Tag Archives: economy

The Generation Portfolio: W.P. Carey, AT&T, Verizon And 3M Company

Summary The Generation Portfolio is an account I manage to which I began adding stock positions in late August 2015. During this past week, I added positions in W.P. Carey, AT&T, Verizon And 3M Company. Looking ahead, it appears as if the volatility in the market will remain for the time being due to continued Fed reluctance to normalize interest rates and global economic issues. Background The Generation Portfolio is an account that I manage for others. I discuss its genesis here . I provide weekly updates, such as here , here and here . Previous to my involvement, it was an accumulation of random stocks built up over decades which had no underlying theme, many now worthless. I liquidated (with a few exceptions) those positions in the spring of 2015, and then began adding positions to the Generation Portfolio again in late August 2015. I manage the account for no compensation, but the experience has been very personally rewarding and it does give me something to write about. My hope is that this series will serve several purposes: It will illustrate the implementation of a true “buy on weakness” strategy in close to real time; It may provide some ideas for other investors, who are searching for a strategy or investments of their own and can learn from my successes and failures; Show in deed and not just in word that it pays off to buy Quality Stocks (as I defined that term) on weakness. It is easy to talk a good game about buying on weakness or buying “value” or buying whatever stock serves today’s agenda, mouthing empty words without consequence. That pretty much sums up the story of stock “analysis” on the Internet, and I have been reading about stocks online since 1994. However, my experience is that you usually only hear about great buys made by others long after they turned out well. So-so buys tend to not get mentioned so much, and ones that don’t work out well at all go straight down the Memory Hole from George Orwell’s “1984.” It is an old, old story that essentially never changes except among a very small group of transparent analysts. For better or worse, there is going to be strict accountability in this ongoing series. This series is going to show a specific value/income strategy as it evolves over time, examining both the winners and the losers. I hope it will prove useful to others considering similar strategies in the future. Of course, everyone must do their own due diligence and tailor their purchases and sales to their own goals, outlook and ever-changing market conditions. Previous Purchases During the week of 24 August 2015, I added the following positions: Wells Fargo (NYSE: WFC ); Disney (NYSE: DIS ); Bristol-Myers Squibb (NYSE: BMY ); MFA Financial (NYSE: MFA ). During the week of 31 August 2015, I added the following positions: Omega Healthcare (NYSE: OHI ); Chevron (NYSE: CVX ); Procter & Gamble (NYSE: PG ); CYS Investments (NYSE: CYS ). During the week of 7 September 2015, I added the following positions: Coca-Cola (NYSE: KO ); Medical Properties (NYSE: MPW ); Wal-Mart (NYSE: WMT ); Ventas (NYSE: VTR ); Kinder Morgan (NYSE: KMI ). Entering this week, and excluding legacy positions that I retained but did not initiate, the Generation Portfolio had 13 positions comprising about 26% of available trading funds. Summary of the Past Week The market volatility that began in August 2015 continued, providing some nice buying opportunities in Quality Stocks. As expected, the market was transfixed by the Fed meeting that concluded on 17 September 2015. The major averages rose into the meeting, had a brief but sharp spike higher after the Fed announced no change in policy, and then fell back to conclude the week essentially unchanged. General Strategy During the period of market turbulence that began in late August 2015, after keeping the Generation Portfolio 100% in cash for about six months, I finally began adding positions. I decided to use individual stocks and not just rely on index funds for reasons (among others) that I explained here . The focus of the Generation Portfolio is to provide stability while generating steady income, which to the extent possible will be used to add other positions, pay taxes and so forth. As I discussed in a previous article, I side with those who prefer wide diversification, both between sectors and within them. I would rather own smaller positions of two leaders in a sector rather than just place all of my hopes on just “the” leader. Accordingly, the Generation Portfolio is shaping up to have dozens of positions, each with a projected weighting of 2-3%. I believe in the importance of cash flow, so the overwhelming majority of positions will pay good dividends. I like the tax advantages and strong cash flow of REITs, so they will form a substantial subset of the Generation Portfolio. I have no problem at all about investing in to companies with similar risk profiles. It’s all about tactics, and bad tactics can ruin the best strategy. Most Recent Purchases During the week of 14 September 2015, I added the following positions: W.P. Carey, Inc. (NYSE: WPC ); AT&T Inc. (NYSE: T ); Verizon Communications (NYSE: VZ ); 3M Company (NYSE: MMM ). The Portfolio as it Stands Now Below is how the Generation Portfolio stands now. The Generation Portfolio as of 19 September 2015 Stock Purchase Date Purchase Price Recent Price Change since Purchase WFC 8/25/2015 51.75 51.06 (1.37%) DIS 8/25/2015 98.75 102.80 4.14% BMY 8/25/2015 59.75 65.99 8.03% MFA 8/25/2015 7.05 7.17 1.70% OHI 8/31/2015 33.95 33.93 2.36% CVX 9/02/2015 77.90 77.70 (0.21%) PG 9/03/2015 69.95 70.04 (0.01%) CYS 9/04/2015 7.68 7.51 (2.21%) KO 9/09/2015 38.50 39.01 1.25% MPW 9/10/2015 10.89 11.28 3.58% WMT 9/10/2015 64.40 63.40 (1.65%) VTR 9/10/2015 52.80 56.15 6.34% KMI 9/11/2015 29.95 30.64 1.67% WPC 9/15/2015 56.75 59.16 4.37% T 9/17/2015 32.50 32.50 0.15% VZ 9/17/2015 44.95 44.57 (0.85%) MMM 9/18/2015 139.90 140.29 (0.20%) Recent Prices are those supplied by my broker as of the close on 9/18/2015. A large legacy position in Ford Motor Company is omitted. Percentage changes since purchase are those supplied by my broker. There was a point on Thursday afternoon, immediately after the Fed meeting, when pretty much every single position was showing a profit. I should have taken a picture, because that isn’t likely to happen again any time soon. The percentage changes, supplied by the broker, conflict sometimes with the “last” prices it supplies. For instance, according to the last prices, PG and MMM should show a slight profit since purchase, and T should show as being flat. However, brokers have their ways, and the difference is probably accounted for by after-hours transactions. I am just going with what the broker (TD Ameritrade) reports, for better or worse. The percentage changes also do not account for stocks that have gone ex-dividend. CYS, for instance, went ex during the week, so it shows as a loss. However, when adding back in the dividend, it actually is one of the winners in the Generation Portfolio. Coke, of course, also went ex last week. As time goes by, I will begin accounting for dividends as they are received. With the four purchases made this week, the seventeen positions (less the legacy positions, which are not included in any calculations), based on initial purchase value and not subsequent price movements, now occupy 37.4% of the available trading funds. The position sizes are not all equal, as like most humans I prefer to trade in even lots, but they are of roughly equivalent total values. Analysis of Holdings While it may not appear like it from a quick glance at the table of holdings, it was a good week for the Generation Portfolio. Several positions went up by significant percentages, while the laggards had minimal losses. I went into the Fed meeting expecting no raise in rates, for the reasons set forth in some detail in my recent article “The September Jobs Report Does Not Support A Fed Rate Hike.” As can be seen from the holdings in the Generation Portfolio, it is heavily weighted toward REITs (CYS, OHI, VTR, WPC, MFA, MPW) that tend to benefit in the investing community’s view from lower rates. I even added the W.P. Carey position right before the Fed meeting based on that expectation. Banks can be expected to react poorly to lower rates, and the only such holding is Wells Fargo, which I think is a good value regardless of Fed action. The market, apparently, was leaning the other way, and the Fed non-action took it by surprise. The net effect on the Generation Portfolio was very positive. All of the REITs shot up in value, while the other holdings declined but held their values fairly well. It was amusing watching companies announce their upcoming dividends after the Fed announcement. It appeared that managers did not want to commit themselves until the Fed was out of the way, sort of like the two alternate newspaper headlines in ” Citizen Kane ” depending on whether Kane won or lost his election. W.P. Carey increased its dividend slightly on Thursday, and every little bit helps. The other major star of the week was Bristol-Myers Squibb. BMY rose from under 60 to almost 66, which for a sleepy pharmaceutical is spectacular. The reason appeared to be speculation about a takeover. Guy Adami on CNBC’s “Fast Money” show has been dropping hints about BMY all week. I did not buy BMY as a takeover play, but would be happy to go along for the ride. General Discussion To echo a recent popular tune, it’s all about the interest rates, the interest rates, the interest rates. As I noted in my article about the jobs report, global effects simply cannot be ignored these days. There are very practical reasons for this which the Fed – quite wisely – has begun giving significant weight. The common refrain from bond traders is that interest rates are too low. In fact, they are too high. (click to enlarge) Source: CYS Investments Form 8-K filing for presentation at Barclays financial services conference on the morning of 17 September 2015. While interest rates are at historically low levels for US markets, in fact they are much higher than in other major economies. I discussed the factors affecting Fed policy in some detail in my February 2015 article “The Case for REITS in 2015” and a follow-up in July 2015. To summarize, having US rates out of alignment with global interest rates would hurt US exports by strengthening the US Dollar. With an iffy job market as I discussed in my article on the September jobs report, and no inflation, raising rates could not only not help the economy, it could damage it severely. Simply put, the US no longer dominates the global economy as it once did when other nations had been destroyed by World War II. That decline has accelerated in recent years. The US can no longer simply set its own rules and expect the rest of the world to adjust accordingly. Listening to Fed Chair Janet Yellen’s speech, she emphasized repeatedly that global economic developments and the absence of inflation were the prime factors behind the Fed not raising interest rates. She also said that, ceteris paribus (economist-speak for “all else being equal”), the Fed would need evidence of improvement in the labor market before it would take any action. As I discussed in relation to the September jobs report, not only is the labor market not improving as much as some appear to think, in fact job growth has declined in recent months. It is hard to see how conditions overseas that prevented a Fed hike in September are going to mysteriously clear up by December. It also is difficult to predict that conditions in the labor market will improve significantly in that time. To be fair, inflation may appear to pick up in coming months as the dramatic declines in energy prices of late 2014 roll off the annual price increase measures. However, the Fed is smart enough not to rely on such obvious statistical artifacts in making long-term, forward-looking policy. Chair Yellen said that the Fed does not expect inflation to hits its 2% target until 2018, which implies that there will be no need for a rate hike any time soon, and certainly not in the near term. There is a conundrum here, as Janet Yellen’s stated reasons for no hike in September conflict with her abstract comments that the Fed Board of Governors still expects to raise in 2015. You cannot expect a short-term reversal of long-term trends such as global deflation. In other words, the uncertainty continues. I play it as it lays, to use a golfing term. The Fed, despite all “moral suasion” to the contrary, is in no hurry to raise rates. Whether or not I agree with that is irrelevant, but I will point out that uncertainty about rates leads to mis-allocation of capital. It would be better for the economy if the Fed either set some kind of firm data requirement for it to take action (“when the CPI tops .3% for three months in a row” or something along those lines), or stopped its members and Chair from implying that it might raise rates under some ambiguous and nebulous “analysis” of its own devise. However, it is possible to make a judgment based on what the Fed has done instead of said. Unless there are significant improvements in the stream of economic data that the US government releases in coming months, and that places like China release as well, I expect no rate hike in 2015. Put me down firmly in the 2016 camp. One other consideration is the status of the current business cycle. The economy is chugging along, slowly but steadily. The current expansion, as the White House likes to note , now has hit 66 months (omitting the quarter of negative GDP growth in early 2014). This is far longer than the post-war average of 58 months. If you go back further in time, the length of the current expansion appears out of alignment with historical precedent. One can make the argument that modern economic policy has lengthened the business cycle, that specific policies can stretch out the length of an expansion at the cost of its strength, and that the sharp recession of 2008-2009 laid the foundation for an especially prolonged period of growth. However, at some point the economy will experience weakness again, and the market will start noticing. Thus, I will remain very conservative in my stock choices for the time being and avoid growth stocks that pay no dividends. Stocks Under Consideration This is a general list of the stocks I am considering. While I also watch other stocks and am opportunistic, these should give some idea of what is near the top of the list. Many of my previous buys have come straight off this list. (NYSE: ABT ), (NASDAQ: AGNC ), (NYSE: BPL ), (NYSE: CAH ), (NYSE: CAT ), (NYSE: CL ), (NYSE: COP ), (NYSE: CSX ), (NYSE: CY ), (NYSE: DE ), (NYSE: DLR ), (NYSE: EV ), (NYSE: EMR ), (NYSE: FCX ), (NYSE: GE ), (NASDAQ: GILD ), (NYSE: GIS ), (NYSE: GS ), (NYSE: HD ), (NYSE: HON ), (NYSE: JNJ ), (NYSE: JPM ), (NYSE: KKR ), (NYSE: KMB ), (NYSE: LMT ), (NYSE: MAIN ), (NYSE: MO ), (NYSE: MS ), (NASDAQ: NFLX ), (NYSE: NKE ), (NYSE: NNN ), (NYSE: NSC ), (NYSE: O ), (NYSE: OXY ), (NYSE: PANW ), (NYSE: PBY ), (NYSE: PEP ), (NYSE: PFE ), (NYSE: PM ), (NYSE: PSX ), (NYSE: RDS.B ), (NYSE: RTN ), (NYSE: SCG ), (NYSE: STAG ), (NYSE: KSS ), (NYSE: SDRL ), (NYSE: STWD ), (NYSE: TOL ), (NYSE: UNH ),(NYSE: UNP ), (NYSE: UTX ), (NYSE:), (NYSE: XOM ). Actionable Ideas Given my judgment that the Fed will keep rates low for the foreseeable future, I will continue to emphasize rate-sensitive stocks such as REITs in the Generation Portfolio. However, banks sold off hard after the Fed announcement because investors perceive them as being the beneficiaries of higher rates, so there may be opportunities in stocks such as GS, JPM and MS after the market fully digests the Fed decision. In addition, general market weakness may provide some opportunities in stocks like GIS and CL. Energy stocks remain at the top of the list due to their astounding sell-off over the past year. Earnings season now is just around the corner, and the prospect of a government shut-down looms, so the market volatility should continue and provide good stock-picking openings. Conclusion As expected, the Fed did not raise interest rates in September 2015 due to global economic issues and the lack of domestic inflation. Those issues do not appear likely to evaporate any time soon. Following a preference for rate-sensitive REITs has paid off for the Generation Portfolio, and there is no need to alter that strategy. However, opportunities in the banking and related fields may present themselves in coming days and weeks as the market digests the lack of Fed action. With earnings season coming up, it is a good time to review lists of candidates for addition to the portfolio and plan accordingly. Disclosure: I am/we are long CYS, MPW, WMT. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: While I personally only own the stocks listed in the disclosure, the Generation Portfolio which I manage owns all the stocks indicated as such in the article.

Cybersecurity – Beating HACK And CIBR From The Inside

Summary The ETFs, HACK and CIBR, overlap on 23 companies, six of which are among the top-ten holdings of each fund. Given the strength of the performance of some of the companies on which the ETFs overlap, it seems plausible to derive a smaller portfolio that would outperform either ETF. I consider two portfolios made up of holdings shared by both ETFs, and consider whether the performance gains are worth the tradeoff in security. When looking at a new ETF, I often find myself wondering if – given the ETF’s portfolio – there was a subset of that portfolio that would outperform the ETF itself, and not just outperform it, but outperform it by a significant amount . 1 How would one go about identifying that subset? I began thinking about this in detail as I wrote my last article, a comparison of two new ETFs – the PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) and the First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ: CIBR ). 2 The funds, which take two fairly different approaches to investing in cybersecurity, have holdings that overlap with 23 companies. What I thought was particularly interesting was that the top-ten holdings in each portfolio overlapped on six companies. The funds weighted their holdings differently, with HACK having a modified equal-weighting structure, and CIBR being weighted according to market liquidity over the preceding 90 days. Would stocks in these companies outperform either or both ETFs? Group I The six companies that were among the top-ten-weighted holdings in both portfolios are: Cisco Systems, Inc. (NASDAQ: CSCO ) Fortinet, Inc. (NASDAQ: FTNT ) Imperva, Inc. (NYSE: IMPV ) Palo Alto Networks, Inc. (NYSE: PANW ) Proofpoint, Inc. (NASDAQ: PFPT ) Trend Micro Inc. ( OTCPK:TMICY ) The question: could holdings in these six companies ( Group I ) be reasonably expected to outperform HACK and/or CIBR? To answer the question, I traced the portfolios of the two ETFs back to August 1, 2010, and charted their performance through August 31, 2015. 3 I then tracked Group I apart from the ETFs. Each portfolio started with a $25,000.00 stake. 4 The results: (click to enlarge) Group I quite clearly outperformed both ETFs, growing the initial stake to $88,971.99 (a gain of more than 255% ), compared to HACK with $55,925.78 (~ 123%) and CIBR with $57,892.92 (~ 131%). A difference in growth of that magnitude over a period of five years certainly seems significant, by just about any standards. In principle, it would seem rational for an investor to choose to invest in the six companies that make up Group I rather than investing in either of the ETFs. A Caveat But while it might seem to be a good bet to buy shares in the Group I companies, upon closer examination there are some problems to consider. The following table lists some of these companies’ fundamental data: Of the six companies, only Cisco , Fortinet and Trend Micro stand up to close scrutiny. Each one is profitable; 5 all have manageable debt ( Cisco has the highest debt/equity ratio, at 0.44%, but its quick ratio is a very healthy 3.15); gross margin and operating margin for each are comparable to or better than those of their peers. The remaining three companies – Imperva , Palo Alto and Proofpoint – present a significantly different picture. None of these companies has made a profit in the five-plus years represented in the test; indeed, these companies have been losing substantial amounts of money annually. The companies have financed operations through sale of shares – thus diluting shareholders’ holdings – and by incurring debt. Only Imperva has maintained a low D/E ratio, with Palo Alto ‘s D/E rising just above 1, and Proofpoint ‘s D/E topping out at 3.78. Readers familiar with my approach to companies know that I focus heavily on fundamentals, particularly operating margin, returns, debt/equity and quick ratio. Only Cisco and Trend Micro come close to meeting my usual minimum standards. 6 Investing in companies that have a losing track record is a very subjective enterprise. On the one hand, I dismiss companies that habitually post losses out of hand; on the other hand, not all “losing” companies are bad bets. But investing in one requires that one take a leap of faith, and it’s not a leap to be taken lightly. I highly recommend serious study of such a company before investing in it. 7 Group II To go around the problem of investing in “losing” companies, I graded the 23 holdings over which HACK and CIBR overlapped. Interestingly, nine of those companies were operating in the red, and since operating margin and the three returns count heavily in my ranking system, those nine companies were excluded. Three more companies were excluded because they are foreign (this includes Trend Micro , even though it is one of the companies in Group I ). I still feel uncertain about foreign investments. After ranking the 11 companies remaining, I ended up with the following set of five stocks to make up Group II : 8 Check Point Software Technologies Ltd. (NASDAQ: CHKP ) CyberArk Software Ltd. (NASDAQ: CYBR ) F5 Networks, Inc. (NASDAQ: FFIV ) Qualys, Inc. (NASDAQ: QLYS ) VASCO Data Security International, Inc. (NASDAQ: VDSI ) The following table shows their “vital statistics”: In principle – on the basis of their fundamentals – I would consider these to be the top five of the 23 companies shared by the two ETFs. How do they perform? I subjected Group II to the same test I ran for Group I , with the following results: (click to enlarge) While it is clear that Group II does markedly better than either HACK or CIBR, it is also clear that it falls far short of the performance of Group I . The following chart shows how the two groups compare: (click to enlarge) Group I clearly outperforms Group II and does so quite handily, with its growth outpacing the latter group by more than 25%. I’m not certain that this means Group I is the better set of stocks, though; consider this chart: (click to enlarge) The past 20 months or so have been rough on the market in general, and particularly so for tech stocks. The spring of 2014 saw tech stocks take a hit with no general, significant driving force other than that the stocks were perceived as overvalued; this past summer saw the market as a whole go through a “correction” attributed to ((a)) growing concern over weakness in the Chinese economy , ((b)) a perceived weakening of the economic recovery in America , ((c)) a meltdown in oil prices , and ((d)) the prospect of the Fed raising interest rates . It is interesting to note, then, that Group II outperformed Group I during the stretch from January 1, 2014, through August 2015. The difference is not great, all things considered, but it serves to remind investors that a stock’s (or a portfolio’s) performance is dependent upon the perspective from which it is viewed. Assessment Moreover, since we are supposed to acknowledge that we cannot infer future performance simply on the basis of past performance, we need to look at an investment from a variety of perspectives. There is a distinct difference between the market of 2010 – 2013 and the market of 2014 – mid-2015 . The former was a significant part of the extended bull market that led the economy out of the Great Recession; the latter has been a period where the bull market has weakened (and maybe died), culminating in a summer-long correction . There is no surprise that stocks are going to rise (some, dramatically) when the market is hot; the surprise would be those companies that (continued to) drop in value. On the other hand, when the market in general is stumbling, one should maybe take note of performance that seems to “buck” the trend by showing a little strength; during such a period, 1200bps may have no small significance in comparing the relative strengths of a couple of portfolios. Looking at Group I , Imperva , Palo Alto and Proofpoint are losing money annually and persistently. According to Capital Cube, all three stocks are overvalued; Palo Alto has lost over $375 million in the past two years, yet currently commands a price over $179.00/share – with key valuations well in excess of its peers. 9 The stocks in Group II , on the other hand, have maintained solid fundamentals. Three of the companies ( Check Point , CyberArk and Qualys ) are perhaps overpriced, but Check Point is posting solid numbers comparable to F5 and VASCO , and none of the companies seems to be showing any problem areas. Being somewhat (!) risk averse, I would likely prefer the holdings listed in Group II , perhaps with Cisco (or Trend Micro ) added for good measure. However The advantage of an ETF such as HACK or CIBR is that one does not have to worry about the performance of the individual stocks in one’s portfolio – that is the fund manager’s job. There is a tradeoff involved, and it is up to the individual investor to decide if the prospective loss of growth that might be realized by investing in a basket of stocks is worth the work involved in choosing and monitoring a hand-picked selection of individual holdings. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s SEC filings to the extent possible. All tables, charts and graphs are produced by me using pertinent SEC filings as provided by Capital Cube ; historical price data is from The Wall Street Journal . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. ——————– 1 Of course, what counts as a “significant amount” is fairly subjective. A 25% improvement would be significant, I should think, but would 5% be significant – and in one year? Five years? I should think there would be a correlation between the length of time one was discussing and the level one would consider “significant” an improvement of 1000bps (when speaking of performance), or 10% (when talking about value) over five years would seem to be a safe margin to consider significant – while an improvement of 500 bps (or 5%) over 2 years would be perhaps a little less significant. Also, we can ask what it means to be “significant.” Again, this is fairly subjective, but let’s suppose we’re talking about the level of difference at which one would seriously consider investing in the subset, rather than in the ETF itself. I might consider the chance of a 2% improvement over the first year to be enough to convince me, while someone else might not be convinced with anything less than 5%. Yet another person might opt for the ETF even if there was reasonable prospect of improving the payout by 25% by investing in the subset. 2 ” 2 New ETFs Track Cybersecurity Growth ,” Seeking Alpha , August 24, 2015. 3 While the ETFs are new within the past nine months, I traced the performance of their portfolios as they existed on August 21, 2015, maintaining the same weighting throughout as they had on that date. Companies that did not start trading until after August 2010 were added during quarterly rebalancing and reconstitution; funds that would have applied to those companies were held in reserve until they “formally” joined the portfolio. To differentiate between the ETFs and the extension of their portfolios, I will refer to the portfolios as HACKʹ and CIBRʹ . Please note that the data for their portfolios is not intended to indicate how the ETFs themselves would have performed over the same period. 4 The portfolios for HACKʹ and CIBRʹ were weighted according to note 3 above. Group I was weighted equally. All portfolios were rebalanced and reconstituted quarterly. 5 For the period of the test (August 2010 – present) each of the three companies has recorded net profit for each of the years included. 6 In many of my articles I rely on a fairly small set of fundamental criteria that emphasize efficiency, effective management and financial responsibility. In the past, my basic standards were: OM > 25%; RoE, RoA and RoI > 15%; D/E < 0.5; QR > 1. 7 For my part, I have a moderate stake in Neuralstem, Inc. (NASDAQ: CUR ), and have had one for a few years. It has not made a profit since before I bought shares. I did my homework before investing in Neuralstem, and while its fundamentals are very weak, I believe that their business – and the science behind it – is sound, and all indications are that it will, in the very near future, show some of the enormous promise it has. Before it took a serious dive this year, it had been a four-bagger for me. 8 The number five is totally arbitrary. A group of six or more (or four or less) might work, but five seems like a nice number to work with. As luck would have it, an extension to six would have included Cisco, which missed membership in Group II by only a few points. 9 See here , for instance. Also, as a matter of fact, according to Capital Cube only Cisco – out of all of Group I – is undervalued. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long CUR. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Markets Know What The Analysts And Economists Don’t

Scores of analysts insist that U.S. stocks cannot fall a bearish 20% or more because the U.S. is not entering a recession. Haven’t these market watchers learned that financial markets themselves are better at forecasting than they are? It is important to realize that the markets themselves know what analysts and economists do not. The best economists on the planet regularly hamper the investing community. For example, the National Bureau of Economic Research (NBER) acknowledged in December of 2008 that a recession had started one year earlier (December 2007). Unfortunately, by December of 2008, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) had already forfeited close to half of its value (46%). Similarly, by the time that NBER recognized the existence of the 2001 recession in November of that year, the S&P 500 had shed 29% and the “New Economy” NASDAQ had plunged 65%. Nevertheless, scores of analysts insist that U.S. stocks cannot fall a bearish 20% or more because the U.S. is not entering a recession. Haven’t these market watchers learned that financial markets themselves are better at forecasting than they are? And it’s not just equities. Consider the bond market at the start of 2014. Bloomberg News surveyed the top banks and securities companies on where the 10-year Treasury yield would finish by December 31st. Every economist of the 50-plus in the poll had projected higher 10-year Treasury bond yields (i.e., lower prices on 10-year Treasury bonds). The average projection? The 10-year yield should move from 3.01% up to 3.41%. Instead, the 10-year dropped to 2.17%. Every single top economist had completely whiffed with respect to the direction of interest rates (10-year yields). What’s more, every analyst who subscribed to the notion that economists are helpful in forecasting the direction of market-based securities missed out on an extraordinary bullish trend in bonds. Those who went against the herd in contrarian fashion – those who had followed basic technical trendlines and/or understood the fundamental backdrop of Treasury bond supply and demand – profited from an allocation to the long end of the yield curve. Indeed, one of our largest client holdings in 2014 had been the Vanguard Long-Term Bond ETF (NYSEARCA: BLV ) – an asset that outperformed our stock holdings as well as the major benchmarks. Are analysts or economists doing any better with their expectations for bond yields in 2015, with the average anticipated to move up from 2.17% to 2.75%? In spite of bond market volatility, the 10-year essentially remains unchanged and I doubt that the same prognosticators are confident in a year-end rate of 2.75% today. Note: For our clients, we did move down the yield curve to reduce volatility . Clients currently hold positions in the iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ) or the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ). If the information provided by economists and like-minded analysts tend to lead investors astray, why do so many folks listen? I’m not sure that I have an adequate answer for that. My own approach to tactical asset allocation involves a wide range of data – fundamental, technical, economic and historical. Evidence in the aggregate is what led me to reduce exposure to riskier assets prior to the 2000-2002 tech wreck, 2007-2009 financial collapse, 2011 eurozone crisis and the 2015 selloff. As I explained prior to the August-September downturn in “Market Top? 15 Warning Signs”: “If your asset allocation target is typically 65% stock (e.g., domestic, foreign, large, small, etc.) and 35% bond (e.g, short, long, investment grade, higher yielding, etc.), you might choose to downshift. Perhaps it would be 50% stock (mostly large-cap domestic), 25% income (mostly investment grade) and 25% cash/cash equivalents. Raising the cash level and modifying the type of stock and bond risk will help in a market sell-off as well as offer opportunity to purchase risk assets at better prices in the future.” In practice, I am neither bearish nor bullish; rather, we have target asset allocations for a “risk-on” environment and we reduce exposure to riskier assets when a wide variety of data set off alarms. The cash that we raised prior to the August-September downturn can be used to acquire beaten-down bargains today or broader market benchmark ETFs tomorrow. The one thing that I am not particularly interested in? Economist and analyst “group-think.” It fails miserably when it comes to stocks. It fails miserably when it comes to bonds. And it may be equally inept on the currency front. For instance, how many of these people are insisting that the U.S. greenback can only go up? Meanwhile, the PowerShares DB USD Bull ETF (NYSEARCA: UUP ) has fallen below its 200-day moving average and has been declining since mid-March. In essence, the big move higher in the dollar occurred between July of 2014 and March of 2015; the markets moved dramatically long before analyst-economist “group-think” expressed a belief that the dollar can only move higher. Don’t get me wrong. I do not anticipate a rapid-fire dollar demise. The global economic slowdown provides support for ownership of U.S. currency while Fed cautiousness on the pace of rate hikes should keep the dollar from eclipsing the March highs. Still, it is important to realize that the markets themselves know what analysts and economists do not; that is, market-based securities – stocks, bonds, currencies, commodities – know where they are heading. Economists? Analysts? The media? These groups mislead as often as they succeed. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.