Is it all over for the Euro?

Things have been bad in Europe recently. Between the travel restrictions due to the volcano and ash, as well as Greece not wanting to conform to strict fiscal policies, problems are adding up and adding weight onto the euro.
It is interesting to note that in the beginning of 2010, everyone was bearish on the dollar. Looking at the market action alone we could see that the dollar has done very well vis-à-vis the euro. This is where technical analysis shines as it is an unbiased viewpoint of the collective wisdom of all market participants.
In this new video Adam Hewison shows you how you can trade the euro/USD cross using their “Trade Triangle” technology and come out of winner no matter what happens to Greece, Portugal, or Spain.
As always you can watch their videos without registration and there are no fees involved.

More on this topic (What's this?)
Soros on the Euro
The Cost of Greece Exiting the Euro
Read more on Euro (EUR) at Wikinvest

8 High Yield, Low Payout Dividend Growers

Below is a list of 8 stocks yielding more then 3% with a dividend payout ratio less than 70% as of the close on April 27th. In addition, I required the stocks have a recent history of rising dividends. I looked for

Dividend Percent Change, Year Over Year (%) > 10,
Dividend Growth Rate, 3 Years (%) > 15,
Dividend 5 Year Growth Rate (%) > 20.

The screen was done using stockscreen123. February’s list of 12 stocks is here and March’s list of 6 stocks is here.

I featured TKC and LPHI in previous months and they remain on this months list and have held up well of late.   The only two stocks on the list that haven’t appeared in recent months are Cal-Maine Foods (CALM) and Empresa Nacional de Electricidad (EOC).  Both are in downtrends and CALM recently started a downtrend after a downgrade, the ongoing threat of an egg price fixing lawsuit, and an earnings report that warned of volatile feed costs (see Finviz chart below).

In addition to dividend reductions/increases, share price fluctuations affect yield and can cause this list to fluctuate.

As I stated previously, for investors worried that equity market rallies may be getting long in the tooth, high yield stocks with strong cash flow and a history of dividend increases may offer a small buffer for skittish investors who still want to maintain equity exposure.

Ticker Name Free Trend Analysis MktCap PayRatio Yield
CALM Cal-Maine Foods, Inc. Here 799.92 33.32 5.71
EOC Empresa Nacional de Electrici Here 12639.11 35.13 4.36
HCBK Hudson City Bancorp, Inc. Here 6998.78 54.7 4.51
LLTC Linear Technology Corporation Here 6785.78 62.1 3.03
LPHI Life Partners Holdings, Inc. Here 356.47 13.54 4.17
MCD McDonald’s Corporation Here 75844.85 49.12 3.12
OSG Overseas Shipholding Group In Here 1281.67 67.16 3.67
TKC Turkcell Iletisim Hizmetleri Here 13701.6 65.2 5.2

3 Dividend Aristocrats at Attractive Valuations

Earlier last month I began profiling various Dividend Aristocrats that are worthy of further investigation. For this list, I looked for Dividend Aristocrats trading at attractive valuations using the free screening service at Finviz. The list of attractively valued aristocrats continues to shrink as the overall market climbs higher.  Increasingly I find deep bargains among widely followed companies nearly impossible to find.

The list looks for Dividend Aristocrats which meet the following criteria:

  • Forward P/E < 15
  • Price/Free Cash Flow < 15
  • Price/Sales < 1
  • Long Term Debt/Equity < 1

One name that continues to appear on my lists is Integrys Energy Group (TEG).  It weather two analyst downgrades in March and has continued a steady climb higher.  The chart could not be prettier for investors in TEG:

 The trend in TEG could turn at any point, however, a yield near 5.5% from a company with a history of raising dividends is still enticing for yield hungry investors. As an alternative, an investor could hedge positions–such as a strategy I detailed here or use more active trading such as that I detailed here–if the are still worried about market weakness.

The other two names on the list are Target, TGT and Bemis, BEM.  

Ticker Company Industry Trend Analysis Forward P/E P/S Dividend Yield LT Debt / Equity
BMS Bemis Co. Inc. Packaging & Containers Here 13.27 0.97 2.94% 0.68
TEG Integrys Energy Group, Inc. Diversified Utilities Here 14.9 0.51 5.43% 0.82
TGT Target Corp. Discount, Variety Stores Here 13.53 0.7 1.17% 0.99

No positions

Monday Readings

Looking Back, Looking Forward – John Hussman

“As of last week, our most comprehensive measure of market valuation reached a price-to-normalized earnings multiple of 19.1, exceeding the peaks of August 1987 (18.6) and December 1973 (18.3). Outside of the valuations achieved during the late 1990’s bubble and the approach to the 2007 market peak, the only other historical observation exceeding the current level of valuation was the extreme of 20.1 reached just prior to the 1929 crash. The corollary to this level of rich valuation is that our projection for 10-year total returns for the S&P 500 is now just 5.3% annually.”

The 200-Week Moving Average in Market History –

I’ve reproduced part of the article below:

Over the past few days I’ve seen several references to the fact that both the Dow and S&P 500 weekly closes are in the vicinity of their 200-week simple moving averages (SMA). I’ve spent some time studying this indicator in both indexes, and I’ve extended my investigation to the Nasdaq 100 and the Nikkei 225.

S&P 500 
Since its creation in 1957 until the top of the Tech Bubble in 2000, the S&P 500 has generally trended above the 200-week (SMA). The bear market declines are responsible for the few occasions when the index dipped to or below the 200-SMA — most notably in 1968-1970 and 1973-1974.

Here’s a chart of the index weekly closes since 1950 with the 200-SMA (the S&P 500 is spliced with the earlier S&P Composite). I’ve highlighted bear-market declines and recessions, and I’ve given a “real” alternative view to indicate the amount of nominal performance that is inflationary illusion:

More on this topic (What's this?)
Nearly 70% Of S&P 500 Stocks In Correction Or Bear Market Territory
Bears Awaken From Their Worst Nightmare
S&P Approaches Critical Tipping Point
Read more on S&P 500 (SPX) at Wikinvest

Top Stocks Based on Momentum/PEG

I have begun conducting the following screen on a monthly basis. Early out-of-sample results have been positive, especially in a bullish environment like the current one. March’s list is here, February’s list is here and January’s here. The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio
  • low debt
  • a history of high return on equity and investment, and
  • price momentum as gauged by the percentage the stock is trading to its 250 day high.
January’s list returned 1.39% vs .57% for SPY. February’s list returned a solid 11.78% vs. 6.77% for SPY. March returned 7.91% vs. 4.23% for SPY. I have also started tracking returns of the top 10 stocks at the beginning of each list, the top 10 are selected based on fundamental factors.  The top 10 on March’s list returned an average of 10.77%. The top return stock on March’s list was Joseph A Banks (JOSB) , which returned over 24% in one month. For the full list of stocks and results, please see the right hand side of Scott’s Investments.

With the US equity markets near an 18 month high, this list will be more expansive than in other, less bullish periods since it looks for stocks near 250 day highs. It has tested well historically in bullish periods. Strategies an investor could use to avoid drawdowns would be to either a) abandon this type of strategy entirely when the S&P 500 or another major index is below a long term moving average, or b) hedge positions with a short option strategy on an equity index or ETF like SPY.

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123.
No positions in stocks mentioned

Ticker Name Trend Analysis Last
WDC Western Digital Corp. Here 44.71
EZPW EZCORP, Inc. Here 23.31
MDF Metropolitan Health Networks, Here 3.12
CBEH China Integrated Energy, Inc. Here 11.53
PTI Patni Computer Systems Limite Here 25.76
USNA USANA Health Sciences, Inc. Here 34.72
DECK Deckers Outdoor Corporation Here 157.21
HSTM HealthStream, Inc. Here 4.85
MD Mednax Inc. Here 57.02
MANT ManTech International Corpora Here 50.36
AFAM Almost Family, Inc. Here 39.4
ARO Aeropostale, Inc. Here 31.88
AAON AAON, Inc. Here 23.95
TRLG True Religion Apparel, Inc. Here 33.11
AEO American Eagle Outfitters Here 18.14
FCFS First Cash Financial Services Here 23.49
LHCG LHC Group, Inc. Here 36.51
IDCC InterDigital, Inc. Here 28.94
JOSB Jos. A. Bank Clothiers, Inc. Here 64.13
USPH U.S. Physical Therapy, Inc. Here 18.03
CHSI Catalyst Health Solutions, In Here 45
DDMX Dynamex, Inc. Here 17.95
CTCM CTC Media, Inc. Here 19.53
MA MasterCard Incorporated Here 267.22
CPLA Capella Education Company Here 93.51
ESV ENSCO PLC Here 51.95
STRA Strayer Education, Inc. Here 253.03
BWLD Buffalo Wild Wings Here 51.33
QCOR Questcor Pharmaceuticals, Inc Here 8.21

Re-visiting One of My Favorite Strategies

Since it is a weekend and I don’t have any original ideas for today, I thought it would be worthwhile re-posting one of my favorite strategies I have detailed to date. The 5 stock hedged portfolio which is based on AlphaClone’s service has produced some impressive returns the past decade.  Below is the original post which I wrote on March 16th:

Is it possible to beat the S&P 500 with a portfolio as small as 5 stocks while also having lower overall volatility than the S&P 500?  The answer has been yes since 2000 if you followed a strategy developed by AlphaClone.

AlphaClone seeks to “clone” or simulate investing in the ideas of the world’s best investors when they are made public.  They do so by tracking public filings of hedge funds and institutional investors.  While there are limitations to this system – a hedge funds quarterly filing may contain purchases that are weeks or months old – the historical performance of “cloning” speaks for itself.

I ran a couple of backtests, two using AlphaClone’s site and one with the help of Mebane Faber.  The first two results are a clone of 10 institutional managers selected by Mebane Faber and available with a membership in AlphaClone: Appaloosa Management, Baupost Group, Berkshire Hathaway, Blue Ridge Capital, Eminence Capital, Greenlight Capital, Lone Pine Capital, Maverick Capital, Private Capital Management, and Tiger Global Management.  The particular clone I ran purchases the top 5 most popular stocks among these 10 managers as determined by how many managers hold a stock in their top 20 holdings (AlphaClone allows you to run a variety of strategies based on any number of clones).  The stocks are then typically rebalanced quarterly.

A long only portfolio of 5 stocks invested in this clone had the following returns since 2000, soundly beating the S&P 500 every year:

Year                      Clone                    SP500                        +/-
2000 21.6% -8.2% 29.8%
2001 9.4% -11.9% 21.3%
2002 -16.2% -22.1% 5.9%
2003 51.5% 28.7% 22.8%
2004 39.4% 10.9% 28.5%
2005 18.2% 4.9% 13.3%
2006 21.8% 15.8% 6.0%
2007 12.7% 5.5% 7.2%
2008 -29.1% -37.0% 7.9%
2009 55.9% 26.5% 29.4%
2010 5.0% 3.6% 1.4%

Total Return 31.7% 100.0% 343.1%
Annualized Return 9.6% 14.9% 15.6%
Annualized Volatility 22.0% 19.2% 18.8%
Sharpe Ratio 0.3 0.6 0.6
Max Drawdown -42.1% -42.0% -42.0%
Average Turnover 45.0% 45.0% 45.0%
Alpha 13.4 13.6 15.5
Correlation S&P 0.9 0.9 0.7

For those who more risk-adverse, AlphaClone allows you to backtest returns if you hedged a clone 25, 50, 75, or 100%. I hedged the identical portfolio above 100%, which means that a short position in the S&P 500 was always in place for an equal amount of the total long positions. Given that we have gone through 2 nasty bear markets since 2000, the hedged portfolio shows slightly better returns since inception but with much lower volatility than the long only strategy and has not had a down year in the past decade:

Yearly Returns

Year Clone SP500 +/-
2000 30.6% -8.2% 38.8%
2001 21.0% -11.9% 32.9%
2002 7.5% -22.1% 29.6%
2003 17.6% 28.7% -11.1%
2004 26.0% 10.9% 15.1%
2005 13.1% 4.9% 8.2%
2006 5.5% 15.8% -10.3%
2007 7.3% 5.5% 1.8%
2008 12.6% -37.0% 49.6%
2009 21.8% 26.5% -4.7%
2010 1.6% 3.6% -2.0%
Performance Statistics as of 2010-03-16

Total Return 48.4% 88.1% 349.1%
Annualized Return 14.1% 13.5% 15.8%
Annualized Volatility 10.1% 10.1% 12.9%
Sharpe Ratio 1 0.9 0.9
Max Drawdown -7.9% -7.9% -12.3%
Average Turnover 45.0% 45.0% 45.0%
Alpha 9.9 9.5 11.2
Correlation S&P -0.1 0 -0.2

After running these tests I thought that there may be a better way to find a ‘middle’ ground between the two strategies. I wanted to capture as much upside as possible in bull markets while hedging myself as much as possible in bear markets. A 50% hedge strategy is one option, but it is hedged 50% at all times, bull or bear market. Thus, I asked the guys at AlphaClone to help with the following strategy: go long in the top 5 popular stocks in World Beta Clone when the S&P 500 is above its 10 month simple moving average. When the S&P 500 closes below its 10 month SMA, hedge the portfolio beginning the following month. The returns, since inception, speak for themselves and again this strategy has not had a down year since 2000 and has absolutely crushed the S&P 500:

Clone SP500
CAGR 23.84% -0.53%
Vol 15.49% 16.02%
Max DD -17.50% -50.95%
                  Clone                 SP500                       +/-
2000 29.68% -8.2% 37.88
2001 20.18% -11.9% 32.08
2002 2.07% -22.1% 24.17
2003 38.10% 28.7% 9.4
2004 31.81% 10.9% 20.91
2005 18.44% 4.9% 13.54
2006 20.39% 15.8% 4.59
2007 14.26% 5.5% 8.76
2008 12.25% -37.0% 49.25
2009 41.30% 26.5% 14.8
2010 4.63% 3.1% 1.53

Now matter which way you backtest this clone it has outperformed the S&P 500 by a wide margin.  For the risk adverse, one of the second two strategies offer a safer way to hold stocks while hedging your position.  Keep in mind that this is just one clone of potentially hundreds you can run using AlphaClone and used one strategy (top 5 popularity) among many.  The ability to replicate top institutional investors has a track record of success but to be honest even I was a bit surprised by how wide of a margin even the ‘safe’ strategies outperformed the S&P 500.

Disclosures: I am an AlphaClone affiliate (only becoming one after first trying their service and being thoroughly impressed) and use their service frequently

Important Weekend Read, Jeremy Grantham

I always look forward to Jeremy Grantham’s Quarterly Letter.  His April 2010 letter is now available for free on GMO’s site (free registration required).  Below are some excerpts I found noteworthy:

“The massive bailout program stopped the meltdown of the financial system and engineered at least a temporary economic recovery. We know the obvious cost of this bailout: unprecedented deterioration of the Federal balance sheet. But what of the less obvious costs incurred by taking away the rewards of caution by saving the reckless and incompetent? These weak enterprises, financial and other, were not gobbled up by the stronger, more prudent,and more competent natural survivors, and there is a longterm cost in that.”

 “If, however, the economy only limps along, which seems more likely to me, then we run a very real danger of a third dangerous bubble in stocks and in risk-taking in general. For in that event, Bernanke will defi nitely keep rates low quarter after quarter and speculation will surely respond.
Again? Yes, I’m afraid so. In that environment, Bernanke will do nothing to let the air out gently. His lack of antibubble action is pretty much guaranteed. The end of such events is always hard to predict, but usually bubbles break for almost any reason when they are big enough. Of course, the larger the asset bubble, the bigger the shock to the economic and financial system.”

“…the line of least resistance is a market move in the next 18 months or so back to the old highs, say, 1500 to 1600 on the S&P, accompanied by an equivalent gain in most risk measures, followed once again by a very dangerous break. If that happens, rates will still be low
and thus diffi cult to use as a jump starter, the fi nancial system will still be fragile, and the piggybank will be more or less empty. It is remarkably silly for the Fed to allow, even encourage, this fl ight path. It is also remarkably silly for investors to be so carefree, given their recent experiences. Fortunately, there are several less likely outcomes that collectively, I hope, are equally probable. We are defi nitely playing with fi re and need some luck. The best kind of luck would be that Bernanke gets bitten by a Volcker bug.”

Is the Next Big Step in Gold in Place?

In this new (brief) video, Adam Hewison shows you how this market is setting itself up for a large move to the upside. He also points out that this is not going to happen tomorrow. The video is about two minutes long and I think it will give you a great insight into the past and future of this particular market.

As always, their videos are free to watch and there are no registration requirements.

More on this topic (What's this?)
Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
Read more on Gold at Wikinvest

Micro Stock Value Screen / Strategy

I am a member of AAII (American Association of Individual Investors) and was recently reading one of their more popular screens, the Shadow Stock Screen.  I decided to run my own test of the screen with a few small twists.  This is a very simple screen that seeks out small/microcap value stocks.  The screen criteria I used are below:

  • No over-the-counter stocks
  • No financial stocks
  • Market cap > $20 Million and <$200 million
  • Previous EBITDA quarter and trailing twelve months are positive
  • Share price > $4
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns
  • Screen is run every 4 weeks

 I would describe this as a high beta strategy – it performs very well in bullish markets and underperforms in bear markets.  Since I personally am getting a bit squeamish on how much longer we can go without at least seeing a significant pullback in this market, this is not a strategy I am investing in.  However, if an investor was looking to add some risk to his or her portfolio, this one could certainly add some “juice”.  Below are charts of the 5, 3, and 1 year returns which include a .5% assumption for  slippage.  The current top 10 stocks as of today are also below:

Current top 10 stocks on the list, based on 52 week returns:

Ticker Name Free Trend Analysis MktCap Industry
SALM Salem Communications Corp Here 128.82 Broadcasting & Cable TV
ESCA Escalade, Inc. Here 54.54 Recreational Products
SGMA SigmaTron International Here 23.32 Electronic Instr. & Controls
WCAA WCA Waste Corporation Here 101.83 Waste Management Services
RCKY Rocky Brands, Inc. Here 57.15 Footwear
BXG Bluegreen Corporation Here 163.4 Hotels & Motels
HAST Hastings Entertainment, Inc. Here 67.23 Retail (Specialty)
PNTR Pointer Telocation Limited Here 32.32 Security Systems & Services
DSWL Deswell Industries, Inc. Here 83.21 Chemicals – Plastics & Rubber
SYMS Syms Corp. Here 145.4 Retail (Apparel)