The title to this article is a snowclone. And while many of you don't know (yet) what a snowclone is, I believe the entertainment value of knowing a little about them almost matches the value of knowing which group of stocks has historically smashed the market's averages. Before I wander off on my tangent, you want to know about the new strong buys.
What's old is new again, because here in mid-2008, the new strong buys are the ones that have also historically bested the broader market by about 5% per year. That's always a good start, but today there's an added bonus -- these "strong buys" are coming off consecutive years of significant underperformance. Small-cap value stocks are priced better today than they have been for years.
I love the smell of small-cap value in the morning (it's the smell of victory)
According to Wikipedia, "A snowclone is a type of cliche and phrasal template originally defined as 'a multi-use, customizable, instantly recognizable, time-worn, quoted or misquoted phrase or sentence that can be used in an entirely open array of different jokey variants by lazy journalists and writers.'"
(Did somebody just call my name?)
The term "snowclones" originates from one of the lesser-known time-worn cliched templates, "If the Eskimos have N words for snow, the X surely have M words for Y." For instance: "If the Eskimos have 300 words for snow, Wall Street financiers must have 600 words for subprime mortgage derivatives."
It turns out that the Eskimos don't have a particularly large number of words for snow. (Wall Street does have several dozen terms for subprime mortgage products, though because of the number of layoffs of Wall Street's finest, most of these are unprintable in a decent public forum. But I digress.)
You might have used such other snowclones, such as "Got X [milk]?" Or perhaps: "(Dammit, Jim,) I'm a doctor, not an [X]." Or even: "I'm not an [X], but I play one on TV." So in a move that will surprise nobody more than my editors (hey guys, I finally came up with my own subheads!), I've lazily inserted some classic snowclones below as phrasal templates to illuminate a few reasons behind small-cap value stocks' market dominance, and current strong positioning.
Give me your poor, your tired, your small-cap value stocks
In one of my favorite articles, "70 Times Better than the Next Microsoft," I recounted why small-cap value stocks crush the other quadrants of the market, large value, large growth, and especially small growth, over time. It's mostly because small value stocks are unexciting, spat upon, and ignored. They're the type of companies that seem painfully outdated, quaint, poor -- tired, even -- compared to the exciting tech stocks, biotechs, and other sectors that end up getting bid up to the moon -- and consequently disappoint the majority of investors. And yet, the returns are stunning. Here's one of my favorite tables proving the point:
Sector
Annual Returns, 1927-2005
Large-Cap Growth
9.54%
Large-Cap Value
12.37%
Small-Cap Growth
9.22%
Small-Cap Value
15.37%
Total Stock Market
10.01%
The most dramatic example this year is the way coal stocks like James River Coal (Nasdaq: JRCC) have taken off, moving up 200%-plus year to date. James River has done so with a fraction of the attention sexier companies garner -- think back to the nonstop headlines after Google's (Nasdaq: GOOG) IPO, or the attention tech bellwether Cisco (Nasdaq: CSCO) received in the go-go 1990s.
Small-cap value is the new black -- and the new strong buys
When something is anointed the "new black," it is so hot and trendy that it will replace the old guard. The new black will be the color everyone will wear. Well, at least until the next "new black." Nothing ever really does replace black, but this construction is an attempt to promote something of the moment.
The highest compliment you can give to a stock in some corners is to say it is a "strong buy." But you know what? Small-cap value stocks are virtually never given Wall Street's official imprimatur as strong buys. The lack of such ratings keeps small value stocks at far better prices than the highly followed and touted large caps that do get dozens of strong buy ratings from the Street. Never being "the new black" or "strong buys" has provided small-cap value stocks' actual investors with great entry points for their money.
Though small-cap value stocks are dramatically underfollowed on Wall Street, numerous studies and reports argue that they have the best returns. Combine that fact with the particularly attractive prices at which these stocks are trading today, and you're looking at something far better than "the new black" or a "strong buy." You're looking at the antithesis of trendy: boring companies with boring returns over the past two years. These are precisely the companies that tend to dramatically beat the market over the long term -- especially after dry periods like the one we've just witnessed.
There's no crying in small-cap value!
Small-cap value doesn't beat the market average every year -- its performance in the past two and a half years or so has alternated between "desultory" and "painful." Some of that underperformance results from the performance of financial companies, which comprise a large chunk of the value indices. However badly large caps such as Citigroup (NYSE: C) and JPMorgan (NYSE: JPM) have performed, small-cap regional banks like Cascade Bancorp (Nasdaq: CACB) and City National (NYSE: CYN) have followed suit.
But you won't see us crying about that at Hidden Gems. The prices and opportunities that are available in small-cap value, particularly outside of financials, haven't been seen for at least four years, and probably closer to six.
Monday, June 2, 2008
Saturday, May 24, 2008
Stocks with strong, predictable growths
"There are whole swaths of the market right now where it's difficult to have high conviction," said Parton, who co-manages JPMorgan Growth Advantage Fund (VHIAX:
8.42, -0.06, -0.7%) with Christopher Jones. "We've really focused on high quality, predictable companies with repeat revenue to anchor the portfolio. They tend to be the most bullet-proof business models."
Parton runs a multicap portfolio of about 85 stocks that so far has weathered the market's recent storms quite well. The fund's Class A shares gained 10.3% over the 12 months through May 16 compared with a 2.7% rise for its category peers, according to fund-tracker Lipper Inc. Its three-year annualized 16% gain also outpaces its rivals' 11.7% average return.
"We've been trying to focus on higher-conviction names and kick out things that have issues or question marks," Parton noted. "In such an unforgiving market, there's no point in trying to fight too hard when something is in the penalty box."
MasterCard
One company that earns the fund manager's confidence is MasterCard Inc. (MA: 273.22, -2.68, -1.0%) , the credit-card giant.
First is its global brand -- more than half of its business is outside of the U.S., where consumer health is stronger, Parton said. Second, using plastic over cash for purchases is increasingly common. Third, MasterCard takes a fee based on the value of every transaction, and the bill for many goods and services that people use a credit card for -- gasoline, fast food, even taxis -- is going up.
"There are nice, long, underlying growth drivers to the business," he said. "There's reasonably assured top-line revenue growth and a very leverageable business model with relatively fixed costs, so margins will go up gradually over time."
Shares of MasterCard closed Monday at $280, down $3.40.
Illumina Inc. (ILMN:76.22, -1.13, -1.5%) is one of the "purer high-growth companies" on Parton's screen nowadays. The company, a newer portfolio addition, is on the cutting edge of a growing field -- developing tools and systems used in genetic studies and testing.
"The trend to using genetic analysis and research is still very early," Parton said. "This kind of equipment is being bought everywhere -- universities, biotech companies" and other facilities.
The stock is not cheap, he notes, but its price reflects the 40% to 50% growth rate Parton expects. "They've definitely exceeded expectations," he said. "You have such strong dominance and intellectual property and high growth; these sorts of companies can often hold very high multiples."
In trading Monday, shares of Illumina added 76 cents to $79.04.
Southwestern Energy
The demand for more electricity and power in the U.S. is well-known. How to supply it is less apparent. Many strategists are pinning hopes for meeting demand on nuclear energy or coal, but those large-scale projects are years from completion, Parton said. Short-term, he added, the answer to the country's energy needs is natural gas.
"There are few alternatives to natural gas," Parton said. "That is going to support natural gas prices very well. What you've seen and will continue to see is a premium valuation put on companies that have long-lived natural-gas assets that have some certainty to it."
That is, companies such as Southwestern Energy (SWN:
45.05, -0.44, -1.0%) , one of the fund's top holdings.
Parton's case for Southwestern Energy hinges in large part on its stake in a natural-gas gold mine called the Fayetteville Shale. The company has a major portion of the acreage in this Arkansas land, which Parton said creates a steady, recurring and profitable business.
"Now we're into the sweet spot," he said. "They've explored most areas of the Shale, and can focus their efforts and energy."
On Monday, shares of Southwestern Energy fell 25 cents to $45.87
8.42, -0.06, -0.7%) with Christopher Jones. "We've really focused on high quality, predictable companies with repeat revenue to anchor the portfolio. They tend to be the most bullet-proof business models."
Parton runs a multicap portfolio of about 85 stocks that so far has weathered the market's recent storms quite well. The fund's Class A shares gained 10.3% over the 12 months through May 16 compared with a 2.7% rise for its category peers, according to fund-tracker Lipper Inc. Its three-year annualized 16% gain also outpaces its rivals' 11.7% average return.
"We've been trying to focus on higher-conviction names and kick out things that have issues or question marks," Parton noted. "In such an unforgiving market, there's no point in trying to fight too hard when something is in the penalty box."
MasterCard
One company that earns the fund manager's confidence is MasterCard Inc. (MA: 273.22, -2.68, -1.0%) , the credit-card giant.
First is its global brand -- more than half of its business is outside of the U.S., where consumer health is stronger, Parton said. Second, using plastic over cash for purchases is increasingly common. Third, MasterCard takes a fee based on the value of every transaction, and the bill for many goods and services that people use a credit card for -- gasoline, fast food, even taxis -- is going up.
"There are nice, long, underlying growth drivers to the business," he said. "There's reasonably assured top-line revenue growth and a very leverageable business model with relatively fixed costs, so margins will go up gradually over time."
Shares of MasterCard closed Monday at $280, down $3.40.
Illumina Inc. (ILMN:76.22, -1.13, -1.5%) is one of the "purer high-growth companies" on Parton's screen nowadays. The company, a newer portfolio addition, is on the cutting edge of a growing field -- developing tools and systems used in genetic studies and testing.
"The trend to using genetic analysis and research is still very early," Parton said. "This kind of equipment is being bought everywhere -- universities, biotech companies" and other facilities.
The stock is not cheap, he notes, but its price reflects the 40% to 50% growth rate Parton expects. "They've definitely exceeded expectations," he said. "You have such strong dominance and intellectual property and high growth; these sorts of companies can often hold very high multiples."
In trading Monday, shares of Illumina added 76 cents to $79.04.
Southwestern Energy
The demand for more electricity and power in the U.S. is well-known. How to supply it is less apparent. Many strategists are pinning hopes for meeting demand on nuclear energy or coal, but those large-scale projects are years from completion, Parton said. Short-term, he added, the answer to the country's energy needs is natural gas.
"There are few alternatives to natural gas," Parton said. "That is going to support natural gas prices very well. What you've seen and will continue to see is a premium valuation put on companies that have long-lived natural-gas assets that have some certainty to it."
That is, companies such as Southwestern Energy (SWN:
45.05, -0.44, -1.0%) , one of the fund's top holdings.
Parton's case for Southwestern Energy hinges in large part on its stake in a natural-gas gold mine called the Fayetteville Shale. The company has a major portion of the acreage in this Arkansas land, which Parton said creates a steady, recurring and profitable business.
"Now we're into the sweet spot," he said. "They've explored most areas of the Shale, and can focus their efforts and energy."
On Monday, shares of Southwestern Energy fell 25 cents to $45.87
Friday, May 23, 2008
LIST OF LONG-TERM INVETMENT STOCKS!!!
Long-term investing candidates often share a few common traits: steady profit growth, a product that's needed in good times or bad, and geographic diversification.
Idex (IEX) fits the bill on most of those counts. The Northbrook, Ill., company makes pumps, valves, flow meters and other engineered fluid-handling equipment.
Its four segments cover markets such as agriculture, chemical processing, fuels, health care, food and beverage, and water.
The fluid and metering segment accounted for 42% of 2007 revenue, followed by health and safety with 24%, fire and safety/diversified with 21% and dispensing with 13%.
More than half of sales, 54%, came from the U.S. and 25% from Europe. Other countries, which include Australia, Brazil, China, India, Mexico and Singapore, made up the remaining 21%.
Idex has increased its annual profit in each of the past six years, and is expected to do so for at least two more years. Analysts call for 12% growth this year and 12% the next.
A 23% five-year growth rate in earnings per share and an EPS Stability Rating of 3 may also appeal to the long-term investor.
Annual pretax margin improved in each of the past six years, reaching 17.6% in 2007.
The stock reached an all-time high Aug. 9 before easing to start a base. It corrected as much as 40%, more than many other stocks with stable earnings performance, but still within acceptable range given the bear market at the time.
The week it hit the low of its base, Idex closed in the upper half of its range in heavy trade, a sign of support. It's now 14% off its high.
Click here to view an Excel spreadsheet of the screen below with expanded data.
Long-Term Investor Screen
Symbol Company Name EPS
Stability
Rating EPS
Rating Additional
Research
CVD Covance Inc 1 88
EMR Emerson Electric Co 2 88
PX Praxair Inc 2 87
AFL A F L A C Inc 2 82
ANSS Ansys Inc 3 97
AME Ametek Inc 3 92
ROP Roper Industries Inc 3 91
IDXX Idexx Laboratories Inc 3 87
NTRS Northern Trust Corp 3 86
SRCL Stericycle Inc 3 86
APH Amphenol Corp Cl A 4 94
DRS D R S Technologies Inc 4 89
GD General Dynamics Corp 4 89
DHR Danaher Corp 4 86
APD Air Products & Chemicals 4 85
BCR Bard C R Inc 4 80
HSC Harsco Corp 5 92
FLIR Flir Systems Inc 5 91
VAR Varian Medical Systems 5 83
BIIB Biogen Idec Inc 6 96
KEX Kirby Corp 6 95
ARG Airgas Inc 6 92
CHRW C H Robinson Worldwide 6 90
TRMB Trimble Navigation Ltd 6 89
STR Questar Corp 6 89
PKI Perkinelmer Inc 6 87
FAST Fastenal Co 7 92
SII Smith International 7 91
WFT Weatherford Intl Ltd 8 95
BLK Blackrock Inc 8 93
HRS Harris Corp 8 91
SLB Schlumberger Ltd 8 91
XOM Exxon Mobil Corp 9 91
GILD Gilead Sciences Inc 9 89
ADM Archer Daniels Midland 10 90
GOOG Google Inc 11 98
CSX C S X Corp 11 95
HAL Halliburton Company 11 89
PH Parker-Hannifin Corp 12 92
FMC F M C Corp 12 83
Idex (IEX) fits the bill on most of those counts. The Northbrook, Ill., company makes pumps, valves, flow meters and other engineered fluid-handling equipment.
Its four segments cover markets such as agriculture, chemical processing, fuels, health care, food and beverage, and water.
The fluid and metering segment accounted for 42% of 2007 revenue, followed by health and safety with 24%, fire and safety/diversified with 21% and dispensing with 13%.
More than half of sales, 54%, came from the U.S. and 25% from Europe. Other countries, which include Australia, Brazil, China, India, Mexico and Singapore, made up the remaining 21%.
Idex has increased its annual profit in each of the past six years, and is expected to do so for at least two more years. Analysts call for 12% growth this year and 12% the next.
A 23% five-year growth rate in earnings per share and an EPS Stability Rating of 3 may also appeal to the long-term investor.
Annual pretax margin improved in each of the past six years, reaching 17.6% in 2007.
The stock reached an all-time high Aug. 9 before easing to start a base. It corrected as much as 40%, more than many other stocks with stable earnings performance, but still within acceptable range given the bear market at the time.
The week it hit the low of its base, Idex closed in the upper half of its range in heavy trade, a sign of support. It's now 14% off its high.
Click here to view an Excel spreadsheet of the screen below with expanded data.
Long-Term Investor Screen
Symbol Company Name EPS
Stability
Rating EPS
Rating Additional
Research
CVD Covance Inc 1 88
EMR Emerson Electric Co 2 88
PX Praxair Inc 2 87
AFL A F L A C Inc 2 82
ANSS Ansys Inc 3 97
AME Ametek Inc 3 92
ROP Roper Industries Inc 3 91
IDXX Idexx Laboratories Inc 3 87
NTRS Northern Trust Corp 3 86
SRCL Stericycle Inc 3 86
APH Amphenol Corp Cl A 4 94
DRS D R S Technologies Inc 4 89
GD General Dynamics Corp 4 89
DHR Danaher Corp 4 86
APD Air Products & Chemicals 4 85
BCR Bard C R Inc 4 80
HSC Harsco Corp 5 92
FLIR Flir Systems Inc 5 91
VAR Varian Medical Systems 5 83
BIIB Biogen Idec Inc 6 96
KEX Kirby Corp 6 95
ARG Airgas Inc 6 92
CHRW C H Robinson Worldwide 6 90
TRMB Trimble Navigation Ltd 6 89
STR Questar Corp 6 89
PKI Perkinelmer Inc 6 87
FAST Fastenal Co 7 92
SII Smith International 7 91
WFT Weatherford Intl Ltd 8 95
BLK Blackrock Inc 8 93
HRS Harris Corp 8 91
SLB Schlumberger Ltd 8 91
XOM Exxon Mobil Corp 9 91
GILD Gilead Sciences Inc 9 89
ADM Archer Daniels Midland 10 90
GOOG Google Inc 11 98
CSX C S X Corp 11 95
HAL Halliburton Company 11 89
PH Parker-Hannifin Corp 12 92
FMC F M C Corp 12 83
Subscribe to:
Posts (Atom)