative to the free cash they clear. And all pay dividends, which does nothing for suitors but should help keep stockholders happy in the all-too-likely event that offers don’t emerge.
Joy Global (JOYG) made the cut. Now seems a worrisome time to hold shares of the Milwaukee maker of mining equipment. Demand for steel and coal are off amid a manufacturing slowdown, and U.S. politics seem to have shifted in favor of carbon regulation, which could dampen coal demand more. But Joy is financially strong and is quickly trimming costs, and its shares fetch just six times forecast earnings for its fiscal year ending Oct. 31. Also, demand for coal-mining equipment in China and India seems all too likely to help offset a slowdown in the U.S.
Biovail (BVF) shares peaked at more than $27 in 2006. That year, the Ontario drug maker’s blockbuster antidepression pill, Wellbutrin XL, began facing generic competition. By last October, shares of Biovail dipped below $8. They’ve rebounded to $10 and change, but still seem underpriced. Wellbutrin XL sales plunged 43% last year, but total company sales fell only 10%, and current products look promising. Costly Xenazine, used to combat jerky, involuntary movements associated with Huntington’s disease, is selling better than expected. Zovirax, for herpes, has a new sales partner and a better cut for Biovail. Shares go for nine times earnings. The dividend looks suspiciously high, at over 13%, with a payment equal to more than the company will likely earn this year. But while the company is unlikely to keep paying that amount for long, it can afford to pay plenty, with no debt and cash and equivalents equal to 18% of its stock price.
| Ticker | Company | Industry | Share Price | EV/Ebitda | Price/FCF | Yield (%) |
|---|---|---|---|---|---|---|
| ALV | Autoliv | Auto Parts | $25.16 | 3.69 | 5.53 | 3.34 |
| BVF | Biovail | Drug Delivery | 11.05 | 4.33 | 9.59 | 13.57 |
| ITW | Illinois Tool Works | Diversified Machinery | 32.22 | 5.31 | 8.61 | 3.85 |
| JOYG | Joy Global | Mining Equipment | 24.41 | 4.55 | 6.84 | 2.87 |
| NAFC | Nash-Finch | Wholesale Food | 29.81 | 5.77 | 4.77 | 2.42 |
| PPDI | Pharmaceutical Product Development | Medical Labs & Research | 23.79 | 6.73 | 8.99 | 2.10 |
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11 Small-Cap Funds Poised for Big Rebounds April 17, 2009
Posted by Jack Hough in : Uncategorized , comments closedEntire careers have been made out of following the historical performance of certain stocks and sectors during all types of market conditions: from roaring bull markets to bearish recessions. Now, market watchers are looking to history once again, hoping to determine what will lead us out of this unprecedented downturn.
Three areas are under scrutiny: growth shares, technology and small caps, all of which are known to perform well coming out of broad market declines. According to Lipper, large-cap growth stock funds have returned 3.5% this year, eight percentage points ahead of their large-cap value brethren (data are through Thursday). Tech funds, meanwhile, are up an astounding 14% in 2009. Small-cap funds, however, have yet to turn in a similarly momentous performance. The average fund is just over a percentage point ahead of the broad market -- not exactly a compelling sign that history will repeat itself. As a result of this lackluster performance, the category has been hotly debated.
Over the last few weeks, we've listened to both sides of the small-cap debate and one thing is clear: No one doubts that this niche will eventually thrive. Instead, it's a matter of when it will be the right time to jump in. With that in mind, we devoted this week's screen to small-cap mutual funds. There are 1,694 small-cap funds in our database. We knocked out more than 1,400 that charged sales loads. We then added in our usual performance and fee criteria. And since we think experience counts when sizing up risky small caps, we also searched for managers who had been in place for at least five years. We were left with the 11 funds listed in the table below.
Investors traditionally equate the stock market's tiniest firms with those run by smart entrepreneurs looking to be the next Bill Gates. But in a downturn, when market caps have taken a big hit, what qualifies as a small-cap stock looks much different. We usually define small caps as companies with market capitalizations under $2 billion. With that as a guide, General Motors (GM), insurance heavyweight Genworth Financial (GNW) and United Airlines' owner UAL (UAUA) would qualify. Not exactly a group of budding Microsofts (MSFT) circa 1986 (when the company went public).
But that's one of the reasons small-cap stocks do well in post-bear markets. As credit and capital ease, small-cap firms gain access to funds that can help them grow or get back on track. Reorganized or emerging firms all of a sudden appear as solid M&A targets by opportunistic suitors. And when companies exceed low earnings expectations, they also regain favor with investors who, thinking that the worst is behind them, become more comfortable buying riskier stocks.
After the bear market earlier this decade, small-cap stocks enjoyed a solid run. IShares Russell 2000 (IWM), an exchange-traded fund that mirrors the Russell 2000 index of small-cap stocks, lost 20.3% in 2002, according to Morningstar, but then gained 47.6%, 18%, 4.5% and 18.3% over the next four years, respectively.
Judith Lau, president of money-management firm Lau Associates in Wilmington, Del., isn't so sure small caps are ready to repeat that performance quite yet. Even though the category has shown signs of breaking out during the broad market rally that's occurred since the March 9 market low, Lau isn't ready to jump in. "[We] think it may be a bear market rally," she says.
Lori Calvasina, Citigroup's (C) small- and midcap strategist, is a bit more bullish. "The 29% small cap gain since March 9 has been swift, but is short of the average 12-month bounce off market bottoms in recent recessions," she wrote in a report last week. "It is time to move back to smaller stocks." Lately, she's been making the case for small-cap tech, noting the group's earnings momentum and possible M&A activity.
Essentially the only thing separating Lau from Calvasina is timing. Regardless of whether you are ready to increase your exposure to small caps or plan to take a wait-and-see approach, we think these funds are worth checking out. The Royce funds have a tried and true history of investing in the space. Meanwhile, FBR Focus (FBRVX) can invest up and down the market cap spectrum, but tends to stay closer to the small-cap and midcap space and performs quite well there. It also carries Morningstar's stamp of approval. "We remain confident FBR Focus can deliver," said analyst Ryan Leggio in a recent write-up.
The Criteria: The funds on the table are categorized by Lipper as small-cap funds. They are open to new money, require a minimum investment under $5,000 and charge less than a 1.5% annual expense ratio. Their performance track records put them in the top 20% of the peer group during the trailing three- and five-year time periods. They also have managers who have been in place for over five years. Finally, we did not include load funds.
| Ticker | Name | Assets (In Millions) | YTD Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) | Manager's Tenure |
|---|---|---|---|---|---|---|---|
| Source: Lipper Note: Data as of April 16, 2009 |
|||||||
| BGRFX | Baron Growth | 3645.6 | 1.20 | -11.61 | -1.34 | 1.32 | 14 |
| BSCFX | Baron Small Cap | 1922.7 | 1.19 | -11.66 | -1.77 | 1.32 | 12 |
| PVFIX | Bertolet:Pinnacle Value | 56.3 | 3.67 | 2.90 | 7.13 | 1.49 | 6 |
| BUFSX | Buffalo Small Cap | 1255.8 | 7.09 | -8.10 | -0.37 | 1.00 | 11 |
| FBRVX | FBR Focus | 621.4 | 7.16 | -6.82 | 2.68 | 1.42 | 12 |
| GABSX | Gabelli Small Cap Growth | 690.8 | 0.05 | -6.8 | 1.39 | 1.43 | 18 |
| RGFAX | Royce Heritage | 75.6 | 6.16 | -10.6 | 0.34 | 1.27 | 14 |
| RPFFX | Royce Premier | 201.0 | 0.99 | -7.20 | 2.87 | 1.29 | 7 |
| RYSEX | Royce Special Equity | 355.8 | 0.58 | -3.41 | 0.48 | 1.15 | 11 |
| RYVFX | Royce Value | 658.6 | 5.29 | -9.14 | 2.89 | 1.36 | 5 |
| TGSCX | TCW Small Cap Growth | 78.2 | 8.86 | -7.36 | 0.30 | 1.20 | 14 |
- Fund Type = Small Caps
- Annualized 3-Year Return (%) = Display Only
- Rank in Classification (%) (3 year performance) <= 20
- Annualized 5-Year Return (%) = Display Only
- Rank in Classification (%) (5 year performance) <= 20
- Year-to-Date Return (%) > = -3.46
- Expense Ratio <= 1.5%
- Load Fund (type) = No Load
- Minimum Initial Investment <= $5,000
- Open to New Investors = Yes
- Total Net Assets ($ millions) >= 50
- Manager's Tenure >= 5
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5 Stocks for Sinners April 15, 2009
Posted by Jack Hough in : Uncategorized , comments closedAs a rule, I try not to lure readers into eternal damnation. Purely for academic interest, though, note that so-called sin stocks provide generous returns.
Over 41 years ended 2006, alcohol, tobacco and gambling shares returned about 3.5 percentage points a year more than other stocks, according to a new study slated for publication in the Journal of Financial Economics. Ironically, scrupulous investors might have created the outperformance by shunning such stocks, thereby leaving them available to other investors at bargain prices.
The study’s authors, Harrison Hong of Princeton University and Marcin Kacperczyk of New York University, found that institutions like pension funds owned just 23% of the shares of their average vice company versus 28% for ordinary companies. Sin stocks were covered by an average of 1.3 analysts compared with 1.7 for other stocks. Also, sin shares were 15% to 20% cheaper based on valuation ratios.
Socially irresponsible investing offers three other perks. Vice goods and services tend to sell relatively well during economic downturns. Low share prices can make for giant dividend yields. And vice companies are likely to use conservative accounting, since their wares subject them to close regulatory scrutiny.
Choose your sin carefully, though. The risks of a deteriorating business or industry trump the allure of forbidden goods. Investors who relied on cigarettes and beer for stock performance over the past three years have likely done much better than the broad market, which has fallen by about a third. Those who took a chance on gambling stocks have done much worse, since casinos have been hampered by deep debt and a plunge in travel. Publicly-traded porn has lost appeal, too. I’ve argued here before that Playboy’s (PLA) greatest sins are poor management, an unfair voting structure and a stuck-in-the-‘70s business model; Playboy magazine is today too smutty for subway readers and not smutty enough for porn buyers. Management has recently changed, but long-term challenges remain.
Also, differing definitions of “sin” can affect returns. The Vice Fund (VICEX), a mutual fund loaded with alcohol and tobacco shares, outperformed the S&P 500 index over three years through March, but trailed it over the past year. Recent laggards include aerospace names like Boeing (BA). It’s business of building jumbo jets might not seem like the devil’s work (at least to premium-class passengers), but many big aviation companies also have a hand in weapons -- sin or salvation, depending on your view.
The transgressors listed below offer modest valuation and generous dividends.
| Company | Ticker | Sin | Share Price | P/E | Dividend Yield (%) |
|---|---|---|---|---|---|
| Altria Group | MO | cigarettes | $16.48 | 10 | 7.7 |
| Brown-Forman | BFB | liquor | 40.70 | 15 | 2.8 |
| International Game Technology | IGT | gambling machines | 11.43 | 12 | 2.1 |
| Molson Coors Brewing Company | TAP | beer | 35.21 | 11 | 2.3 |
| Phillip Morris International | PM | cigarettes | 36.44 | 12 | 5.8 |
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8 Index Funds With a Leading Edge April 10, 2009
Posted by Jack Hough in : Uncategorized , comments closedWhenever the stock market takes a turn for the worse, it reignites an age-old debate in the mutual fund world: Which strategy works better, active or passive management?
Fans of active management argue that it's well worth it to pay for the privilege of having a good manager that uses analysis to pick winning investments. However, passive investors reason the overwhelming majority of those managers inevitably underperform a given index over time. These investors simply put their cash in a low-cost index fund that tracks the returns of a benchmark like the S&P 500. The downturn just exacerbates this debate: The average S&P 500 index fund is down 4.4% in 2009, according to Lipper. Almost 40% of the large-cap funds and share classes in our database failed to beat that return. The average large-cap fund also trailed the S&P 500 in 2008. That means index funds seem to have the upper hand — at least for now.
With that in mind, we decided to focus this week's screen on index offerings. This is a much more elaborate undertaking than it appears. We don't simply look at S&P 500 funds since the only thing differentiating them would be the fees that eat into their performance. So instead of weeding out funds based on our regular set of criteria, this week we list a range of index funds and their performance numbers. The surprising revelation: Index funds with exposure to tech and small caps are beating their actively-managed competitors — and the S&P 500, too. See the table below for our eight picks.
There are a few reasons we resort to compiling the screen this way. Over the last few years the exchange-traded fund industry has pushed the boundaries of what constitutes an index fund. The gold standard used to be the S&P 500, but now investors can find funds based on indexes from Russell, Morningstar and Dow Jones and others that track the Nasdaq or use a new-fangled "fundamental" indexing strategy that focuses on book value and sales, among other things. There are even offerings that equal weight the S&P and concentrate on dividends.
While there may not be a huge difference between these funds' performances, even the slightest edge can add up since index investors usually hold their funds for decades. Just 1% more a year can mean tens of thousands of dollars over the life of a retirement account.
There are certain trends worth picking up on in the index world that professional money managers and individual investors alike can follow. Technology stocks, for example, typically perform well coming out of downturns because investors rush to the few shares still experiencing growth. That theme is playing out now. The tech-heavy PowerShares QQQ (QQQQ), or Cubes, which tracks the 100 largest non-financial stocks on the Nasdaq, is up 10.9% this year thanks, in part, to merger and acquisitions and some decent earnings.
Like tech stocks, small caps excel in times like these as capital becomes more accessible and M&A deals pick up. As a testament to this trend, funds that have exposure to small-cap stocks are outperforming the S&P 500. "The 29% small-cap gain since March 9 has been swift," said Citigroup's small-cap strategist Lori Calvasina in a recent report. "But it is short of the average 12-month bounce off market bottoms in recent recessions and crises." In other words, more upside could be had.
The Fidelity Spartan Total Market (FSTMX), an index fund that tracks over 3,000 stocks, has almost 30% of its holdings in small- and mid-cap stocks. Year-to-date it's down 3.6%, almost a full percentage point ahead of the S&P. The Rydex S&P Equal Weight index fund (RSP) assigns the same 0.2% weighting to each of the member companies in that benchmark (the usual methodology focuses on market capitalization). The subtle differences in weightings means the smaller companies in the S&P get equal billing. It has gained 0.8% in 2009.
Those index funds could easily lose favor to traditional S&P funds or actively-managed offerings if the market recovers. In fact, that already appears to be happening. The Dow Jones Industrial Average recently posted its fifth-straight week in the black. And as government rescue plans take hold they could put the financial sector, the one main drag on the S&P 500, back on the road to recovery. Indeed, Wells Fargo (WFC) announced on Thursday it will probably post record quarterly results later this month. Any rally could spark interest in the market's biggest blue chips, stealing small cap's thunder.
A rally could also play into the hands of active managers. We've watched over the last few months as managers like CGM's Ken Heebner have shuffled their holdings in funds like CGM Focus (CGMFX). They bought what they believed were cheap stocks and now are just waiting for the market to come around. If they start to post big numbers, the debate will quickly shift back to the merits of paying for a manager.
The Criteria: Below we list eight index funds along with their return numbers for different time periods. Some are traditional mutual funds. Some are exchange-traded funds. The funds listed below are not be construed as the best of their respective category. Indeed, we simply use one to represent the performance of its group as a whole (although, in some cases, fees will certainly play a part).
| Fund | Ticker | Tracking Index | Expense Ratio (%) | Year-to-Date Return (%) |
|---|---|---|---|---|
| Source: Morningstar Note: Data as of April 9, 2009 |
||||
| PowerShares QQQ | QQQQ | Nasdaq 100 | 0.2 | 10.9 |
| Rydex S&P Equal Weight | RSP | Modified S&P 500 | 0.4 | 0.8 |
| Schwab Fundamental U.S. Large Company | SFLVX | FTSE RAFI U.S. 1000 | 0.59 | -2.2 |
| Fidelity Spartan Total Market | FSTMX | Dow Jones Wilshire 5000 | 0.1 | -3.6 |
| iShares Russell 1000 | IWB | Largest 1000 companies in Russell 3000 | 0.15 | -3.3 |
| Vanguard 500 | VFINX | S&P 500 | 0.16 | -4.4 |
| iShares Russell 2000 | IWM | Smallest 2000 companies in Russell 3000 | 0.2 | -5 |
| WisdomTree Large Cap Dividend | DLN | WisdomTree Large Cap Dividend | 0.28 | -10.4 |
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Why the Poor Pick Bad Stocks April 9, 2009
Posted by Jack Hough in : Uncategorized , comments closedCommitted lottery players annoy me. Sometimes I get stuck behind one at the corner store and watch as he forfeits $30 of his last paycheck to the clerk and calls out elaborate strategies over the frantic printing of the ticket machine. I think: If you just invested that much each week you’d make your own jackpot.
Maybe he wouldn’t, though. A new study suggests avid lottery players who delve into stocks are likely to pick lottery-like ones, which lose almost as surely as the tickets. Moreover, I should perhaps stop looking on lottery players as sad sacks because it seems there’s a little bit of them in most stock buyers.
Classic economics is based on the notion that people always make rational choices, but three decades of research in behavioral finance suggests they don’t. For example, the pain they feel from losses is twice as acute as the joy they get from gains, studies show. That leads stock investors to clutch losers until the ugly end and sell winners too soon. Also, people tend to place a higher value on unlikely events and a lower value on average ones. They’re happy to drive recklessly to the airport but fear for their safety when the plane takes off.
State lotteries play to both these tendencies. Losses are small and known ahead of time, while gains, no matter how improbable, are large. As New York’s marketers are quick to remind, all that’s needed is a dollar and a dream. Since people’s appetite for loss is framed in part by their wealth, the tiny entry price for lotteries appeals most to the economically disadvantaged. Studies have long shown that a disproportionate number of tickets are bought by the poor, young and less-educated, and by members of ethnic minorities.
Alok Kumar, who teaches finance at the University of Texas at Austin, attempts to bridge lottery findings with stock choice in a paper scheduled for publication later this year in the Journal of Finance. He begins by defining lottery-type stocks as ones with low prices, plenty of volatility and high “skewness,” or abnormal past returns. Armed with customer data from a major discount brokerage firm, he reports four main findings.
First, institutions avoid lottery stocks, but individual investors flock to them. Lottery stocks make up 1.25% of the overall market and 0.76% of institutional accounts but 3.74% of all individual portfolios.
Second, Kumar reports that the same socioeconomic traits that predict lottery ticket purchases also predict a preference for lottery stocks. The data here perhaps invite questions. Brokerage applications ask customers about their wealth and income, but customers don’t always answer truthfully. Also, the forms say nothing about education or ethnicity. For this, Kumar cross-references zip codes with census data, but we must assume the make-up of stock investors in a given zip code matches that of the broader population. It might not. Perhaps the most interesting trend found is that low-income brokerage customers who live close to high-income ones are especially likely to favor lottery stocks. Peer comparison, it seems, leads them to invest desperately.
The third finding is that lottery-type stocks underperform ordinary ones by an average of four percentage points a year. The miserable results are almost a necessary outcome of the first finding. If investors overweight lottery stocks, they’re more expensive than they ought to be and thus not worth the price.
The fourth finding is important to all investors, especially right now. Kumar reports that when economic indicators like the unemployment rate turn gloomy, investors load up on lottery stocks. If he’s right, too many of us surely own them now with unemployment having almost doubled in two years.
If lotteries appeal to the economically disadvantaged, perhaps we’re all feeling less-advantaged with the Dow down more than 40% from its October 2007 high. But be aware of the temptation to load up on low-price, speculative stocks. Leave the gambling to others. Quality stocks, not flaky ones, offer the best chance of restoring lost wealth.
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Beating Earnings Isn’t Always Good April 8, 2009
Posted by Jack Hough in : Uncategorized , comments closedA company whose shares you own just beat Wall Street’s earnings forecast by a penny. It’s good news, but after you cheer you should verify. New research shows that shares of companies that top earnings estimates for the wrong reasons get a short-term boost but disappoint over the long term.
Suppose you manage a publicly-traded manufacturer. It’s the last month of the quarter and your sales reports suggest you’re running a penny or two behind Wall Street’s consensus earnings estimate. You have options that can help you avoid disappointing investors for now.
First, there’s discretionary spending. You can pull ads or halt new-product development. Marketing and research, after all, pay off in the future but not today. Second, you can finesse your accruals--the difference between paper profits you report and cash you take in. For example, you can offer retailers generous return privileges on unsold goods. They’ll order more than they need, which will count towards sales and profits now even if returns count against them in future quarters.
In “Making Sense of Cents,” a new study slated for publication in the Journal of Finance, four researchers examined cases between 1988 and 2006 where companies beat or missed earnings estimates by a penny. Changes to research and marketing spending and accruals were used to signal high or low earnings quality. The researchers found that shares of low-quality beaters outperformed those of high-quality missers but only for a year. Three years out, low-quality beaters did worse. In other words, investors were fooled but not permanently.
For fast traders, the results suggest upside earnings surprises are generally welcome no matter the reason. Buy-and-hold investors should pay attention to quality. With earnings season just starting, examine results for big changes to discretionary spending or cases where companies continually report glowing earnings but weak operating cash flow.
Also, stock investors of all types have something new to grumble about. The study also found that bosses of companies that beat earnings estimates for the wrong reasons are more likely to sell personal shares or issue new shares to the public. The suggestion, grimy as it seems, is that earnings-massagers realize their actions are short-sighted and so are eager to cash in.
Below are five companies whose stocks I’ve recommended in the past and whose earnings reports are expected in the next few days.
| Company | Ticker | Industry | Share Price | Expected Report Date | EPS Estimate |
|---|---|---|---|---|---|
| Intel | INTC | computer chips | 15.45 | April 13 | 0.02 |
| Fastenal | FAST | general building materials | 35.85 | April 13 | 0.34 |
| Abbott | ABT | drugs | 42.92 | April 14 | 0.71 |
| Genuine Parts | GPC | car parts | 30.77 | April 15 | 0.49 |
| Parker Hannifin | PH | industrial equipment | 36.61 | April 15 | 0.52 |
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