Advanced Micro Devices (AMD) was upgraded by Sterne Agee to Buy from Neutral and with a target price of $15. Also, ThinkEquity named AMD as one of its ten top technology picks for 2011. We highlighted AMD as a long idea to clients in our weekly update issued on January 23 and added it to our model portfolios a week later.
Emerson Electric Co. (EMR) a well run $45b market cap Industrial sector company, announced today it would increase its workforce by 7000 to 137,000 people worldwide by the end of the year.
To us, this is another positive anecdotal piece of information regarding the possibility for an ongoing corporate recovery, market PE multiple expansion and a falling unemployment rate. This is extremely positive anecdotal news to us.
A company like EMR is not going to significantly expand its workforce unless it believes it will be able to sustain operating momentum as measured by cash flow growth and ROIC expansion.
As long as companies like EMR are able to support ongoing expansion in ROIC, market PE multiples will expand. This could indicates that a lot of the operating efficiencies wrung out over the last few quarters go well beyond labor cuts. If true, America will have its cake and eat it too.
Ascendere Model Portfolio Daily Update: February 1, 2011
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JP Morgan initiated coverage of Ares Capital Corporation (ARCC) today with an Overweight rating and $19 price target.
Williams-Sonoma Inc. (WSM) approved a $125 million stock repurchase program today after completing a $65m repurchase program previously announced in September 2010.
We expected a positive first day of monthly trading, as we noted yesterday, and were not disappointed. The S&P 500 closed up 1.67% and our theoretical long models finished up 2.22%. [emember_protected] led by a 5.50% gain in Westlake Chemical Corp. (WLK) and a 4.98% gain in Advanced Micro Devices Inc. (AMD), with our worst performer United Continental Holdings, Inc. (UAL) losing -0.55% on the day. While we are especially pleased with our addition of AMD and SNDK to our model portfolios since they reflect the power of focusing on fundamentals and relative value in the face of price volatility and general skittishness, we are a bit more so with our holding in WLK.
WLK was our worst performer last month, down -10.93% in January, but today it gained more than half of that loss back. It is another anecdotal data point that bolsters our conviction that there is significant opportunity in high-quality stocks that have declined for no apparent fundamental reason. When a stock declines with no significant change to its relative fundamental rankings, it can indicate that simple noise is depressing the stock and nothing else. While it can be the case that an unexpected stock price decline can presage fundamental weakness, it is difficult to be increasingly sanguine about a stock’s prospects if on a relative basis the reported fundamentals are strong relative to an even weaker stock price.
Another example that is still playing out is in our opinion apparent with Fossil, Inc. (FOSL), which reports on February 15. The stock has declined from its highs in recent weeks due to margin compression fears; we think these fears are unfounded. Even if margins compress, this company is likely to report expanding ROIC, which should be the true underlying measure of earnings quality and hence potential multiple expansion. [/emember_protected]
Lear Corp. (LEA) reported a better than expected quarter today but provided guidance unchanged relative to its January 11 Deutsche Bank conference presentation. Consensus is currently at the high end of the guided range which was not raised, so the tepid market reaction is probably reflective of this. In our opinion, it’s tough to keep a lid on fundamental momentum in whichever direction, so we would expect higher revisions to guidance to be made over the course of the year. In other words, we are accusing Lear of borrowing from Apple Inc.’s (AAPL) investor relations playbook. Don’t be fooled.
We are including a more-detailed model than usual below. [emember_protected] The model has not populated the data point for Provisions and Extraordinary items yet. From our perspective as a generalists covering more than 3000 stocks, this is largely irrelevant to us. Yes, we would like to have the best and updated data available from our institutional data provider, but for the purposes of our approach — which is to focus on relative fundamental trends, Lear’s story is still a strong and improving one. We share this example of a possibly incomplete Economic Profit model on Lear to demonstrate how as a single-employee shop we are able to generate a large number of actionable and valuable stock ideas with ease and with sometimes incomplete information. We are a complement to industry experts and sell side specialists, not a competitor. Our edge is our consistent and sophisticated modeling process, leveraged by institutional data feeds, technology, experience and intuition. [/emember_protected]
About this report
This daily update is a supplement to a monthly report issued on January 30, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”). For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live. See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.
During 2010, the S&P 500 finished up the first day of any month 9 out of 12 times, and this continued in January 2011 for an average gain of 0.95%. The cumulative first-day-of-the-month gain in the S&P 500 in 2010 was 11.16% and 12.29% if you add the January 3, 2011 1.13% positive return.
Looking at a combination of backtest data and realtime data, our Opportunistic Long Model portfolio was 10 out of 12 times in 2010, and again in January 2011 for an average first-day-of-the-month theoretical gain of 1.42%. The cumulative return of first-day periods was 17.06% for 2010 (excluding any kind of costs).
The point? These first day surges are probably created by the simple back office mechanics of portfolio rebalancing in an increasingly short-term and quantitative-driven market. Barring the arrival of a North Korean submarine in the Hudson River or similar, we are starting to think that it would not be a surprise not to finish up on the first day of trading in any of the months ahead.
Model Portfolio Daily Update: January 31, 2011
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Our 25-stock theoretical long portfolio issued to clients on December 31 presaged 45 major positive upgrades by more than 20 sell side firms. (A real portfolio model based in part on our theoretical models is available on Covestor Ltd.)
In other words, within a single day on December 31 our firm issued a report with more actionable relevance, value and foresight than a disparate team of 20+ sell side analysts and their ~40+ associates produced over the course of the entire month of January.
Despite our prescient stock picking, our theoretical Opportunistic Long Only model portfolio finished up 1.59% for the month versus 2.28% for the S&P 500. TRW Automotive (TRW) was our best performing holding, up 13.21% and Westlake Chemical Corp. (WLK) was our worst at -10.93%.
Separately, we are assuming today’s closing prices were obtained for the newly rebalanced portfolio models, which were published yesterday. Our long models now assume 32 stock positions versus 25 last month. We will begin tracking returns of the 32-stock portfolio on February 1 (see our previously issued monthly report for details). We are doing this to avoid the huge surges in stock prices we have increasingly been seeing on the first day of the month.
To go back to the theme of presaging sell side analysts, we provide below non-comprehensive list of sell side actions on stocks that have been in our model portfolios since at least 12/31/2010:
1/27/2011 — TRW Automotive (TRW) — Goldman Sachs upgraded to Buy from Neutral and its price target was also raised to $77 from $60, based on valuation, above average growth, and low expectations .
1/27/2011 — RPC, Inc. (RES) – Gabelli upgraded the stock to Buy from Hold.
1/27/2011 — East West Bancorp (EWBC) – Cantor Fitzgerald increased its price target on the stock to $26 from $22.
1/27/2011 — United Continental Holdings (UAL) — was upgraded to Buy from Hold at Dahlman Rose.
1/26/2011 — East West Bancorp Inc. (EWBC) — Credit Suisse raised its price target to $22 from $20, RBC raised its price target to $23 from $20, Sandler O’Neil raised its target to $23 from $20 and Citigroup raised it to $22 from $20.
1/26/2011 — United Continental Holdings, Inc. (UAL) — Morgan Stanley lists the stock as a long Research Tactical idea.
1/25/2011 — Lam Research Corp. (LRCX) –UBS raises LRCX price target to $60 from $59, and raises targets for AMAT, KLAC, NLVS, VSEA and TER as well.
1/25/2011 — LyondellBasell Industries NV (LYB) — UBS initiates with a Buy rating and $42 price target.
1/25/2011 — Huntsman Corporation (HUN) – UBS initiates the stock with a Buy rating and $21 price target.
1/24/2011 — Waddell & Reed Financial, Inc. (WDR) — Bank of America/Merrill Lynch upgraded the stock to Buy from Neutral and its price target was raised to $44 from $35. According to TheFlyOnTheWall.com, “the firm believes the company’s operating leverage is accelerating and that it should benefit from a rotation into equities.”
1/21/2011 — Parker-Hannifin Corp (PH) — Citigroup raises target to $100 from $94, citing recent sell off as a buying opportunity.
1/20/2011 — Macy’s, Inc. (M) – Credit Suisse names the stock its top pick for 2011 after previously upgrading on 1/11.
1/20/2011 — TRW Automotive Holdings Corp. (TRW) — Soleil raised its price target to $71 from $59 “to reflect higher build assumptions and new business wins.”
1/19/2011 — Avnet Inc. (AVT) — UBS raises price target to $42 from $40.
1/19/2011 — Waddell & Reed Financial, Inc. (WDR) — Stifel Nicolaus raises rating to Buy from Hold
1/18/2011 — Avnet Inc. (AVT) — Longbow upgrades to Buy from Neutral with a $41 price target.
1/14/2011 — Lam Research Corp. (LRCX) –Deutsche Bank upgrades to Buy from Hold.
1/14/2011 — Freeport McMoRan Copper & Gold (FCX) — Dahlman Rose raises price target to $160 from $125.
1/14/2011 — Lam Research Corp. (LRCX) – Bank of America/Merrill Lynch raises price target to $50 from $40.
1/13/2011 — Parker Hannifin Corp (PH) — JP Morgan upgrades the stock to Overweight from Neutral.
1/13/2011 — Huntsman (HUN) — Jefferies raises price target to $21 from $18 maintaining Buy rating.
1/13/2011 — Albemarle Corp. (ALB) – Jefferies raises price target to $75 from $61 and maintains Buy rating.
1/12/2011 –Albemarle Corp. (ALB) — named a long Tactical Research Idea by Morgan Stanley.
1/12/2011 — Lear Corp. (LEA) — Credit Suisse raises Lear target price to $142 from $133 and maintains Outperform rating.
1/12/2011 — PNC Financial Services Group Inc (PNC) –Wells Fargo upgrades bank sector to Overweight from Neutral and names PNC Financial one of five bank stocks (BAC, JPM, GS, CMA, PNC) as a top idea for 2011.
1/11/2011 — Waddell & Reed Financial, Inc. (WDR) — Barclays raises price target to $43 from $41.
1/11/2011 — T. Rowe Price Group, Inc. (TROW) — Barclays raises price target to $71 from $69.
1/11/2011 — Macy’s, Inc. (M) – Credit Suisse upgrades to Outperform from Neutral and raised its price target to $27 from $25. The analyst expects shareholders to benefit from the ongoing pay down of debt.
1/10/2011 — Freeport McMoRan Copper & Gold (FCX) – Stifel Nicolaus upgraded the stock to Buy from Hold based on expected leverage to rising commodity prices.
1/10/2011 — United Continental (UAL) – Soleil raised estimates and its price target for UAL to $35 from $33.
1/10/2011 — LyondellBasell (LYB) – BWS Financial raised its price target for LYB to $40 from $35. Also, FMR Corp. reported a 10.18% passive stake in the company.
1/10/2011 — Lam Research (LRCX) – Morgan Stanley added the name as a long Research Tactical Idea.
1/10/2011 — Lear Corp. (LEA) — Barclays upgraded the stock to Overweight from Equal weight, and increased its stock price target to $123 from $94.
1/10/2011 — Westlake Chemical Corp. (WLK) — Goldman Sachs upgrades stock to Neutral from Sell and removes from its Americas Sell List. According to Reuters, Goldman upgraded raised a number of ratings and price targets in the chemical industry given the group’s “improved outlook, higher growth prospects and attractive valuation” and that the group “…should see another year of outperformance primarily driven by continued estimate increases.”
1/10/2011 — Parker-Hannifin Corporation (PH) — Goldman Sachs upgrades stock to Buy from Neutral and raises stock price target to $105 from $92.
1/10/2011 — Dover Corporation (DOV) – Goldman Sachs increased its price target to $72 from $65, removed the stock from the Conviction Buy List and kept it rated Buy.
1/7/2011 — T. Rowe Price Group, Inc. (TROW) — Deutsche Bank raises price target to $65 from $58.
1/7/2011 — East West Bancorp Inc. (EWBC) – Goldman Sachs initiated with a Buy rating and $24.50 price target.
1/7/2011 — Freeport McMoRan Copper & Gold Inc. (FCX) – Canaccord upgrades to Buy from Hold, raising target to $135 from $98.
1/6/2011 — PNC Financial Services Group Inc (PNC) — UBS names the stock a short-term Buy.
1/6/2011 — PNC Financial Services Group Inc (PNC) – Nomura initiated coverage of the stock with a Buy rating and $73 target.
About this report
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”). For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live. See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.
Proxies that we use measure cash flow growth, ROIC and fundamental quality continue to improve for many companies. We think this is a great anecdotal sign for the market in general, and despite recent market volatility and some strategist calls for a top we think the market will end up higher by the end of the year.
As a result, there are now 32 companies in a model long portfolio selected from an eligible group of 82 stocks, up from 25 stocks selected from an eligible group of 65 stocks last month. We are closing 7 positions, opening 14 positions and rebalancing 18 positions. A real model portfolio based in part on this theoretical model is available on Covestor, Ltd.
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Energy, Healthcare and Technology Showing Strong Fundamental Momentum
Very interesting to us is the surge in the number of “high-quality” Technology companies – there are now 17 high-quality stocks in our eligible list, up from 9 last month. Another sector that gets our attention is Healthcare – there are now 5 high-quality stocks up from only 1 last month. This could indicate continued favorable prospects for Tech stocks and perhaps renewed interest and sustained momentum in a number of Healthcare stocks going forward. Also, the number of eligible high-quality Energy companies is now 7, up from 3 last month.
Highest Ranking Stocks in the Long Model Portfolio
5 out of 32 stocks in the new long model get the highest possible scores in the key factors that we measure:
1) Relative Value;
2) Operating Momentum;
3) Analyst Revision Momentum; and
4) Fundamental Quality. They include the following:
[emember_protected]
TRW Automotive Holdings Company (TRW)
Freeport McMoRan Copper & Gold (FCX)
RPC Inc. (RES)
Teradyne Inc. (TER)
SanDisk Corp. (SNDK)
[/emember_protected]
Controversial Stocks
There are a few “controversial” names in the long models this month. The first is Advanced Micro Devices (AMD), a stock that has been written off by many investors as a has-been player in processor and graphics chips. While Intel (INTC) made it to our eligible list, we think that on a month-to-month basis AMD has better price appreciation potential and added it to our high-turnover model portfolio strategy. A catalyst for the stock may be the new addition of a reputable CEO.
Another “controversial” selection is [emember_protected] East West Bancorp (EWBC). This stock has been a stellar performer since first being added to our model long portfolios on 10/31/2010, moving up 22.3% over that time. It just recently reported an outstanding 4Q10, and a high-number of sell side analysts have since raised estimates and price targets for the company. [/emember_protected] This selection is controversial because it has moved beyond growth-at-a-reasonable-price (GARP) territory and into pure growth, as we define it. It scores a poor 2 out of 5 for Relative Value, but scores 5 in other key categories such as Operating Momentum, Analyst Revision Momentum and Fundamental Quality.
We normally rebalance stocks out that become too pricy by our measures, but we have noticed over the years that stocks that 1,5,5,5 and 2,5,5,5 stocks sometimes keep growing to absurd valuations. Such examples include Apple Inc. (AAPL), Netflix, Inc. (NFLX) and Chipotle Mexican Grill, Inc. (CMG). We doubt that [emember_protected] EWBC [/emember_protected] is the next Financial sector Netflix, but on the other hand we think it could work in our favor if we keep it a bit longer.
Our approach to stock selection suggested that we get rid of [emember_protected] Williams-Sonoma Inc. (WSM) [/emember_protected] and replace it with [emember_protected] Coach, Inc. (COH) [/emember_protected] instead. [emember_protected] However, there is nothing fundamentally wrong with WSM; it was just beat out slightly by COH. The last time we deferred completely to a non-fundamental measure to our model portfolio selection strategy the stock surged more than 20%. We are not making the same mistake this time and so are adding COH to our existing WSM position. [/emember_protected]
We are reluctantly getting rid of [emember_protected] Huntsman Corp (HUN) [/emember_protected] based on relative valuation concerns. [emember_protected] Like EWBC, it scores a 2 for relative value, but does not come in at the top for other key measures so it gets rebalanced out. [/emember_protected] On any price pullback it could be relatively attractive again so we would keep a close eye on this one.
We are also a bit reluctant to get rid of [emember_protected] Dover Corp (DOV) [/emember_protected] after a stellar 4Q10 report. However, on a relative basis it looks a bit weak on value and quality. It is quite possible as more companies report 4Q10 results it could find itself back within the top rankings, so we would watch this one as well. Sometimes rankings themselves can be a bit volatile, especially during earnings season. [emember_protected] A good example was our move to sell Union Pacific Corporation (UNP) and CSX Corp. (CSX) on 12/31/2010 only to be adding them back on 1/31/2011. [/emember_protected]
Dollar Neutral Strategy
Shorting low-quality stocks over the last few months has not worked very well; this is because on an absolute basis there are not very many poor fundamental companies. Virtually every company that has remained solvent has taken massive steps to improve cash flow growth and operating efficiency. In addition, as economic prospects continue to improve, these relatively unattractive companies are “surprisingly” reporting better than expected results relative to very depressed estimates and valuations. This has caused a number of “low-quality” stocks to outperform “high-quality” stocks. Investors looking to implement a hedged strategy would probably do better to short broad indices as opposed to specific stocks or groups.
The aggressive investor may also want to focus on “low-quality” stocks as potential long ideas. Adobe Systems Inc.’s (ADBE) recent price move is a good example of what can happen to “low-quality” stocks that significantly beat estimates and raise guidance.
Summary
Adhering to a systematic strategy, even if only as a partial guide to generating individual stock ideas, can in our opinion greatly enhance the odds of beating any given benchmark.
Ascendere Weekly Ranking Update: January 28, 2011
Every week, we include in this report a list of the highest quality and lowest quality stocks as defined by four key factors: 1) Relative Value; 2) Operating Momentum; 3) Analyst Revision Momentum; and 4) Fundamental Quality. At the end of each month, we take roughly 1/3 of the stocks on this list to construct our various long/short and long-only model portfolios based on real trade data. But as you can read below, there are several other ways to use this data.
This week, 81 stocks make the “high-quality” list versus 68 last week, with 26 additions and 13 deletions. 31 stocks make the “low-quality” list compared to 26 last week, with 10 additions and 5 deletions. The number of high-quality Energy, Healthcare and Technology names continue to expand. While all new additions deserve special attention, we take a special focus on SanDisk Corp. (SNDK).
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Three ways to use this newsletter:
Build your own hedge fund. Use data in this report at discretion or as an enhancement to our model portfolio strategy newsletter.
Anticipate sell side research ratings changes. It is not uncommon to find these stocks presaging changes to sell side price targets, ratings or conviction lists.
Generate relevant long-term ideas for further study. Buy and hold still does work. We do the heavy lifting and find you “high-quality” stocks; you provide the incremental research time and effort.
Examples of just a few recent sell side actions that we have presaged since December 31, 2010
Model Portfolio Daily Update: January 28, 2011
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A model short position in Cemex S.A.B. (CX) reached its stock price target and will be assumed closed at the end of trading tomorrow. [/emember_protected]
Of Note:
Look for our January 30 report in which we rebalance our model portfolios for implementation on January 31.
T. Rowe Price Group, Inc (TROW) reported 4Q10 results that were better than expected on Friday, January 28. Assets under management increased to a record level driven by cash inflows and market appreciation, driving advisory revenues up 21% for the quarter versus last year. CEO James Kennedy stated that “The firm’s long-term investment advisory results relative to our peers remain very strong, with 86% of the T. Rowe Price funds across their share classes surpassing their comparable Lipper averages…” and the firm continues to add to investment professionals, including research analysts and sales people.
Stocks declined across the board on Friday, with the S&P 500 declining -1.79%. Our theoretical Opportunistic Long Model declined -2.07%. The sell off was ostensibly driven by fears of Middle East turmoil. The sell off may or may not continue, but in our opinion just sets the market up for another buying opportunity. Companies have become overwhelming efficient at generating cash for given level of investment. From what we have read, Egyptian security forces are one of the best in the Middle East and it seems like a handover to former general Omar Suleiman, which may be a compromise acceptable by the populace, is likely to occur. Sustained chaos in Egypt in our opinion is an unlikely scenario. Even if energy prices were to rise substantially from here we would still likely see cash flow growth and ROIC expansion, thereby driving prices and PE multiples higher.
T. Rowe Price is a good case in point — ROIC by our measure has not been this high for the company since March 2007, and according to our forecasts the company could expand ROIC by another 75% over the next year.
About this report
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”). For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live. See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.
Model Portfolio Daily Update: January 27, 2011
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New Actions Required: [emember_protected] A short position in Tidewater Inc. (TDW) closed above its stop price of $57.58 and will be assumed closed at the end of trading tomorrow. A short position in ProLogis (PLD) closed above its stop price of $15.63 and will be assumed closed at the end of trading tomorrow. [/emember_protected]
As we have noted before, over the last few months it has been a better for hedged strategies to short index futures instead of individual stocks, because many relatively unattractive stocks (fundamentally speaking) are increasingly surprising to the upside as the economic backdrop improves against already depressed valuations and fundamentals.
Of Note:
The 25 stocks in our long models have in total for the month to date experienced at least 45 major positive upgrades from the sell side upgrades that we are aware of.
Today, our models experienced four positive revisions:
TRW Automotive (TRW) was upgraded to Buy from Neutral by Goldman Sachs, which also raised its price target to $77 from $60, based on valuation, above average growth, and low expectations according to TheFlyOnTheWall.com.
RPC, Inc. (RES) was upgraded to Buy from Hold by Gabelli.
East West Bancorp (EWBC) had its price target raised to $26 from $22 by Cantor Fitzgerald. United Continental Holdings (UAL) was upgraded to Buy from Hold at Dahlman Rose.
By consistently buying and holding stocks that demonstrate historical and likely ongoing improvements in returns on capital that are trading a decent relative value, investors are maximizing their chances of being “surprised” to the upside and are equipping themselves to better ignore the incessant noise that comprises financial news stories and seemingly random price action. UAL is a recent good example of this, having declined nearly 14% last month and risen by almost as much this month. Nothing significant has changed with its relative standings in our rankings. Through today at least, it remains a fundamentally solid improving company with relative value.
Avnet Inc. (AVT) reported solid quarterly results after the close today, beating in all key metrics. Revenue guidance for its next fiscal quarter ended March 2011 is now $5.95-6.55b versus current consensus of $6.198b and EPS guidance is $0.93-1.01 versus consensus of $0.94. As of today, it seems like AVT will remain a highly ranked stock in the Technology sector.
About this report
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”). For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live. See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.
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