Archive for December, 2015

  • The 2016 Buy List
    , December 31st, 2015 at 7:50 pm

    Here are the 20 stocks for the 2016 Buy List. It’s locked and sealed and I can’t make any changes for 12 months.

    For tracking purposes, I assume the Buy List is a $1 million portfolio that’s equally divided among 20 stocks. Below are all 20 positions with the amount of shares for each and the closing price for 2015. Whenever I discuss how the Buy List is doing, the list below is what I’m referring to.

    Company Ticker Price Shares Balance
    Alliance Data Systems ADS $276.57 180.7861 $50,000.00
    AFLAC AFL $59.90 834.7245 $50,000.00
    Bed Bath & Beyond BBBY $48.25 1,036.2694 $50,000.00
    CR Bard BCR $189.44 263.9358 $50,000.00
    Biogen BIIB $306.35 163.2120 $50,000.00
    Cerner CERN $60.17 830.9789 $50,000.00
    Cognizant Technology Solutions CTSH $60.02 833.0556 $50,000.00
    Express Scripts ESRX $87.41 572.0169 $50,000.00
    Ford Motor F $14.09 3,548.6160 $50,000.00
    Fiserv FISV $91.46 546.6871 $50,000.00
    HEICO HEI $54.36 919.7940 $50,000.00
    Hormel Foods HRL $79.08 632.2711 $50,000.00
    Microsoft MSFT $55.48 901.2257 $50,000.00
    Ross Stores ROST $53.81 929.1953 $50,000.00
    Signature Bank SBNY $153.37 326.0090 $50,000.00
    Snap-on SNA $171.43 291.6642 $50,000.00
    Stericycle SRCL $120.60 414.5937 $50,000.00
    Stryker SYK $92.94 537.9815 $50,000.00
    Wabtec WAB $71.12 703.0371 $50,000.00
    Wells Fargo WFC $54.36 919.7940 $50,000.00
    Total $1,000,000.00

    The five new stocks are Alliance Data Systems, Biogen, Cerner, HEICO and Stericycle.

    The six deletions are Ball, eBay, Moog, Oracle, PayPal and Qualcomm. We have an extra stock leaving this year due to the PayPal spinoff.

    Here’s a brief description of the new buys.

    Alliance Data Systems (ADS). These are the guys behind the rewards programs for many different companies. It’s one of the businesses you would never think is as profitable as it is. ADS has grown its EPS very steadily for the last several years: $5.16, $5.86, $7.63, $8.71, $10.01 and $12.56. The company expects $15 for 2015 and $17 for next year. I think they can top both of those. Again, don’t let the high share price scare you.

    There are about 400 publicly traded biotech stocks. Only about 10% are profitable in any meaningful sense. Biogen (BIIB) is one, and it’s a good one. The recent numbers have been quite good. The company also took a painful but necessary step in cutting its workforce. Biogen also has one of the highest profit margins you’ll see, about 34%. Only the mafia and the government get higher than that.

    Cerner (CERN) is a healthcare IT company. What Fiserv is to finance, Cerner is to healthcare. This is another stock that’s been chopped down this year. CERN was over $75 in April and now it’s near $60. Last month, the company gave a weak outlook for 2016. They see earnings ranging between $2.30 and $2.40 per share. Wall Street had been expecting $2.53 per share. Still, that’s a nice increase over the $2.07 they should earn for 2015 and the $1.65 they made last year. Cerner is a solid company.

    HEICO (HEI) is exactly the kind of company I love to find. HEICO is a defense and aerospace contractor. They’re not well known. They’re kind of boring. And they’re very profitable. In fact, the stock was just upgraded by Bank of America Merrill Lynch. Please note that I’m recommending HEI, the common shares. There are A shares which have slightly different voting rights. Of the five new stocks, HEICO is the only one that pays a dividend, but it’s pretty small (0.30%).

    Stericycle (SRCL) is a medical-waste-management company whose stock got clobbered last earnings season. SRCL plunged from around $150 to $120 per share, which is about where it is today. The company missed earnings by 10 cents per share. I’m not sure why a profit miss is valued with a P/E Ratio of 300, but in this case, it was. Some of the earnings miss was due to the dollar, and some was due to a business slowdown. Stericycle said that should pass. I like that this business has high fixed costs. Also, almost all of their revenue comes from long-term contracts. Stericycle is poised for a good year.

    The average market cap is $58 billion. That ranges from a high of $443 billion for Microsoft (MSFT) to a low of $3.6 billion for HEICO (HEI). Eleven of the twenty stocks pay dividends. The total yield of the Buy List comes to 0.95%.

    Only three stocks have been on the Buy List all eleven years: AFLAC (AFL), Bed Bath & Beyond (BBBY) and Fiserv (FISV). This will be Stryker’s (SYK) ninth-straight year on the Buy List.

  • The 2015 Buy List
    , December 31st, 2015 at 7:42 pm

    The 2015 trading year is on the books, and I’m happy to report that we once again beat the market. This is the eighth time in the last nine years in which our Buy List has outpaced the S&P 500.

    For the year, our Buy List gained 3.73% and including dividends, we were up 4.93%. The S&P 500 lost 0.73% for the year but gained 1.38% once you include dividends.

    Our biggest gainer on the year was Hormel Foods (HRL) with a gain of 51.8%. Fiserv (FISV) was a distant second at 28.9%.

    Our biggest loser was Bed Bath & Beyond (BBBY) with a loss of 36.7% followed by Qualcomm (QCOM), which lost 32.8%.

    Counting the eBay/PayPal investment as one position, 12 of our 20 stocks made money this year. For people who care about such things, the “beta” of our Buy List was 0.9981. The correlation of the daily changes of the Buy List to the changes of the S&P 500 was 96.5%.

    Over the ten-year history of the Buy List, our total compounded gain including dividends is 163.67%. That’s compared with 102.42% for the S&P 500. Our beta over 10 years comes to 0.9619.

    The chart below details the Buy List’s performance. I’ve listed each stock, along with the number of shares and the starting and ending prices. For tracking purposes, I assume the Buy List is a $1 million portfolio that starts equally divided among the 20 stocks.

    Stock Shares 12/31/14 Beginning 12/31/15 Ending Profit/Loss
    AFL 818.4646 $61.09 $50,000.00 $59.90 $49,026.03 -1.95%
    BBBY 656.4264 $76.17 $50,000.00 $48.25 $31,672.57 -36.65%
    BCR 300.0840 $166.62 $50,000.00 $189.44 $56,847.91 13.70%
    BLL 733.4605 $68.17 $50,000.00 $72.73 $53,344.58 6.69%
    CTSH 949.4873 $52.66 $50,000.00 $60.02 $56,988.23 13.98%
    EBAY 890.9480 $23.6197 $21,043.92 $27.48 $24,483.25 16.34%
    ESRX 590.5279 $84.67 $50,000.00 $87.41 $51,618.04 3.24%
    F 3225.8065 $15.50 $50,000.00 $14.09 $45,451.61 -9.10%
    FISV 704.5230 $70.97 $50,000.00 $91.46 $64,435.67 28.87%
    HRL 959.6929 $52.10 $50,000.00 $79.08 $75,892.51 51.79%
    MOG-A 675.4019 $74.03 $50,000.00 $60.60 $40,929.36 -18.14%
    MSFT 1076.4263 $46.45 $50,000.00 $55.48 $59,720.13 19.44%
    ORCL 1111.8523 $44.97 $50,000.00 $36.53 $40,615.96 -18.77%
    PYPL 890.9480 $32.5003 $28,956.08 $36.20 $32,252.32 11.38%
    QCOM 672.6759 $74.33 $50,000.00 $49.985 $33,623.70 -32.75%
    ROST 1060.8954 $47.13 $50,000.00 $53.81 $57,086.78 14.17%
    SBNY 396.9514 $125.96 $50,000.00 $153.37 $60,880.44 21.76%
    SNA 365.6575 $136.74 $50,000.00 $171.43 $62,684.66 25.37%
    SYK 530.0541 $94.33 $50,000.00 $92.94 $49,263.23 -1.47%
    WAB 575.4402 $86.89 $50,000.00 $71.12 $40,925.31 -18.15%
    WFC 912.0759 $54.82 $50,000.00 $54.36 $49,580.45 -0.84%
    Total $1,000,000.00 $1,037,322.75 3.73%

    Note that Ross Stores (ROST) split 2-for-1 on June 12. Also, eBay (EBAY) spun off shares of PayPal (PYPL) on July 6. Here are the details of the accounting for the spin-off.

    Here’s how the Buy List performed throughout the year:


  • Talking Consumer Stocks
    , December 31st, 2015 at 1:20 pm

  • Morning News: December 31, 2015
    , December 31st, 2015 at 7:15 am

    Iran Says Any U.S. Sanctions on Missiles Illegal

    Facebook Fights For Free Internet in India, Global Test-Case

    Puerto Rico to Default on $37 Million of Payments Due Jan. 1

    U.S. Stocks Slip From Three-Week High, Paring S&P 500 2015 Gain

    Sky-High Stocks Book Fourth Year of Gains, Tipped For More

    Pending Sales of U.S. Existing Homes Unexpectedly Decrease

    Shell Opens Natural Gas Wells Off Of Irish Coast

    Drifting Barge Closes North Sea Oil Fields, Forces Evacuations

    Mega Ships Bring Benefits and Challenges to Ports of L.A. and Long Beach

    Midwest Flooding Might Make the Oil Glut Worse

    Several Days After Christmas, Toys ‘R’ Us Closes in Times Square

    It’s Amazon and Also-Rans in Retailers’ Race for Online Sales

    Microsoft to Warn E-Mail Users About Government Hack Attacks

    Here Are the Best- and Worst-Performing Assets of 2015

    Roger Nusbaum: 2015: Did You Screw Anything Up Beyond Repair?

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  • The S&P 500 and Its Earnings
    , December 30th, 2015 at 9:38 am

    Here’s the S&P 500 along with its earnings. The index is in black and it follows the left scale. The earnings are in yellow and follow the right scale.


    The two lines are scaled at a ratio of 16 to 1. That means whenever the lines cross, the market’s P/E Ratio is exactly 16.

    As you can see, earnings have ticked down for the last four quarters but are expected to rise again for Q4. The forward part of the earnings line is Wall Street’s estimate.

  • Morning News: December 30, 2015
    , December 30th, 2015 at 7:02 am

    Global Growth Will Be Disappointing in 2016: IMF’s Lagarde

    A Chinese Company in India, Stumbling Over A Culture

    Puerto Rico Debt Crisis Closes In on Jan. 1 Deadline

    Consumer Confidence in U.S. Increases More Than Projected

    For the Wealthiest, a Private Tax System That Saves Them Billions

    Oil Prices Become a Problem for U.S. Steelmakers

    Exporting Crude Oil

    A Former ‘Pharma Bro’ Company Files For Bankruptcy

    FedEx Cites ‘Unprecedented’ E-Commerce Surge in Christmas Delays

    China Telecom Chairman Resigns Amid Corruption Probe

    Chicago Subway System Now Has Full 4G Wireless Coverage

    Icahn Has High Bid for Pep Boys as Bridgestone Backs Away

    Elon Musk `Stepping on Toes’ in Space Race, Russia Official Says

    Cullen Roche: The Best Econ and Finance Research of 2015

    Jeff Carter: Never Pay For An Introduction

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  • The 2/10 Spread Drops Below 120
    , December 29th, 2015 at 2:27 pm

    I’ve probably become a bore on this point, but I like to keep a close eye on the spread between the 2- and 10-year Treasury bond yields. This indicator has a pretty good track record over the last few decades. When it goes negative, bad times are not long off.

    We’re still a long way from going negative, but the spread dropped below 120 basis points yesterday. That’s among the narrowest spreads in eight years.

    The spread briefly hit 119 in February of this next year before bouncing up to 177 by summer.

  • Should Cognizant Buy Perot Systems?
    , December 29th, 2015 at 2:17 pm

    One analyst thinks so. Here’s the story: Dell bought Perot Systems from Ross Perot for $4 billion. Now Dell is buying EMC so they want to free up some cash by selling off Perot.

    David Koning at Robert W. Baird think Cognizant would be an ideal buyer:

    Koning estimates Perot revenue at $3.1 billion annually, which is roughly 22.5% of Cognizant’s annual revenue. He estimates Perot’s EBITDA — earnings before interest, taxes, depreciation and amortization — at about $470 million, or roughly 15% of Cognizant’s EBITDA. He expects the combination would create about $50 million worth “of synergies.” Cognizant’s $3 billion of net cash in the bank could swing to $2 billion in debt, depending on how Cognizant financed the acquisition, he says.

    Bottom line? Maybe 20 to 25 cents per share of improvement to Cognizant’s annual earnings, Koning says. “Investors sometimes don’t like the strategic fit but end up giving credit for accretion,” he wrote.

    Interesting, but I’m not sure if this would be a good idea long-term. Sometimes I wonder if sitting on too much cash is a good thing. I’m reminded of what Peter Lynch called the “Bladder Theory of Corporate Finance.”

  • Lost in a Gloom of Uninspired Research
    , December 29th, 2015 at 11:07 am

    This time of year is popular for market watchers to make forecasts for the coming year. I try to avoid that game. I like to say that my year-end forecast for the Dow is December 31. Of course, I have the Buy List, but I’m referring to analysts who confidently say that the Dow or the S&P 500 will close next year at some precise level. The most I’ll say is that the math favors or doesn’t favor something. That’s quite a bit different from forecasting the precise close 12 months hence.

    Bad news sells, and making dire forecasts is especially popular. In finance, there’s no shortage of people predicting doom and gloom. The problem is that whatever bad news comes along, they claim they were vindicated while conveniently overlooking the other bad stuff they predicted.

    I remember one guru who claimed he predicted the financial crisis. To be fair, he did predict a financial collapse, but he predicted the meltdown of civil society. He said chaos would overtake the earth and people would have to turn to drinking rainwater to survive. I don’t recall that happening but those other forecasts get pushed down the memory.

    I recently saw the movie, The Big Short. It’s OK, but not outstanding. I give the moviemakers credit for trying to explain some of the complex finance. As such, the movie is unconventional at times. The film centers on Dr. Michael Burry, an eccentric doctor-turned-hedge fund manager who correctly predicted the housing bubble.

    The problem is that lots and lots of other people also predicted the housing bubble. Neil Irwin of the New York Times shows that the Google searches for housing bubble peaked in August 2005, two years before the crisis began. Even if you get the phenomenon right, there’s still the issue of timing.

    What Dr. Burry got right was the systemic collapse. Burry recently had a rather gloomy outlook for the U.S. I have to say that I don’t find his views very persuasive. That’s the issue I want to get at. Burry is obviously intelligent, but intelligence isn’t the top trait an investor needs to have. I would rank patience and discipline above brains.

    But there’s a certain kind of intelligence that can actively hinder investing performance. When you overanalyze too many variables, it often leads to a certain kind of highly intelligent person down the road forecasting disaster. As Wordsworth put it, “lost in a gloom of uninspired research.”

    This leads me to one of the most complex and difficult to understand observations about people, and by extension, markets. This complex idea is that people generally find a way to muddle through, especially at the micro level.

    Sounds earth-shattering, I know, but lots of smart people don’t get it. The famous guru will identify some terrible event, but they project its impact well out in the future. Instead, people will work around it.

    For example, when a snowstorm hits a city, folks in the neighborhood are largely able to get by. They eventually dig themselves out. People look in on their elderly neighbors. Sure, It may not be pleasant, but within time, things slowly return to normal. But the city business or transit system will be complete chaos. That’s the thing. Big breakdowns usually happen at the higher orders (think Katrina). Large systems can freeze up, but people usually don’t.

    Dr. Burry was able to see the threats to the system. His eccentric personality probably aided him in connecting all the dots. It’s usually the outsider with marginal views who’s right when all the experts are wrong. But that’s also why the same person will likely be dead wrong with their next 20 predictions. Making forecasts isn’t a skill like shooting free throws where you simply listen to people with better track records.

    The Big Short notes that $5 trillion was destroyed by the financial crisis. That’s true, but at Gary Alexander points out, $30 trillion has been created since then. People muddled through.

  • Morning News: December 29, 2015
    , December 29th, 2015 at 7:06 am

    Putin’s Bailout Bank Needs a Rescue; It’s an $18 Billion Whopper

    Crude Prices Rise on U.S. Export Prospects

    Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down

    Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge

    Marc Faber Takes on Janet Yellen

    4 Tactical/Momentum ETFs: A Disappointing 1-Year Anniversary

    Icahn Sweetens His Bid for Pep Boys to More Than $1 Billion

    Whole Foods to Pay $500,000 for Overcharging NYC Customers

    Deutsche Bank to Raise Up to $4 Billion From Huaxia Sale

    U.S. Trade Body Declines Nvidia’s Review Petition Against Samsung

    Start-Up With Bitcoin in Its DNA Stumbles on Fund-Raising Trail

    Universities Race to Nurture Start-Up Founders of the Future

    Adidas Not Facing Shareholder Pressure to Sell Reebok

    Roger Nusbaum: Santa Claus Checks In

    Joshua Brown: The Riskalyze Report: A Year-End Rotation

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