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Acceleration In The Underperformance Of Dividend And Value Stocks

The top 20% of SPY components in Dividend and Value have lagged the benchmark for 18 months. The last few weeks have been especially harmful for them. Momentum stocks have widely outperformed. This article compares the trends of four investing styles: Value, dividend, quality and momentum. It doesn’t suggest that investors should use these simplistic models, but it shows how stocks may be influenced by cycles, not only in asset classes and sectors but also in dominant investing styles. Large groups of S&P 500 stocks selected on value, dividend and quality factors have been lagging SPY since the third quarter of 2014. This phenomenon is not limited to small groups. It can be observed in the 100 best stocks of the index in each category. These categories are defined by taking the top 20% of the S&P 500 ranked on a unique factor. The top 20% of value stocks is defined as the 100 S&P 500 stocks with the lowest price/earnings ratio (P/E). The top 20% of dividend stocks is defined as the 100 S&P 500 stocks with the highest yield. The top 20% of quality stocks is defined as the 100 S&P 500 stocks with the highest return on equity (ROE). The top 20% of momentum stocks is defined as the 100 S&P 500 stocks with the highest price increase in one year. Variations in the relative performance of such large groups of stocks on long periods are the expression of behavioral changes in the market. My aim here is to observe and quantify these changes, not to explain them. The next charts show equity curves and statistics of the four “top 20%” groups for one month. The groups are updated and equal-weighted on market opening of the first trading day every week. Dividends are reinvested. Top 20% Value: (click to enlarge) Top 20% Dividend: (click to enlarge) Top 20% Quality: (click to enlarge) Top 20% Momentum (click to enlarge) The next table gives the annualized excess return over SPY of the top 20% group for each category since 1/1/2000, then on the last 12, 6, 3 and 1 months. Annualized excess return of the top 20% stocks in… Since 2000 Last 12 months Last 6 months Last 3 months Last month Value 6.60% -7.45% -16.30% -15.30% -27.76% Dividend 4.61% -7.31% -8.93% -9.55% -32.9% Quality 3.14% -4.29% -6.31% -12.94% -5.82% Momentum 1.12% 2.82% 5.24% -7.06% 8.49% Value stocks have outperformed for 16 years but they have lagged the benchmark since June 2014. The meltdown in energy companies is an incomplete explanation: It’s accountable for less than half of the negative excess return of value stocks. The relative loss of value stocks has accelerated in the last month. Dividend stocks also have lagged for at least one year. Their underperformance has accelerated considerably in the last month. It seems that expectations of a rate hike this week have made some dividend investors more nervous. Momentum stocks have outperformed their own historical excess return for at least one year. They started to lag in the last few months, but their excess return surged again in the last weeks. The transfer of excess return from value and dividend to momentum started more than one year ago and seems to continue. I have written in a previous article that such a pattern is not a reliable clue of a market top . Value and dividend offer a statistical bias on the long term, but in the short term investors following strategies based on these investing styles may experience more frustration before getting back their edge. Indeed, momentum stocks traditionally benefit from “window dressing” at the end of the year: some fund managers buy them to make their portfolios look better in annual reports. If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article. Data: portfolio123

Suburban Propane Partners Q4 Earnings Review: Good Performance Despite Higher Losses

Summary Operating loss increased from $34 million to $48 million. Integration costs and pension charges skewed results. Earnings should improve once these charges are eliminated. It’s been a week since Suburban Propane Partners (NYSE: SPH ) reported Q4 earnings, and the market remained neutral. Despite declining revenue and $48 million in operating loss, I believe that results were fantastic. Let me tell you why. As with many other natural gas related companies, sales suffered, dropping from $241 million to $174 million. The difference between this revenue decline and say a midstream company with POP contracts is that a lot of the company’s costs are variable. As the result of lower commodity prices, the company was actually able to increase the gross margin from 50% last year to 67%. This is a phenomenon that is common among refiners as well. What about the net loss? After all, the company did report an operating loss of $48 million. I would like to remind readers that the propane business is highly seasonal, and losses during warmer months are expected. (see below) As mentioned in my previous article , the company sells around two-thirds of retail volume from October to March, so the goal during hotter months is really to minimize loss. Unfortunately, the company does not seem to have accomplished that goal, as Q4’s operating loss of $48 million was higher than Q4 2014’s loss by 39%. However, there were multiple one-time costs that hurt Q4 results. First there is the integration cost. As mentioned in the previous article, the company acquired Inergy in 2012, and the integration process was still in progress in Q4 2015. During the quarter, the company spent $6.4 million on integration costs versus $3.2 million last year. This may be alarming since it would appear that integration costs are ramping up as opposed to going down. However, the management stated that the integration process was essentially complete, leading me to believe to that this cost increase is related to the “final push” as the company wraps up everything. Going forward, I expect integration costs to decline significantly or be eliminated. In addition to the integration costs, the company also had two pension related charges. First there was $11.3 million relating to the company’s partial withdrawal from a pension plan covering some former Inergy employees, which will save the company money later. If we account for these one-time charges, operating loss would actually decrease $30 million, which would be a 3% improvement from Q4 2014’s adjusted loss of $31 million. Keep in mind that the company was able to achieve this result despite the warmer weathers that we’ve been experiencing. When we take the above factors into consideration, I think it’s clear that the company’s Q4 performance was very impressive. Takeaway Despite mounting losses, I believe that the company had a great quarter when we take one-time factors into account. When you invest in Suburban Propane Partners, there is always the risk of warmer weather. Unfortunately that is what we’ve experienced in Q4, but that is what makes Q4 performance even more impressive. Overall, I believe that the company will improve earnings going forward as it gets rid of the one-time charges.

Myopia & Market Function

Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.”. Myopic loss aversion can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. We know that there will be future bear markets and probably another crisis or two in most of our lifetimes. By Roger Nusbaum AdvisorShares ETF Strategist The Wall Street Journal posted an article written by Shlomo Benartzi who is a professor at UCLA specializing in behavioral finance. The article primarily focuses on the behavioral problems, like myopic loss aversion, that can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Benartzi cites that the stock market has a down day 47% of the time, a down month happens 41% of the time, a down year 30% of the time and a down decade 15% of the time. We’ve talked about this before going back before the crisis albeit with some different wording. Before and during the last major decline, as well as many times since then, I’ve said that when the market does take a serious hit that it will then recover to make a new high with the variable being how long it takes. While this seems obvious now it is one of many things frequently forgotten in the heat of a large decline. Additionally we know that there will be future bear markets and probably another crisis or two in most of our lifetimes. And those future bear markets/crises will take stocks down a lot which will then be followed by a new high after some period of time. This is not a predictive comment this is simply how markets work with Japan being a possible stubborn exception that proves the rule. It took the S&P 500 five and half years to make a new nominal high after the “worst crisis since the great depression.” If you are one to use some sort of defensive strategy, it is hopefully one that you laid out when the market and your emotions were calm and your strategy probably doesn’t involve selling after a large decline. My preference is to start reducing exposure slowly as the market starts to show signs of rolling over. Very importantly though is that if you somehow miss the opportunity to reduce exposure, time will bail you out….probably. I say probably based on when a bear market starts in relation to when retirement is started. If a year after retiring, a 60% weighting to equities that cuts in half combined with a life event at the same time that requires a relatively large withdrawal (this is not uncommon) it will pose some serious obstacles. I think the best way to mitigate this is, as mentioned, a clearly laid out defensive strategy but not everyone will want to take on that level of engagement. In that case it may make sense for someone very close to retirement and having reached their number (or at least gotten close) to reduce their equity exposure. Not eliminate, but reduce. Back to the idea of myopic loss aversion and how to at least partially mitigate it. Knowing how markets work and then being able to remember how they work will hopefully provide an opportunity to prevent emotion from creeping in to process and giving in exactly as Benartzi describes.