8 Growth Funds Beating the Broad Market May 29, 2009
Posted by Jack Hough in : Uncategorized , comments closedFor two straight years, Fidelity Contrafund (FCNTX) didn't make a single appearance on the SmartMoney.com fund screen even though its performance track record qualified it for inclusion. The problem was that the fund was closed to new investors, which violates one of our long-standing criteria. After all, what good is there in writing about a fund most readers can't put their money into? Fortunately, that situation changed last December when Fidelity reopened the fund to all comers.
Contrafund has been making our screens ever since, and it's easy to see why. Will Danoff, who's been running the large-company growth fund for almost 20 years, is a throwback type who uses extensive research and management interviews to find companies the market under-appreciates. Even as Danoff's fund ballooned to more than $50 billion -- a level of assets that would handcuff most managers -- he kept it above water by investing throughout the market-cap spectrum, keeping turnover low and holding cash during a raucous 2008. According to Lipper, Contrafund has failed to beat the S&P 500 only three times during the last decade.
Contrafund is one of the finalists on a screen we did this week that focuses on large-cap growth funds. We started with a universe of 864 funds and share classes and quickly narrowed that field to 104 by knocking out offerings that levied a load fee. We then looked for funds with low expense ratios and top-tier track records over the trailing three- and five-year time periods. Since the stock market has been so up-and-down lately, we also required the offerings to have a year-to-date return that exceeded that of the S&P 500. We wound up with a list of eight funds that are on the table below.
We last ran this screen in late February. That three-month span is about half the time we usually wait to revisit a particular topic. Back then, large-cap growth funds -- and mid, multi and small ones, too -- were showing signs of surging ahead of their counterparts on the value side. A week after we published that screen, the Dow Jones Industrial Average bottomed out and has since rallied around 30%. Other major indexes have bounced back, too. That rally lifted many sectors, especially technology, a bellwether of growth funds. Given all the market action, we thought it was time to check back in. Indeed, the average large-cap growth fund has gained 9% this year, according to Lipper, compared to a 1.4% increase for the typical S&P 500 index fund.
"We've been aggressively weighted toward growth for a while," says Jeffrey Phillips, chief investment officer at Rehmann Financial in Troy, Mich. He says that their strategy hurt a bit last year, but "we expect growth to [outperform] for maybe two to three more months. People are looking for companies that can make money in this environment."
The category's performance has rekindled the old growth vs. value debate in many money manager offices around the country. Last year, large-cap value funds beat the average return of their growth brethren by almost three percentage points. That's actually been the historical norm, too. Ibbotson, the market data firm and a division of Morningstar (MORN), found that a $1 investment in value stocks in 1968 would have been worth $68.38 by the end of 2007, a compounded annual rate of return of 11.4%. That same dollar put into growth stocks would have only grown at a 9.2% rate to $31.09.
However, there are times when growth has soared past value. If savvy investors can catch that wave -- and bail out in time -- they can rack up big profits. That was certainly the case in the late 1990s. And growth stocks tend to lead out of downturns like the one we're in now.
That said, it's far from certain whether this will be a prolonged period of outperformance for growth funds. Growth stocks typically depend on companies and consumers spending cash, an uptick in M&A deals, and enough projected earnings growth to convince investors to pay a rich premium over value stocks. Phillips thinks a further increase in unemployment and an erosion of consumer spending during the summer could cause some profit taking that would cool the category off a bit.
So he's been leaning some of his client portfolios heavily toward growth while keeping a close eye on the positions. He prefers funds like Amana Growth (AMAGX) and American Funds' Growth Fund of America (AGTHX). Those are well-respected offerings, but they don't make our cut in this screen: Amana, which is classified as a multi-cap by Lipper and Growth Fund of America, charges a load fee.
Two funds that did make our list -- and are worthy of consideration in your portfolio -- are Contrafund and Harbor Capital Appreciation (HCAIX). Both have experienced managers, charge low fees and have decent track records. They also happen to be easily outpacing the S&P 500 this year.
The Criteria: The funds in our table are part of Lipper's large-cap growth classification. They are open to new money, require a minimum investment of less than $5,000 and charge annual expenses of under 1.5%. Their performance track records over the trailing three- and five-year time periods put them in the top 25% of the category. They are also beating the return of the S&P 500 during 2009. As usual, we did not include load funds.
| Name | Ticker | Assets ($ Millions) | YTD Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) |
|---|---|---|---|---|---|---|
| Source: Lipper Note: Data as of May 28, 2009 |
||||||
| American Century Growth | TWCGX | 2660.7 | 8.09 | -4.66 | -0.07 | 1.00 |
| Aston/Montag & Caldwell Growth | MCGFX | 958.7 | 7.67 | -1.90 | 0.20 | 1.08 |
| Columbia Select Large Cap Growth | UMLGX | 843.6 | 17.36 | -4.32 | 0.88 | 1.16 |
| DWS Capital Growth | SCGSX | 520.0 | 3.33 | -5.36 | -0.76 | 0.79 |
| Fidelity Contrafund | FCNTX | 44260.3 | 4.17 | -5.56 | 2.39 | 0.95 |
| Harbor Capital Appreciation | HCAIX | 490.9 | 12.37 | -5.59 | -0.25 | 1.05 |
| Janus Research | JAMRX | 2472 | 13.65 | -4.84 | 0.03 | 1.06 |
| Sit Large Cap Growth | SNIGX | 286.1 | 6.98 | -4.59 | 0.96 | 1.00 |
- Fund Classification = Large Cap Growth
- Annualized 3-Year Return (%) = Display Only
- Rank in Classification (%) (3 year performance) <= 25
- Annualized 5-Year Return (%) = Display Only
- Rank in Classification (%) (5 year performance) <= 25
- Year-to-Date Return (%) >= 1.4%
- 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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Is Oil Spent or About to Geyser? May 28, 2009
Posted by Jack Hough in : Uncategorized , comments closedIn today’s dollars, a barrel of crude oil collected from America’s seeps in 1859 cost more than $350. It was something of a bargain. Whale oil had shot up to more than $1,000 a barrel, and crude was proving better for lamps, once distilled to kerosene using a process touted by Yale professor Benjamin Silliman. In August of that year Edward Drake drilled 69 feet below Titusville, Pa., to find “rock oil” far more abundant than the seeps. A drilling rush ignited, and just two years later crude had crashed to $12 a barrel.
That was the first of three great dramas for oil’s price in America. The second came more than a century later, when a cartel of Arab oil exporters declared a U.S. embargo (1973), and Iran’s Shah was ousted by Islamic revolutionaries (1979), and crude jumped sevenfold. The third, in which crude rose from less than $20 a barrel in early 2002 to $147 last summer, happened for less-clear reasons, which makes its recent aftershock — prices are up 80% since February — all the more worrisome.
Are we headed for oil drama No. 4 (or if you like, a continuation of No. 3, after it was briefly interrupted by global recession), or is oil just throwing a final fit before it settles back to $30?
As with any good, that depends on supply and demand. For oil, the two are difficult to judge. Demand depends on global economic growth, and the extent to which the spread of oil-saving technology, like electric cars, offsets that of oil-consuming technology, like $2,500 gasoline cars in India. This year, the world is expected to use 3% less oil than last year, but such declines are rare. “Supply” refers not just to how much crude we’ve sucked up and set aside (rich countries are storing almost 20% more than average), or to how much is still in the ground, but also to how costly remaining deposits are to exploit. Pools located far below Arctic ice would cost far more to get at than those just below Saudi desert. Oil mixed with sandy muck costs more to process than light sweet. Reservoirs governed by fickle populists carry added risk, and thus added expense.
Call on experts if you like, but good luck choosing among them. We’re at $63 a barrel now. Veteran oilman T. Boone Pickens sees $75 this year and $200 within five years. Saudi Arabia’s state oil company sees a “vicious” spike brought by low investment. The U.S. Energy Information Administration expects prices to drop $5 or so. The New York Mercantile Exchange reports a sharp increase in options bets on a fall below $50 a barrel by July. This last indicator can’t quite be called bearish. For every trader buying such a bet, there must be one selling it. But it might mean that oil is poised for a big move by August, just in time for the 150th anniversary of that first Titusville find.
Wall Street’s energy analysts seem to expect heaps of excitement ending in big profits. They expect earnings for energy companies in the S&P 500 index to plunge 67% this year but soar 88% next year — a wild ride. If they’re right, big oil producers, whose shares have lost 25% in a year but still look expensive next to meek earnings forecasts, are in fact cheap compared with next year’s results.
I’m never keen on relying on analyst forecasts. Two things make this one easier to accept. First, oil companies pay generous dividends, which will console shareholders if the gains don’t materialize. Second, oil is priced in dollars, making oil producers at once a hedge against a run-up in real crude prices and a hedge against a frittering away of the currency’s value. Below find five major oil stocks and their dividend yields. Note the gap between this year’s price/earnings ratios and next year’s.
| Company | Ticker | Share Price | Market Value ($bil.) | Forward P/E (Current Yr.) | Forward P/E (Next Yr.) | Yield (%) |
|---|---|---|---|---|---|---|
| Data as of May 27, 2009 Source: Reuters | ||||||
| Exxon Mobil | XOM | $68.30 | 333.3 | 16.9 | 11.5 | 2.5 |
| BP PLC ADR | BP | 48.08 | 150.1 | 13.3 | 8.7 | 7.0 |
| Total SA | TOT | 55.10 | 122.8 | 11.1 | 8.6 | 4.8 |
| Chevron | CVX | 64.57 | 129.4 | 14.7 | 8.9 | 4.0 |
| ConocoPhillips | COP | 44.47 | 65.9 | 14.3 | 7.4 | 4.2 |
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5 Stocks With Rising Profit Estimates May 26, 2009
Posted by Jack Hough in : Uncategorized , comments closedThe Great Corporate Profit Rebound of 2009 is looking, well, not so great.
In November, this column warned readers to view skeptically Wall Street’s forecasts for 2009. Analysts at the time expected profits underlying the S&P 500 index to finish the year 17% lower but jump 30% this year. In fact, 2008 profits fell 40%. That should have made a big percentage increase this year all the more attainable.
But calls for that 30% profit jump this year were soon tempered to 24%, then 20%. Now, after a mostly disappointing first quarter, the forecast stands at 9%. Don’t be surprised if even that proves too rosy.
Blame Wall Street’s flubbed estimates on a pair of mental stumbling blocks that behavioral finance researchers call recency bias and anchoring bias. They’re loosely related. People tend to view events that are recent as normal, even when farther-looking historical data say otherwise. They thus often anchor their beliefs in arbitrary benchmarks, not realizing those benchmarks are skewed.
Late last year, analysts might have expected earnings to quickly bounce back to “normal.” Their beliefs were still anchored in the “golden age of profitability,” as one investment firm called 2006. That year, profits reached their highest share of the economy since the 1960s, while incomes lagged, as consumers shopped on borrowed funds made plentiful by bloated house prices. All factors involved -- house prices, consumer spending, corporate profits as a percentage of gross domestic product -- have since reverted to, or at least toward, their long-term averages. Slowly, Wall Street seems to be getting used to the idea that today’s lower level of profits represents a reset, not a temporary lull. In fairness, a rash of layoffs at investment firms means analysts are dividing their coverage time among more stocks, which might also explain why estimates took so long to fall.
If profits are now normal, stock prices seem a touch high. Shares are 17 or 18 times earnings, depending on whether earnings grow 9% or not at all this year. Something closer to 15 or 16 times forward earnings would be more in keeping with history, and prices have languished at much lower levels following bubbles.
Recency and anchoring biases can help investors make money, too. Just as analysts are slow to fully acknowledge bad news, they’re slow to adjust for good news. That’s why studies have long shown that when earnings forecasts for a company are lifted, they’re more likely than not to rise again soon. There’s a shortage of upward earnings revisions at the moment, but there are some. Within the S&P 500, I count 67 companies whose current-year estimates have been raised over the past week, vs. 95 whose estimates have been lowered. Scan the first lot for valuations that still look modest and the results are few, but worth a look. Below I’ve listed five names.
| Company Name | Stock Ticker | Industry | Share Price | Price Change YTD (%) | Forward P/E (Curr. Yr.) | Yield (%) |
|---|---|---|---|---|---|---|
| Data as of May 21, 2009 | ||||||
| Burlington Northern Santa Fe | BNI | Railroads | 67.5 | -11 | 13 | 2.4 |
| El Paso | EP | Oil & Gas Pipelines | 8.8 | 12 | 8 | 2.3 |
| Hewlett-Packard | HPQ | Computers | 34.22 | -6 | 9 | 0.9 |
| Public Storage | PSA | REIT | 64.36 | -19 | 13 | 3.4 |
| Sherwin-Williams | SHW | Chemicals | 54.83 | -8 | 15 | 2.6 |
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A Lone Fund Shines at Investing in Tiny Firms May 22, 2009
Posted by Jack Hough in : Uncategorized , comments closedCal-Maine Foods (CALM) is currently the nation's largest producer of fresh shell eggs. But while its eggs are served on thousands of breakfast tables each morning, its stock isn't as well known. In fact, investors often have a hard time even finding the shares in the funds offered by their 401(k) plans.
That obscurity has nothing to do with Cal-Maine's growth prospects or its balance sheet, both of which are decent at the moment. Rather it can be attributed to the company's market capitalization — the number of outstanding shares times the current price. Cal-Maine is what some investors call a microcap stock. With a market cap just shy of $500 million, the company's stock is a far cry from the multibillion-dollar stock that fund managers are used to investing in. Indeed, because of their size, microcap companies are deemed risky and often struggle to garner any interest from Wall Street analysts and mutual fund managers.
That said, there is a niche within the mutual fund world that focuses on the market's tiniest firms and this week we turn our spotlight on those offerings. In our fund screener tool we found an initial universe of 127 funds and share classes whose portfolios have a median market cap below $500 million. We narrowed that group by looking for funds that had top-tier performance track records over the trailing three- and five-year time periods and also charged low annual fees. That left us with just one fund, Berwyn (BERWX).
This is the only screen we do throughout the year that produces such a small number of finalists (there were two funds the last time we did this screen in April 2008). Drilling down a bit on our screening methodology will help explain that anomaly.
First off, there are really no concrete definitions for what constitutes microcap stocks and their close cousins, small caps. We usually define small caps as stocks with market capitalizations under $2 billion; microcaps start at under $500 million. However, we've seen the small cap cut off extended to $5 billion and managers who say microcaps are stocks with market caps under $250 million.
That means, by screening on median market cap, we actually pull in a lot of small-cap funds whose portfolios happen to be skewing toward the market's tiniest firms. These funds don't consider themselves microcap offerings. (Indeed, Berwyn is classified as a small-cap value fund by Lipper.) Their portfolios are probably valued that way because the economic downturn hit small caps just as hard as other parts of the market in 2008. Indeed, according to Lipper the average small-cap fund lost 37.2% last year, in line with the drop in S&P 500 index funds.
Microcaps do carry some risks. Their business can rise or fall on the back of a single product or see a devastating plunge in sales because a key customer defected to the competition. Not only that but microcap stocks, especially ones that trade under $1 a share, are prone to manipulation.
But just as there are some big risks, there's also the potential for big benefits. Managers who do their homework can easily find diamonds in the rough. If the economy starts picking up, enterprising microcap firms could gain better access to cheap capital to help them grow. Meanwhile, if the stock market shows signs of sustainable improvement it could embolden investors to take on more risk, helping to boost a company's shares. The companies are also historically attractive acquisition targets. Another reason to invest in microcaps: It can diversify a portfolio heavily weighted in large-cap investments.
"Most investors are dramatically underweight microcaps," says Mark Matson of Matson Money Advisors in Mason, Ohio. He's given some of his clients' portfolios as much as 15% exposure to the niche. "[Microcaps] aren't correlated [to large caps] so they can reduce the volatility of the portfolio."
Berwyn posted a loss of 27.1% last year, a poor performance but 10 percentage points ahead of its typical competitor. It pulled that off by avoiding firms with excessive debt like financials, according to Morningstar analyst Greg Carlson. The fund is off to a slow start in 2009 with a 4.2% loss through Thursday. But over the last decade it has returned an average annual 6.1%, better than half of its competitors.
We usually don't dwell on funds that don't make our cuts. But with just one finalist this week we thought we should mention a few offerings that missed inclusion. Bridgeway Ultra-Small Company Market (BRSIX) and Perritt MicroCap Opportunities (PRCGX) are run by two firms with long histories of investing in this space. Bridgeway had a terrible 2008, but has a much better long-term track record. As for the Perritt fund, all those fans of the egg business should take notice: It happens to be one of the few funds we found that had a position in Cal-Maine.
The Criteria: We searched for equity funds with portfolios that had a median market cap under $500 million. The funds were open to new money, required a minimum investment under $5,000 and charged an annual expense ratio less than 1.5%. The funds also had to have track records over the trailing three- and five-year time periods that put them in the top 40% of their peer group.
| Ticker | Name | Year-to-Date Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | 10-Year Average Annual Return (%) | Median Market Cap (In Millions) | Expense Ratio (%) |
|---|---|---|---|---|---|---|---|
| Source: Lipper Note: Data as of May 21, 2009 |
|||||||
| BERWX | Berwyn | -4.22 | -10.75 | -0.16 | 5.84 | 437 | 1.29 |
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Small Venture, Big Gain: 5 Stocks in Single Digits May 20, 2009
Posted by Jack Hough in : Uncategorized , comments closedConsider two stocks, identical in all respects save one: The first sells for $25 a share and the second for $3. Which should stock buyers prefer?
Versed investors will likely say price alone means nothing, but new evidence suggests the lower-price stock is likely to outperform.
Share price can be an arbitrary thing, since managers can adjust it anytime they like through stock splits and the opposite, called reverse stock splits. More telling is stock market value, or the share price times the number of shares outstanding. For example, Citigroup (C) sells for $3 and change per share and Capella Education (CPLA), more than $50 a share. But multiply the prices by the number of shares outstanding, and you find the bank is valued at more than $20 billion and the online school less than $1 billion.
If share price is truly irrelevant, though, why do companies split their stocks? Further, why are stock prices so low? A 2006 study showed that the average stock price had remained about $30 since the Great Depression. Prices of consumer goods have inflated more than tenfold over the same span. If stock prices had done likewise, most stocks would today resemble Google (GOOG), which hasn’t split in its five years of trading and sells for more than $380 a share. For some reason, managers, who understandably strive to increase their stock market values, also seem keen on keeping stock prices low.
A new study suggests why: Low-price stocks outperform high-price ones, all thing equal. Chensheng Lu, a London hedge fund manager, and Soosung Hwang, a finance professor at Korea’s Sungkyunkwan University, studied stock price and return data for 81 years ended 2006. They found that low-price stocks (less than $5 a share) outperformed high-price ones (more than $20) by 0.83 percentage points a month, or 10 percentage points a year. Results are less extreme, but perhaps more relevant, for the period after 1963, since the year before American Stock Exchange and Nasdaq stocks were added to the data set, and the number of low-price stocks rose sharply. During that period, low-price stocks beat high-price ones by 0.53 percentage points a month, or just over six percentage points a year. These results, I should note, are detailed in a paper that has been in circulation for several months, but is too new to have been submitted for publication in a peer-reviewed journal.
Lu and Hwang attribute the results to nominal price illusion, a term researchers use for how investors are fooled by low prices. In the case of my two nearly identical stocks, a 20% increase for each would tack $5 onto the $25 one but just 60 cents onto the $3 one, making the price gap larger. One seems to be outpacing the other, even if price/earnings ratios rise in tandem. Eventually, investors swap the higher-priced stock for the lower-priced one. Managers, perhaps knowing this intuitively, call for splits when prices grow unfashionably high.
Investors should use caution in trying to put this information to work in their portfolios. While low-priced stocks seem to outperform as a group, previous studies have shown they’re also at greater risk for exchange delisting. Those who delve into single digits should pay careful attention to debt levels, since low prices can be a sign of financial distress. Investors who aren’t handy with financial statements can turn to mutual funds that load up on low-price stocks. I have a strong bias against actively managed mutual funds, since studies show most perform poorly. That noted, the Fidelity Low-Priced Stock Fund (FLPSX) has returned 8.6% a year over 10 years through April, vs. 2.5% a year for the Russell 2000. That’s after yearly fund expenses of just over 0.8%.
Two more points to consider. In the aforementioned study, low-priced stocks showed especially strong performance around January. Nimble traders seeking maximum profits might want to shop toward the end of the year and sell by spring. Second, a plunge in stock prices over the past year has made low stock prices less novel. The average share price among S&P 500 companies at the end of 2006 was $51. Today it’s $31. About 11% of members trade in single digits. It’s not yet clear how this swelling of the ranks of cheap stocks will affect their relative performance.
Listed below are stocks priced in single digits which are attached to companies with at least $300 million in yearly sales, modest price/earnings ratios, manageable debt levels and decent prospects for growth.
| Company | Ticker | Industry | Share Price | Sales ($mil.) | Price Change, 52 Weeks (%) | Forward P/E |
|---|---|---|---|---|---|---|
| Data as of May 19, 2009 | ||||||
| American Apparel | APP | Clothing | 5.47 | 545 | -27 | 15 |
| Bioscrip | BIOS | Specialized Health Services | 3.58 | 1400 | -17 | 12 |
| Cal Dive International | DVR | Oil & Gas Services | 9.12 | 919 | -35 | 10 |
| Flextronics International | FLEX | Printed Circuit Boards | 3.69 | 33141 | -66 | 13 |
| Sara Lee | SLE | Packaged Food | 9.5 | 13224 | -32 | 12 |
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5 Small Companies Boosting Dividends May 19, 2009
Posted by Jack Hough in : Uncategorized , comments closedPlenty of company announcements can cause stock prices to rise: big contract wins, important drug approvals and so on. But most good news is priced into shares as quickly as professional investors can do the math. For ordinary investors to profit from news, they need something that pushes stock prices more gradually. They need what researchers call drift.
Drift is a market-beating rise in share prices that occurs gradually over several months or even years after the public learns of new information. A handful of mostly mundane phenomena have been shown to reliably produce it. Upside earnings surprises are probably the most-cited example (“post-earnings announcement drift”), and one that this column has covered several times. But dividend increases cause drift, too. The results are especially strong for small-company stocks.
One study, published in 2003 in Applied Economics, looked at 27 years of dividend changes. It found that companies that increased payments showed evidence of drift for four years afterward, outperforming the broad market by a total of 8.6 percentage points. Only about 30% of the drift was concentrated in the first year. Small and midsize companies showed much greater drift, beating the market by 11.5 and 8.8 percentage points, respectively, over four years. (Shares of companies that cut dividends reacted negatively and more strongly, which is no surprise given that cuts tend to be more than three times as large as increases.)
At the moment, dividend increases should be especially prized. Standard and Poor’s reports that the first quarter of 2009 was the worst for dividends since its record-keeping began in 1955. Within the broad market, there were 367 decreases versus 83 the year before and 17 the year before that. Against such a bleak background, a payment increase signals financial strength, confidence and an ability to weather an economic downturn—in addition to the likelihood of handsome returns to come.
Below are listed five companies selected from the S&P MidCap 400 and SmallCap 600 indexes. Each has increased its dividend payments for at least 10 years running, and has a modest stock valuation and growing or stable earnings.
Church & Dwight (CHD) stock, long recommended by this column, has gained 44% over the past three years, while the broad stock market has lost about 30%. The company’s products include Arm & Hammer baking soda, Orange Glo cleaners, First Response pregnancy tests and Trojan condoms—household and personal items that aren’t especially sensitive to economic lulls. Sales and profits for the company are seen rising this year and next. Management should be a little more generous with dividends, though. Payments have increased regularly, but they’ve lagged well behind profits and the share price, so the company will likely pay out just 11% or so of profits this year, and shares now yield less than 1%.
Ross Stores (ROST) is a rarity among clothing chains in that its sales and profits are increasing. This column recommended the stock in January 2007. It’s up 15% since then, which means it has beaten the broad market by more than 50 percentage points. Ross’s motto is Dress for Less; like TJ Maxx, it uses opportunistic merchandising, scooping up overstocks from other chains or cancelled orders from manufacturers, and scoring deep discounts in the process. A plunge in consumer spending has left plenty of excess clothing for Ross to choose from, while a shift in shopper preference toward discount chains has kept traffic strong.
| COMPANY | TICKER | Industry | Share Price ($) | Forward P/E | Yield (%) |
|---|---|---|---|---|---|
| Data as of May 18, 2009 | |||||
| Ross Stores | ROST | Clothing Stores | 35.19 | 14 | 1.3 |
| Owens & Minor | OMI | Healthcare Supplies | 34.07 | 13 | 2.7 |
| Beckman Coulter | BEC | Healthcare Equipment | 52.43 | 14 | 1.3 |
| Church & Dwight | CHD | Household Products | 52.8 | 16 | 0.7 |
| Vectren | VVC | Utilities | 21.74 | 12 | 6.2 |
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7 Equity Funds on the Comeback Trail May 15, 2009
Posted by Jack Hough in : Uncategorized , comments closedOne lesson that investors have learned the last 18 months is that the economic downturn didn't discriminate between good funds and bad funds -- every offering seemed to take a beating.
Recently, though, we've seen some fund managers dust themselves off and get on the comeback trail. These funds were in the basement of their peer groups during 2008, but now find themselves leading the pack over the trailing three-month period. That's not exactly enough time to proclaim a complete turnaround -- but the gains are large enough that investors are starting to take notice.
This week we searched for equity funds that were in the bottom 25% of their Morningstar categories during 2008. Then we looked to see which of those funds were in the top 25% of those same groups in 2009. We also added in fee criteria and favored funds whose parent companies have good reputations and whose managers have a history of posting decent performance. Below are seven funds we think are back on the right track.
Fund managers may take issue with us proclaiming they're in turnaround mode. After all, one year or three months doesn't make or break a fund. Indeed, reports have shown that every fund manager who outperforms inevitably lags his or her benchmark at some point, too. That said, it does pay to see how funds manage in times of crisis and, more importantly, it's also smart to see how their managers steered them out of the situation.
If you take a quick look at the table you will see that these funds are easily beating the broad market. There is a simple, partial explanation for that rise. The Dow Jones Industrial Average has gained more than 1,900 points since bottoming out at 6440 during trading on March 9. According to Lipper, the fund-data tracking company, over the last three months through Thursday, every broad-focused equity fund category is outpacing the average S&P 500 index fund's 7.5% gain. Good stock picking could account for some of that performance. But also keep in mind that the 30% run-up in the broad market has essentially lifted all boats.
The big question is whether this run is sustainable. The increase in stocks was spurred by a number of factors: A spotty earnings season that was poor but not as bad as originally expected; the release of bank stress test results that showed none of the country's big institutions would fail (although some needed to raise more cash); and economic data that seemed to shift from positive to negative depending on the day of the week. All that added up to a perfect environment for speculators -- not exactly a great foundation to build on.
"We are more bullish than we were at the end of the year," says Paul Ahern, senior vice president at Wealth Trust-Arizona. But, he adds, "we fully expect some profit taking heading into the summer."
That risk led us to add another layer to our screen. To truly determine if a fund can pull off a dramatic turnaround, it helps to see how it did coming out of other downturns. So we also went back to the 2002 bear market to see how funds did during the following year. The offerings on the table below all outpaced the broad market during 2003.
The Hodges fund (HDPMX) lost 49.5% last year vs. roughly a 37% drop for the S&P 500. However, during the trailing three-month period it's up 12.4%, almost four percentage points ahead of that same benchmark. The fund performed in a similar manner during the previous bear market: In 2002 it lost 26.3% but then came roaring back with an 80% gain during 2003. Don and Craig Hodges, the father-and-son team that runs the fund, use a simple rule in these situations: Buy what was strong going into the initial downturn because those stocks will soar sooner when things improve. The duo is also pairing holdings in the fund in order to concentrate on their best ideas. They've done well recently with stocks like Transocean (RIG), Chesapeake Energy (CHK) and Gamestop (GME).
The Criteria: The equity funds on our table were in the bottom 25% of their Lipper peer groups during 2008, but in the top 25% of those same categories so far in 2009. They are open to new money, require a minimum investment under $5,000 and charge an annual expense ratio under 1.5%. We also favored funds whose parent companies have good reputations with financial advisers and whose managers have proven track records. We did not include load funds.
| Fund | Ticker | 3-Month Return (%) | 2008 Return (%) | 2002 Return (%) |
|
|---|---|---|---|---|---|
| Source: Morningstar Note: Data as of May 14, 2009 | |||||
| Croft Value | CLVFX | 14.6 | -42.9 | -25.8 | |
| Dodge & Cox Stock | DODGX | 13.4 | -43.3 | -10.5 | |
| Hartford Capital Appreciation | ITHAX | 18.4 | -46.1 | -22.9 | |
| Hodges | HDPMX | 12.4 | -49.5 | -26.3 | |
| Janus Overseas | JAOSX | 26.4 | -52.8 | -23.9 | |
| Marsico 21st Century | MXXIX | 11.5 | -45.2 | -10.5 | |
| Vanguard Windsor | VWNDX | 14.0 | -41.1 | -22.3 | |
| Vanguard S&P 500 |
| 8.8 | -37.0 | -22.2 | |
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5 Stocks With Good Numbers in a Grim Quarter May 13, 2009
Posted by Jack Hough in : Uncategorized , comments closedThis earnings season, investors got good news early and grim news late, it seems. Three weeks ago, when only 108 members of the S&P 500-stock index had reported results, Standard & Poor’s said earnings were tracking 20% ahead of estimates. Friday, with numbers in from 425 companies, S&P said earnings are running 18% behind estimates. Wednesday, with numbers in from 455 companies, S&P said earnings were running 25% behind estimates.
For now, just 37% of companies have beaten earnings estimates. Fewer have also topped sales forecasts and just a handful have done so while growing at a decent pace. More on them in a moment.
Upside earnings surprises are an important indicator for stock investors. It’s not just that stock prices often jump right away when companies announce better-than-expected earnings. Studies show they also tend to creep higher for several months afterward, outperforming the broad market in the process. Researchers call that post-earnings announcement drift.
PEAD boosts shares of some estimate-beaters more than others, though. A 2006 study published in Financial Analysts Journal looked at thousands of earnings reports from 1987 to 2003. The top 20% in terms of upside earnings surprises beat the broad market by three percentage points over the following six months, it found. The top 20% in terms of sales surprises beat the market by 2.6 percentage points over the same period. But a cross-section of the two — companies that far surpassed both sales and earnings estimates — trounced the market by 5.3 percentage points over six months.
Companies that beat earnings forecasts but disappoint on sales might simply be cutting costs to please Wall Street. The trouble is, cost-cutters eventually run out of ways to save. And sometimes management frugality can hurt shareholders. A recent study found that companies that top earnings forecasts by slashing research and marketing budgets tend to underperform the broad stock market over the long term.
One way to read the recent souring of earnings season is to conclude that the surge in stocks since March is unwarranted, and to raise cash. (On Tuesday, this column considered whether stock investors are headed for a third bubble.) Investors who remain convinced the market will continue climbing might wish to favor companies that recently topped financial forecasts. Banks beat low expectations early in the season, but energy companies have since missed forecasts by a wide margin. Retailers report over the next several days.
I searched among S&P 500 members that have already reported quarterly results for ones that increased both sales and operating earnings per share (as measured by S&P) by at least 10% apiece vs. a year ago. I also looked for positive surprises in both sales and earnings per share (as measured by Thomson Financial). Just 16 companies met those demands, a couple of which I ignored because they benefitted from unusual windfalls. Below are the five survivors with the biggest sales surprises.
| Ticker | Company | Share Price | Quarterly Operating EPS Growth (%) | EPS Surprise (%) | Quarterly Sales Growth (%) | Sales Surprise (%) |
|---|---|---|---|---|---|---|
| EP | El Paso | 8.7 | 121.74 | 28 | 16.94 | 18 |
| HCBK | Hudson City Bancorp | 12.83 | 44.44 | 4 | 17.89 | 4 |
| AMZN | Amazon.com | 77.93 | 20.59 | 33 | 18.23 | 3 |
| MHS | Medco Health Solutions | 45.98 | 15.69 | 1 | 14.43 | 8 |
| PGN | Progress Energy | 35.77 | 13.79 | 8 | 18.2 | 13 |
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22 Funds That Charge Rock-Bottom Fees May 8, 2009
Posted by Jack Hough in : Uncategorized , comments closedWhen it was launched in 1976, the Vanguard 500 index fund (VFINX) – the first of its kind to offer investors market returns at a low price – sparked a heated debate that still simmers in the mutual fund world: Which is better, active or passive management?
Regardless of which camp you’re in, it's hard to argue with the Vanguard 500 fund's success. Since its inception, it has returned an average annual 9.8% while charging some of the lowest fees in the business. Indeed, depending on the share class, the annual expenses run as little at $9 a year for every $1,000 invested. The average actively managed equity fund can charge over 10 times that amount.
Even as the investing world gets sidetracked by "stress tests," dismal earnings and banking woes, it’s still important to remember the most important element of fund-picking: low fees. There are plenty of things that impact fund performance: good (or bad) stock picking, a well-honed (or flawed) investing strategy and the larger economic picture. But fees also play a part -- and there is a powerful incentive to pay attention to them. Over the life of a retirement account, expenses can eat up tens of thousands of dollars.
This week, the SmartMoney.com fund screen looked for funds that had the lowest annual expense ratios in their respective Lipper classifications. That last detail is an important one. If we simply screened for the lowest annual expense ratios, regardless of classification, the table below would be filled with S&P 500 index funds. That's not our goal. Our method finds the cheapest small-cap fund, the cheapest health-care sector fund and the cheapest international offering. We also mixed in performance data. After all, what good are low fees if returns are poor? We ultimately found 22 funds.
Mutual fund fees and how they relate to performance has been widely studied in the academic world. Mark Carhart, a former professor at the University of Southern California, produced a definitive study in 1997. In "On Persistence in Mutual Fund Performance" he tried to nail down exactly what impacts fund performance year after year. One conclusion: "The investment costs of expense ratios, transaction costs and load fees all have a direct, negative impact on performance," he wrote.
Some investors -- especially those who believe in a manager's ability to beat the market -- will take issue with that as a blanket statement. If you were fortunate enough to invest in CGM Focus (CGMFX) heading into 2007 you would have enjoyed an 80% return by the end of the year. That makes paying its 0.97% annual expense ratio much more palatable. However, investors also had to be smart enough to take some profits after that run-up. The fund dropped 48% in 2008.
Investors can also be rewarded in another way for seeking out low-fee funds. If they're willing to move lump sums of money into certain offerings, fund companies will give them a discount. Vanguard offers its Admiral share class to investors with over $100,000 in a fund or to those with $50,000 and 10 years worth of ownership. The share class slashes fees on some funds by anywhere from 18% to 50%. Fidelity's Advantage share class also kicks in with a $100,000 investment.
Of course, in addition to low fees, we want to see a good performance. We offer up our finalists with one caveat: Ailing banks, poor earnings, government programs, falling house prices -- the list of things that can impact stocks is long and varied and won't dissipate any time soon. "Who knows how this stuff will play out," says David Hefty, co-founder of Cornerstone Wealth Management in Auburn, Ind. So while we think the funds below are worthy of consideration, investors of all stripes should prepare for tough times ahead.
The Criteria: The equity funds on our list have annual expense ratios that are in the lowest 5% of their respective Lipper fund classifications. They are open to new money and don't charge a sales load. We waived our usual $5,000 minimum investment criteria since some fund companies offer discounts on larger positions. The funds had three- and five-year performance track records that put them in the top 20% of their peer groups. Finally, we did not consider target date, asset allocation or balanced offerings of funds of funds since they get their own screens at other times during the year.
| Ticker | Name | Assets ($ Millions) | YTD Return (%) | 3-Year Average Annual Return (%) | 5-Year Average Annual Return (%) | Expense Ratio (%) |
|---|---|---|---|---|---|---|
| * Sister share class offers cheaper expense ratio ** Instutional share class requires a $50,000 minimum investment *** Admiral share class |
||||||
| BUFSX | Buffalo Small Cap | 1256 | 13.5 | -6.64 | 1.86 | 1.00 |
| SPFIX | California Investment Trust S&P 500 | 54 | 1.46 | -9.88 | -1.84 | 0.36 |
| CGMRX | CGM Realty | 701 | -9.50 | -10.83 | 8.77 | 0.86 |
| GSFTX | Columbia Dividend Income | 777 | -2.81 | -5.59 | 2.00 | 0.80 |
| FSAGX | Fidelity Select Gold | 2247 | 6.84 | 0.82 | 18.95 | 0.85 |
| FSMEX | Fidelity Select Medical Equip. & Systems | 1029 | 5.26 | -0.26 | 2.81 | 0.88 |
| FSCSX | Fidelity Select Software & Computer Services | 538 | 11.68 | -2.73 | 1.59 | 0.86 |
| FWRLX | Fidelity Select Wireless | 237 | 35.66 | -4.89 | 6.77 | 0.91 |
| FSMKX | Fidelity Spartan S&P 500 * | 4829 | 1.47 | -9.97 | -1.84 | 0.10 |
| HAINX | Harbor International ** | 12577 | 2.69 | -8.23 | 6.67 | 0.79 |
| LEXCX | ING Corporate Leaders | 313 | -4.67 | -6.27 | 3.31 | 0.51 |
| JAENX | Janus Enterprise | 1153 | 12.23 | -6.93 | 2.81 | 0.92 |
| JAOSX | Janus Overseas | 3920 | 33.15 | -3.32 | 13.01 | 0.90 |
| MCHFX | Matthews China | 854 | 25.52 | 11.76 | 15.99 | 1.23 |
| SWPPX | Schwab S&P 500 | 2055 | 1.36 | -9.84 | -1.77 | 0.19 |
| PRHSX | T. Rowe Price Health Sciences | 1659 | 1.21 | -2.44 | 2.46 | 0.86 |
| RPMGX | T. Rowe Price Mid Cap Growth | 9284 | 13.8 | -7.21 | 2.93 | 0.82 |
| PRMTX | T Rowe Price Media & Telecommunications | 870 | 20.0 | -4.28 | 7.47 | 0.90 |
| VFINX | Vanguard 500 * | 34504 | 1.43 | -9.99 | -1.88 | 0.16 |
| VDIGX | Vanguard Dividend Growth | 1745 | 0.18 | -3.96 | 2.05 | 0.36 |
| VWILX | Vanguard International Growth *** | 2672 | 6.93 | -10.14 | 3.34 | 0.28 |
| VWENX | Vanguard Wellington *** | 13846 | 1.84 | -2.38 | 3.46 | 0.18 |
- Fund Classification = *
- 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
- Expense Ratio <= bottom 15% of classification
- Load Fund (type) = No Load
- Open to New Investors = Yes
- Total Net Assets ($ millions) >= 50
- Year-to-Date return = Display Only
* Screen does not include fixed income, fund of funds, target date or balanced offerings.
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Which Country’s Stocks Are Cheapest? May 8, 2009
Posted by Jack Hough in : Uncategorized , comments closedAmerica’s 39% stock plunge last year was grizzly, but plenty of nations did worse. China lost 65% and Russia 72%. World stocks have rallied since March, and some of the most battered markets have gotten the biggest lifts. So where do prices stand?
The chart below offers a snapshot. Price/earnings ratios are listed for major markets, or at least, for exchange-traded funds that target those markets. They’re based on trailing earnings, which some might think unfair, since earnings plunged over the past year. But in the U.S., at least, corporate profits have reverted toward their long-term average as a percent of the economy, not away from it.
Growth rates for gross domestic product are listed, too. These would have misled if I had used either this year’s miserable forecasts or bubbly numbers from before the bust. I took a six-year average of numbers published by the Economist Intelligence Unit. One of those years is already booked (2008). The rest are just forecasts, and I suspect like all forecasts, the further out they go the less reliable they become. However, they’re fine for rough analysis.
In the final column I simply discounted the P/Es by the GDP growth rates to make growers look properly better and shrinkers look worse. (With stocks, it’s common to do the same thing by dividing P/Es by growth projections, but with growth numbers this small and varied that would have proved messy.)
The results suggest a few things. Three of the four BRIC countries -- Brazil, Russia, India -- still look like good deals. China has gotten pricey. Canada has had a fine run since March but now seems priced on par with the U.S. Japan, where stocks today fetch lower prices than they did 25 years ago, still isn’t especially cheap.
| Country | ETF Ticker | Gain Since Mar. 31 (%) | Estimated P/E* | Real GDP Growth** | P/E-GDP Growth Rate |
|---|---|---|---|---|---|
| * From ETF sponsors, adjusted for price changes since last reported ** Average for 2008-2013, Economist Intelligence Unit Data as of May 7, 2009 unless otherwise stated |
|||||
| Russia | RSX | 43.8 | 10.4 | 3.0 | 7.4 |
| India | PIN | 24.3 | 15.5 | 6.9 | 8.6 |
| Turkey | TUR | 36.3 | 11.4 | 1.6 | 9.8 |
| Spain | EWP | 20.4 | 11.1 | 0.3 | 10.8 |
| Brazil | EWZ | 33.0 | 16.2 | 3.1 | 13.1 |
| United Kingdom | EWU | 18.9 | 13.5 | -0.1 | 13.6 |
| Singapore | EWS | 38.7 | 13.7 | 0.1 | 13.6 |
| France | EWQ | 19.6 | 14.7 | 0.3 | 14.4 |
| Chile | ECH | 13.3 | 17.5 | 2.8 | 14.7 |
| Korea | EWY | 27.5 | 16.4 | 1.0 | 15.4 |
| Italy | EWI | 24.9 | 14.9 | -0.6 | 15.5 |
| Hong Kong | EWH | 26.0 | 17.1 | 1.4 | 15.7 |
| China | FXI | 22.4 | 24.0 | 8.0 | 16.0 |
| United States | VTI | 15.4 | 17.1 | 0.7 | 16.4 |
| Canada | EWC | 29.4 | 17.4 | 0.9 | 16.5 |
| Taiwan | EWT | 28.6 | 17.8 | 0.8 | 17.0 |
| Mexico | EWW | 30.5 | 19.1 | 1.7 | 17.4 |
| Germany | EWG | 21.3 | 20.2 | -0.1 | 20.3 |
| Japan | EWJ | 11.9 | 20.3 | -0.5 | 20.8 |
SMARTMONEY ® Layout and look and feel of SmartMoney.com are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.