By Brian Nelson, CFA
The broader stock market has pretty much gone nowhere (not a technical term) since the spring of 2015, and investors are growing impatient. Well, maybe index investors mostly…
Lofty earnings multiples on some of the most well-known stocks, Brexit uncertainty and concerns over systemic risk, emerging-market weakness (particularly in China and Brazil), and the list goes on and on as reasons why the markets have been “stuck” – also not a technical term. Long-term investors may not care, but with the broader S&P 500 (SPY) having tripled since the March 2009 panic bottom, they should at least be paying attention, in my view.
After all, a haircut of 10%-20% on broader market prices or more wouldn’t mean a thing in the context of the rapid run-up during the past 7+ years — some might even call the move lower a healthy “correction.” We’ve sounded like a broken record for some time about this, but can you really afford to give back 10%-20% of your capital over the next 3-5 years? This is a reasonable question you and your clients should be asking right now. We’re addressing this concern with rather high cash balances in the newsletter portfolios, even as we participate in equities.
But even with the “cash drag,” the performance of the Best Ideas Newsletter has simply been fantastic! We’re just going to call things how they are. A snapshot from May 2015 has the newsletter return at 97.3%, outpacing the broader S&P 500 benchmark by more than 27 percentage points. Today, with the S&P 500 effectively unchanged from that time, save dividends, the Best Ideas Newsletter portfolio now boasts a return of 107.5%, outpacing the market nearly 33 percentage points. Said differently, if you joined any time between May 2015 and today, what you’ve witnessed in terms of newsletter performance has been awesome. Frankly, it is extremely difficult to generate strong returns in a flat market, but the newsletter portfolio has done so.
What, you may ask, has led to the outperformance? First, the methodology is sound, but we also have a very strong team at Valuentum. For those that have not been introduced to Mr. Kris Rosemann, who helps head up the investment research team here, he’s one of the best. I’ve worked with hundreds of analysts across the globe with all levels of experience, and he has the most talent that I have ever seen. His work is profiled quite a bit in this edition of the September newsletter, and for those that have already read through his Apple note (sent via email), you simply have to take a read of his research on the 3D printing industry, too. I love that we’re going big in the space with General Electric (GE), as the blue chip still has legs, in our view — and what a yield on GE; we applaud its decision to shed its financial businesses. Great move Mr. Immelt, CEO of GE. He gets a lot of flak, but he’s righting the ship.
Image Source: General Electric
Speaking of financials — what in the world is Wells Fargo (WFC) doing? One of Warren Buffett’s favorites is being investigated by the Feds for opening “2 million phony accounts” with the company having to fire 5,300 employees. The bank was also fined $185 million (a mere drop in the bucket), but how can this happen? I’ve warned time and time again that new regulations have made the financial system “safer,” but there’s still a lot that can go wrong, obviously. The London Whale incident is a prime example, but “2 million phony accounts?” This is getting out of hand. You don’t have to look far to uncover how little we like the big banks. Was it Churchill that said of Russia in 1939, “It is a riddle wrapped in a mystery inside an enigma?” That’s how I’d still describe the big banks today. We talk more about the banks in this newsletter.
I know it’s not easy to be happy when the broader market has been flat for more than a year, but the Best Ideas Newsletter portfolio is performing well. Sure — not all of its ideas have worked out, but we’re targeting portfolio outperformance, not a hit rate of 100% (where every stock outperforms) — though I must admit, the hit rate has been good during these past many years. I think sometimes readers (and me, too) get fixated on the recent moves, as in the case of Gilead (GILD) or Alibaba (BABA), for example, and miss out on the big picture. I want to do good by all, of course, but we’re managing the portfolios for outperformance — individual stock selection is only one aspect of this. I mentioned the following in my personal note to you recently, but it’s worth repeating here: Our newsletter portfolios should NOT be viewed on the same plane as the screens on our website. The newsletter portfolios offer up our best ideas for consideration, while the latter represent a grouping of companies on the basis of common data.
Before we wrap up on the introduction, I’d like to address two very good questions: 1) why don’t we add every company that registers a high rating on the Valuentum Buying Index to the Best Ideas Newsletter portfolio? The answer is simple. One wouldn’t expect a value investor to add every single undervalued stock to his or her portfolio. There are always broader market and sector weighting considerations in any portfolio construct. And 2) is it too late to consider our ideas in the newsletter portfolios since some were added a few years ago? The answer is no. For example, one wouldn’t ask if it’s too late to own a mutual fund, right? If our recent performance is any indication, the answer is a resounding no. I think we’re doing a stand-up job at Valuentum, but let us know how we can get better!
I hope you enjoy this September edition of the Best Ideas Newsletter. Be sure to catch up on the latest edition to the newsletter portfolio, General Motors (GM) – 5 times forward earnings with a 5% dividend yield. Now that’s a bargain even if we are near cyclical peak earnings! Always my best work.
The September edition of the Best Ideas Newsletter is scheduled for release September 15. If you haven’t yet received it via email, it’s on its way.