Analytic Investment Management LLC

Invest Prudently

Main navigation

Portfolio

A Boring 2015 Outlook – It’s All About Earnings!

Following is a slightly revised article first published on TheStreet on 12/12/2014.

The S&P 500 decidedly broke out resistance level in November and is continuing its upward trend. As of December 14, the S&P 500 is up over 12% year-to-date. Guess what? As the 2014 third quarter earnings report season comes to an end, the S&P 500 trailing 12-month earnings growth is exactly at 12%!

The U.S. stock market is boring since it simply follows the earnings growth rate, but there is a lot of excitement in Asia. Fueled by the Shanghai-Hong Kong exchange connect this year, after a lackluster year in 2013, the China Shanghai Stock Exchange A Share Index has rocketed 43% higher year-to-date. India BSE SENSEX Index also has a great run, rising 30% so far this year.

GOLDILOCKS ECONOMY IN US

The U.S. economy is slowly hitting on all cylinders, and is expected to continue its stable upswing in 2015. Here are some indicators that illustrate why:

  • The Index of Consumer Sentiment from University of Michigan rose above its long term average of 80;
  • Weekly Initial Unemployment Claims are near 40-year lows;
  • Housing Starts are improving;
  • ISM Manufacturing PMI Composite Index is staying well above 50 level;
  • Low inflation expectations from falling oil prices and record expansion in solar utility industry.

Corporate earnings growth, the most reliable market gauge in the U.S., is forecasting 10% growth in 2015.

WHAT MATTERS IN MATURE BULL MARKET – EARNINGS

Investors should focus on companies that can increase the most earnings per share efficiently while maintaining low valuation and not be afraid to increase cash allocation. With the U.S. dollar strengthening, lower energy prices and higher consumer spending, the best bets would be on growth at reasonable priced stocks from consumer discretionary and information technology sectors. With 10,000 baby boomers turning 65 and eligible for Medicare per day and the costly implementation of Obamacare, demands and innovations in the healthcare sector will create tremendous investment opportunities.

In the large cap growth space, our Focus Growth computer model’s current favorable stock is Western Digital (NASDAQ: WDC) with a 5.8% allocation. WDC’s 1 year EPS growth rate is 64% and the dividend increased by 46% over one year ago, with P/E/G of only 0.76.

NO BEAR MARKET IN US

To quote Sir John Templeton, “Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Investor sentiment indicators, such as the AAII Investor Sentiment Survey, continue to show a narrow bull-bear spread, indicating that general investors are still skeptical about this five and a half-year-old bull market. Investors and traders continue to embrace momentum trades, creating volatile yet profitable market condition. Bears will probably come out of hibernation when broad-based investors turn to buy-and-hope strategies again and become euphoric about the stock market.

Until then, as Warren Buffett said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

Disclaimer

Investing in the financial markets involves risk, including the risk of principal loss. Don’t invest with money you can’t afford to lose. Information in this report is in no way intended as personalized investment advice and should not be interpreted as such.

Focus Growth AAPL Trades

This article uses live trading records of our Focus Growth model from our brokerage account to illustrate how our sophisticated computer programs traded AAPL from September 2011 to August 2012. Focus Growth is our large cap growth portfolio that invests in large cap stocks using our proprietary computer algorithms. AAPL is the best known stock in the world and is widely held by institutional and individual investors.

Focus Growth made initial purchase of AAPL on September 02, 2011, then scaled in and out it a few times to take advantage of potential opportunities in other large cap stocks, and finally closed the AAPL position on August 22, 2012. The complete AAPL trade lasted almost one year.

Following chart marks the buy/sell entry points and transaction prices.

Following table explains the reason for each AAPL trade that the computer programs made:

Trade Sequence Buy or Sell Date Shares Transaction Price Reason for the Trade
1 Buy 2011/09/02 5 $373.41 AAPL is cheap relative to other large cap stocks.
2 Sell 2011/11/14 1 $383.48 BIIB has better potential. Sell 1 share AAPL to buy BIIB.
3 Sell 2011/12/19 1 $383.7 CELG has better potential. Sell 1 share AAPL to buy CELG.
4 Sell 2011/12/27 1 $407.31 ASML has better potential. Sell 1 share AAPL to buy ASML.
5 Buy 2012/01/30 1 $447.91 After Q1 report, AAPL has better growth rate. Sell other stocks to buy 1 share AAPL.
6 Buy 2012/02/21 1 $506.62 Continue selling other stocks to buy 1 share AAPL.
7 Sell 2012/04/09 1 $629.11 AAPL valuation becomes expensive relatively. Sell 1 share AAPL to buy LULU.
8 Sell 2012/08/22 3 $660.1 After Q2 reports, other large cap stocks have better growth rates, and AAPL price has gone up too much to make its valuation attractive. Close remaining 3 shares to buy other large cap stocks with better potentials.

For Focus Growth to invest in AAPL again in the future, one or more of the following things must happen:

  • Other large cap stocks appreciate significantly faster than AAPL, so that AAPL becomes relatively cheap comparing with others.
  • AAPL growth rates in future quarter reports go back to historical level and make valuation favorable again when comparing with other large cap stocks.
  • AAPL price has good correction from current level so that the valuation becomes attractive even at current growth rate.

We will patiently let our computer programs monitor and keep tracks of both price and financial statements of AAPL and all other large cap stocks, then decide whether/when to pull the trigger to invest in AAPL again.

Disclaimer

Investing in the financial markets involves risk, including the risk of principal loss. Don’t invest with money you can’t afford to lose. Information in this report is in no way intended as personalized investment advice and should not be interpreted as such. Past performance is not necessarily indicative of future results. Performance results do not take into account any tax consequences.

Why does Focus Growth Model like MNST?

Our Focus Growth Model picks top ranked large cap growth stocks according to many fundamental factors published in the books by famous growth stock investors William O’Neil, Peter Lynch, Martin Zweig, and Louis Navellier. Through extensive research, we select and improve the best fundamental factors from their books. We have programmed these factors into computer codes and added proper position sizing algorithm, which enable us to invest in large cap growth stocks without human bias or emotion.

After sifting through and comparing massive amount of fundamental data of large cap stocks, Focus Growth Model currently (as of May 29, 2012) invests around 7.3% in Monster Beverage Corp (Nasdaq:MNST). MNST, through its subsidiaries, develops, markets, sells, and distributes alternative beverage category beverages in the United States and internationally.  Current MNST position is making good profit for Focus Growth Model, and our computer program will decide when it is the right time to take partial or full profit off the table to invest the proceeds into other large cap growth stocks with better profit potential.

The major obstacle that many investors face with growth stocks like MNST is these stocks always look artificially expensive, either from their parabolic move in price chart or their high P/E ratio, and most of these stocks never issue dividends.

However, our computer program has no emotion and it have been able to scratch beyond the surface. Sales and EPS of MNST have been growing consistently over the last 5 years and is ranked highest among its industry peers. Earnings growth of MNST is supported by strong sales growth, and its operating margins and return on equity are top-ranked. All these are important factors that O’Neil, Lynch, Zweig, and Navellier look for. Institutional sponsorship of MNST is rising, an interesting factor that O’Neil uses. However, P/E/G ratio (Lynch’s famous ratio) of MNST has been on the high side, and it is indeed a good fundamental factor to watch out for growth stocks based on our research, so MNST does not make it to our top 5 holdings of Focus Growth Model due to our position sizing algorithm.

Growth rate of all growth stocks will eventually slow down, therefore it is important to analyze their quarterly financial statements constantly, and be ready to move investment capital to the next better growth stocks whenever opportunities arise.

Disclosure

Long MNST in Focus Growth Model in our brokerage account since Sep 02, 2011.

Our computer program may increase or decrease MNST position in Focus Growth Model without notice any time after this article is published.

Disclaimer

Investing in the financial markets involves risk, including the risk of principal loss. Don’t invest with money you can’t afford to lose. Information in this report is in no way intended as personalized investment advice and should not be interpreted as such. Past performance is not necessarily indicative of future results. Performance results do not take into account any tax consequences.

Take Advantage of US Stock Market Changes Since 2001

Three major positive changes in US stock market at the beginning of 21st century bring tremendous investing opportunities to individual investors, leveling the playing field of once institution-dominated arena:

(1) The U.S. Securities and Exchange Commission, the federal agency that oversees the nation’s stock markets, ordered all U.S. stock markets to convert to decimals by April 9, 2001. With this change, the spread for individual investors to trade stocks plunged and resulted in huge increase in market liquidity.

(2) US federal law Sarbanes–Oxley Act of 2002 was a enacted on July 30, 2002, which set new or enhanced standards for all U.S. public company boards, management and public accounting firms. Since then, financial restatements from public companies declined significantly, and individual investors can reliably count on public financial statements to analyze stock fundamental factors without the need to hire an army of accounting investigators for the job.

(3) With the rapid advance of information technologies, individual investors can trade stocks at sub-penny level commission, the same (if not lower) rate as institutions, with the same direct access the trading venues.

With all above, individual investors no longer have to limit their investment needs to the investment products sold by Wall Street companies that are full of conflict-of-interests.