Portfolio Strategy: Weekly Audio Update

Transcription

1 Portfolio Strategy: Weekly Audio Update Chris Senyek, CFA, CPA Head of Macro Research Chief Investment Strategist Chip Miller, CFA, CPA Adam Calingasan, CFA, CPA November 17 th, 2014 DO NOT FORWARD DO NOT DISTRIBUTE This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY

2 Sentiment Very Bullish Again While global economic readings have generally been soft over the past two months, sentiment has turned quickly bullish again as weak growth is met with expectations of additional QE from Japan and Europe. Used as contrarian signals, the % of stocks outperforming is high and AA II Bull-Bear is at its highest reading since late Sources: Wolfe Research Portfolio Strategy, Standard & Poor s, AAII, NYSE, Bloomberg, and FactSet. 2

3 QE Addiction As the Fed s balance sheet levels off, the critical question now is whether money velocity will pick-up. Thus far, the Fed s bang for the buck has been terrible in this recovery. Banks are still reluctant to lend (particularly in home mortgage) and the demand for credit remains tepid (corporate debt/equity ratios are at 25 year lows and cash balances remain high). Where We Want to Be: Money Supply * Velocity = Price Level * Output Sources: Wolfe Research Portfolio Strategy and Bloomberg. 3

4 Excess Return (%) Hit Ratio (%) Excess Return (%) Excess Return (%) Performance Chasing / Tax Loss Selling: Stick with the Top Performers Performance chasing is an important theme into year-end. The data we examined strongly suggests performance chasing and tax loss selling has been pulled forward over the past 10 years into November and ends the week of Christmas. Performance chasing was stronger in markets that were up into November 1 st. Our analysis finds the time to chase laggards or turnarounds is mid-to late December. Such outperformance continues until the end of January Performance From Nov. 1st through Y/E Best Performing Stocks YTD Performance even better in Up Markets 1985-Date 1985-Date in Up Markets Performance From Nov. 1st through Y/E Worst Performing Stocks YTD 1985-Date 2004-Date Performance From Dec. 1st through Y/E Worst Performing Stocks YTD Tax loss selling pulled forward? YTD Worst Performers no longer underperform in December 1985-Date 2004-Date Sources: Wolfe Research Portfolio Strategy and Bloomberg. 4

5 All-Weather Screen: Last 2 Qtrs Top and Bottom Line Beat and Low Stock Price Correlation to Emerging Markets Market LTM SIM Score Short Cap ($ in Total [1 = best; 2Q14 EQ Dividend Interest / 2015E LTM FCFF Ticker Company Sector millions) Return 5 = worst] Score Yield Float % P/E Yield NKE NIKE, Inc. Class B Cons. Disc. 82, % % 1% 24.4x 3% FOXA Twenty-First Century Fox, Inc. Class A Cons. Disc. 76, % % 4% 17.9x 4% ORLY O'Reilly Automotive, Inc. Cons. Disc. 18, % 1 90 NA 6% 21.7x 4% EXPE Expedia, Inc. Cons. Disc. 11, % % 12% 18.8x 10% LEN Lennar Corporation Class A Cons. Disc. 9, % % 15% 13.8x -3% PEP PepsiCo, Inc. Cons. Staples 146, % % 1% 19.9x 4% CVS CVS Health Corporation Cons. Staples 102, % % 1% 17.4x 4% DPS Dr Pepper Snapple Group, Inc. Cons. Staples 13, % % 5% 18.1x 6% CHD Church & Dwight Co., Inc. Cons. Staples 9, % % 2% 22.3x 4% HAIN Hain Celestial Group, Inc. Cons. Staples 5, % 5 13 NA 8% 26.3x NA SAM Boston Beer Company, Inc. Class A Cons. Staples 3, % 5 11 NA 11% 33.4x -1% PSA Public Storage Financials 32, % 4 NA 3.0% 2% 33.2x NA ALL Allstate Corporation Financials 27, % 1 NA 1.7% 2% 11.5x NA HCN Health Care REIT, Inc. Financials 23, % 4 NA 4.5% 4% 51.8x NA BXP Boston Properties, Inc. Financials 19, % 5 NA 2.1% 2% 58.9x NA WRB W. R. Berkley Corporation Financials 6, % 1 NA 0.9% 3% 13.4x NA JLL Jones Lang LaSalle Incorporated Financials 6, % 5 NA 0.3% 2% 15.9x NA AIV Apartment Investment and Management CFinancials 5, % 4 NA 2.9% 2% 88.8x NA CFR Cullen/Frost Bankers, Inc. Financials 5, % 5 NA 2.5% 7% 17.4x NA GEO GEO Group Inc Financials 2, % 1 NA 5.7% 2% 19.2x NA CSH Cash America International, Inc. Financials % 1 NA 0.6% 8% 5.5x NA AMGN Amgen Inc. Health Care 119, % % 1% 17.0x 6% BMY Bristol-Myers Squibb Company Health Care 96, % % 2% 32.0x 4% ABC AmerisourceBergen Corporation Health Care 19, % % 4% 19.4x 6% EW Edwards Lifesciences Corporation Health Care 13, % NA 1% 31.5x 8% BCR C. R. Bard, Inc. Health Care 12, % % 4% 17.8x 9% ENDP Endo International Plc Health Care 10, % 5 31 NA 10% 14.4x 1% Notes: P/E based on consensus estimates. Market data as of 11/14/2014. SIM = our proprietary Stock Idea Model, which ranks companies based on 5 weighted factors depending on the economic cycle. EQ Score = Our proprietary earnings quality score based on 7 equally weighted factors on a scale of where 0=lowest EQ Sources: Wolfe Research Accounting & Tax Policy and Portfolio Strategy Research; Standard & Poor s, Company filings; Bloomberg; and FactSet. 5

6 All-Weather Screen (Cont d): Last 2 Qtrs Top and Bottom Line Beat and Low Stock Price Correlation to Emerging Markets Market LTM SIM Score Short Cap ($ in Total [1 = best; 2Q14 EQ Dividend Interest / 2015E LTM FCFF Ticker Company Sector millions) Return 5 = worst] Score Yield Float % P/E Yield WAT Waters Corporation Health Care 9, % 3 14 NA 3% 18.9x 5% DGX Quest Diagnostics Incorporated Health Care 9, % % 13% 14.2x 5% CNC Centene Corporation Health Care 5, % 2 72 NA 7% 19.7x 18% TFX Teleflex Incorporated Health Care 4, % % 7% 17.8x 5% ICUI ICU Medical, Inc. Health Care 1, % 1 91 NA 10% 31.1x 5% BABY Natus Medical Incorporated Health Care 1, % 1 91 NA 5% 23.6x NA HON Honeywell International Inc. Industrials 75, % % 1% 15.8x 5% TW Towers Watson & Co. Class A Industrials 7, % % 3% 18.2x 4% RHI Robert Half International Inc. Industrials 7, % % 3% 22.2x 4% WCN Waste Connections, Inc. Industrials 6, % % 1% 22.1x 4% MATW Matthews International Corporation Clas Industrials 1, % % 2% 16.6x NA CDI CDI Corp. Industrials % % 2% 19.1x NA FFIV F5 Networks, Inc. Info. Tech. 9, % 1 71 NA 6% 19.7x 6% IT Gartner, Inc. Info. Tech. 7, % 3 54 NA 3% 30.7x 4% RFMD RF Micro Devices, Inc. Info. Tech. 3, % 4 58 NA 22% 11.0x 4% TYL Tyler Technologies, Inc. Info. Tech. 3, % 3 63 NA 4% 44.9x 2% LXK Lexmark International, Inc. Class A Info. Tech. 2, % % 20% 11.0x 12% JCOM j2 Global Inc Info. Tech. 2, % % 16% 15.1x 7% TSRA Tessera Technologies, Inc. Info. Tech. 1, % % 3% 23.1x 9% CATM Cardtronics, Inc. Info. Tech. 1, % 2 36 NA 17% 13.9x 5% OSIS OSI Systems, Inc. Info. Tech. 1, % 2 39 NA 3% 18.6x 7% AEIS Advanced Energy Industries, Inc. Info. Tech % 1 58 NA 4% 11.7x NA ATNI Atlantic Tele-Network, Inc. Telecom Svcs. 1, % % 3% 25.5x -26% EXC Exelon Corporation Utilities 30, % % 10% 14.1x 1% PPL PPL Corporation Utilities 23, % % 2% 15.6x -1% HE Hawaiian Electric Industries, Inc. Utilities 2, % % 20% 16.0x -1% ALE ALLETE, Inc. Utilities 2, % % 6% 15.8x -9% Notes: 2014E P/E based on consensus estimates. Market data as of 11/14/2014. SIM = our proprietary Stock Idea Model, which ranks companies based on 5 weighted factors depending on the economic cycle. EQ Score = Our proprietary earnings quality score based on 7 equally weighted factors on a scale of where 0=lowest EQ Sources: Wolfe Research Accounting & Tax Policy and Portfolio Strategy Research; Standard & Poor s, Company filings; Bloomberg; and FactSet. 6

7 Top Performing Themes/Screens All Weather Screen YTD Relative Return: 12.3% Nov Relative Return: 2.0% YTD Total Return: 25.4% Nov Total Return: 6.9% Cash Usage Companies YTD Relative Return: 5.7% Nov Relative Return: 1.2% YTD Total Return: 17.5% Nov Total Return: 2.4% All Weather Cos. Note: Composite portfolio consists of S&P 1500 companies with recent top- and bottom-line earnings beats and low correlation to emerging markets (36 cos.), measured against a sector relative S&P 1500 benchmark. Please contact us for full list of constituent cos. Market data through 11/14/2014. Cash Usage Note: Composite portfolio consists of companies in 1500 largest market cap. Cos with >=2 favorable cash usage metrics (Share Count Chg, Increasing Buybacks, Divi. Growth, High Cash) measured against a sector relative S&P 1500 benchmark. Market data through 11/14/2014. Source: Wolfe Research Macro Research; Company filings; Bloomberg; Standard & Poor s; FactSet. 7

8 Dividends for a Global QE Market Environment As the Bank of Japan and European Central Bank pursue additional QE, money creation is likely to flow into higher yielding U.S. and foreign securities, and we expect both high dividend yield and high dividend growth strategies to outperform their benchmarks. We expect the market cycle to shift from Late Acceleration to Early Deceleration over the coming months. This has implications for dividend investing as it suggests that both high dividend yield and dividend growth strategies will outperform during this phase of the cycle. For more detail, see our 30 page Quarterly Dividend Guide published 11/14/14 60% % of Stocks Div. Yield > 10 Year Yield (500 Largest MC Cos) % of Stocks Div. Yld. > 10 Yr Yld [L] 10 Year Yld. [R] 15.0 High Dividend Growth Relative Market Cycle Returns ( ) 50% 40% ~29% of stocks currently with dividend yield > 10-Year yield % 4.6% 4.6% 2.5% 30% % 20% 10% % 0% Rebound Early Acceleration Late Acceleration Early Deceleration Late Deceleration Retrenchment Sources: Wolfe Research Portfolio Strategy, FactSet, and Bloomberg. 8

9 Europe and Japan Two of our favorite forward indicators are the ZEW Eurozone and US. We will be closely watching the ZEW Eurozone release this week for signs of a bottom in Europe. There is a disconnect between US and Euro area Manufacturing PMIs Sources: Wolfe Research Portfolio Strategy, Conference Board, ISM, ZEW Centre, and Bloomberg. 9

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