Archive for 2014

War Risk Considerations

Tuesday, September 2nd, 2014

The three big current arguments against owning stocks or other risk assets are:

  • Asset bubble (significantly overvalued asset prices)
  • Economic slowing or deflation
  • War (direct US involvement; or energy, materials and trade disruption)

We will address the question of asset bubbles and economic slowing or deflation in another letter. This one is about war risk to US stocks.


War has not been bad for US stocks over more than 100 years. Don’t run away from stocks due to war risk.

Caveat, all data is with war that is outside of our homeland (except for the beginning of a war caused by 9/11). No data is available for US stocks with war here (we don’t have data for the Civil War period). Also, the risk of a land war elsewhere, with a cyber-war within our borders is not considered, as there is no precedent.

Obviously, war is a horrible thing with devastating impact on individuals and families, and specific companies or industries; but from a stock market perspective only, it has not been a reason to avoid broad stock indexes.

Historical Data:

Using US stock market data from R. Shiller of Yale, which is for the S&P 500 since its inception in 1957, and best proxy precursors prior to that back to 1871, we have measured and plotted US stocks prices, earnings and dividends in each of several key war periods.

This table lists key war periods and shows the beginning and ending dates (rounded to beginning and ending of calendar years – except for the Cuban Missile Crisis which is for the month before, during and after the near nuclear war). It also shows the beginning and ending price of the S&P 500 (or its precursors), and the annualized rate of price change for the period (dividends are not included in the return calculation – price only).


Historical Charts:

Sometimes a visual approach is more revealing than a data table, so here are charts of price, earnings and dividends for each of the war periods in the table above.

Spanish American War




VietNam War

Cuban Missile Crisis.png'

Afgahnistan War



The table and the pictures speak for themselves. Foreign wars are awful experiences, devastating lives and families, but they have not so far been particularly damaging to the US stock market. Other risks are of greater importance.

A war within our borders is probably an entirely different matter, and something that probably would be quite damaging to US stocks, but there is no data to support that; only logical argument of total industrial and commercial disruption and destruction. An effective massive cyber-attack could have at least very negative impact on stocks, but that also has no precedent.

The past is not the future, but historical experience suggests that the level of war ongoing in the world today is not a reason to hide from US stocks.

We do not make the same argument about European stocks (particularly in nations abutting Russia), or about Israel or the GCC countries or Nigeria. Each of these faces potential combat on their soil and (except for Israel) facing potentially superior forces; which is a totally different matter than the US being involved in war on foreign soil as the superior force.


Financial Cyber Security: Paper Financial Statement Records Are Essential

Thursday, August 28th, 2014

QVM Clients:

Given the growing frequency and severity of hacker attacks on financial institutions (JP Morgan yesterday, for example), and given the estimated potential for information damage by an electromagnetic pulse weapon, I recommend that you keep paper statement for all of your investment, banking and other financial accounts.

We made the same recommendation back in 2011 in a SeekingAlpha article about personal financial security best practices.  It made sense then, and makes more sense now as the frequency and severity of attacks increases.

Stealing your account access data, or actually stealing your money in an attack on some institutions is bad, but probably compensable by the compromised institution or their insurers.  However, if a major foe  were to attack in a way that simply deleted or scrambled account data throughout an institution (or many institutions simultaneously) you may spend months or years waiting (and hoping) for recreation of your account data and access to your money, particularly if they were able attack backups somehow.

Data disaster sounds like science fiction, but simply keeping paper statements could make all the difference in the event that such an attack takes place.  Those with paper statements are likely to be resolved first (or at all).

JP Morgan,  which suffered a massive data breach yesterday, is reported to spend $200 million per year on data security, yet all that was penetrated.  They are likely as good as any institution.  The bottom line is your data, and perhaps access to your money is potentially at stake.

Print out or take mail delivery of paper statements, and retain recent copies just in case.

Best 3 Health Care Active Mutual Funds and Their 12 Top Consensus Stock Holdings

Saturday, August 9th, 2014

Except for one gas utility fund (GASFX), only Health Care mutual funds outperformed the S&P 500 over multiple long and short periods (including 2008) with “reasonable” volatility for return generated.

As we inspected those Health Care funds, we identified 3 that had the most attractive overall set of performance attributes.  They are:

  • (FSPHX) Fidelity Select Health Care
  • (JAGFLX) Janus Global Life Sciences
  • (PRHSX) T. Rowe Price Health Sciences

The top 12 individual stocks held by all three of those mutual funds are (with relative weights) as of last  available report:

  • (GILD) Gilead Sciences [17.90%]
  • (ACT) Actavis [14.60%]
  • (BIIB) Biogen [13.90%]
  • (CELG) Celgene [9.71%]
  • (ABBV) AbbVie [9.08%]
  • (ALXN) Alexion Pharmaceuticals [8.45%]
  • (VRTX) Vertex Pharmaceuticals [4.61%]
  • (TEVA) Teva Pharmaceutical Indust. [6.08%]
  • (VRX) Valeant Pharmaceuticals Intl [4.61%]
  • (HCA) HCA Holdings [3.72%]
  • (JAZZ) Jazz Pharmaceuticals [3.24%]
  • (HTWR) Heartware International [2.29%]

[Important Note:  This article is provided as an information aid to do-it-yourself investors.  This IS NOT a specific recommendation to buy or sell any security, nor a statement of suitability for any particular investor.]


Here is how the mutual funds have done versus the S&P 500 (SPY) , the S&P 500 Health Care sector (XLV), and the Biotech sub-sector (IBB):









 10-Year Comparative Accumulated Portfolio

The red line is based on owning the 3 mutual funds in equal weight and rebalanced monthly (no tax effect, so represents tax exempt or tax deferred account).  The blue area plot represents the S&P 500.  We did not provide dollar figures here simply to show the visual proportions.

The Health Care funds outperformed during the 2008 crash as well as over the full 10-year period. That does not mean they will necessarily outperform in a future bear market.  The world is different now than then, the Affordable Care Act not the least of the differences.  However, we are encouraged by historical relative performance.


40-Quarter Performance Spread

This histogram presents the quarterly performance of the 3 funds in equal weight versus less the performance of the S&P 500.


3-yr,  5-yr and 10-yr Sharpe Ratio:

The 3 funds held in an equal weight portfolio had a significantly better Sharpe Ratio over 3, 5 and 10 years — less volatility per unit of return.


Valuation and Operating Statistics

The 3 funds have higher P/E,  P/B,  P/S and P/CF valuations than the S&P 500 benchmark (but with higher growth rates, not shown).

The funds have lower net margin, lower ROE and ROA than the benchmark, due in part to the development stage of some of the biotech holdings.




The 12 top stocks held by each of the three funds substantially outperformed the S&P 500 as well as the 3 mutual funds over the past 10 years.

We must point out that those 12 stocks were not the top 12 consensus stocks throughout the 10 year period that the mutual funds were measured.  These stocks are a current snapshot of the funds’ holdings. There have been very recent developments, such as the Gilead Hep-C drug approval, which may not have had analogs in the past and may not have analogs in the future.

Here is how the individual stocks  have done versus  the S&P 500 Health Care sector (XLV), and the Biotech sub-sector (IBB):


10-Year Comparative Accumulated Portfolio

If the 12 stocks had been purchased 10 years ago and held in equal weight and rebalanced monthly in an account with tax deferral or tax exemption (such as an IRA, pension or foundation), this chart shows how the accumulated value of the stocks (red line) compares to the S&P 500 (blue area plot).  We did not provide dollar figures here simply to show the visual proportions.

They did much better relative to the S&P 500 than the mutual funds (noting that these stocks probably were not the top 12 consensus stocks 10 years ago).


40-Quarter Performance Spread vs. S&P 500


3-yr,  5-yr and 10-yr Sharpe Ratio:

The top 12 consensus stocks help in equal weight produced a higher Sharpe Ratio than the 3 mutual funds held in equal weight — experienced less volatility per unit of return than the mutual funds.


Valuation and Operating Statistics

The 12 stocks have higher valuation ratios than the funds, and lower net margin, but somewhat better ROE and ROA.



Valuation Metrics for the Individual Stocks:



These charts present the Revenue, EBITDA and Dividend payments over the past 10 years for each of the individual top 12 consensus stocks:


Investment Quality Ratings By Wright’s:

Wright’s rates each stock by four key attributes: Investor Acceptance, Financial Strength, Profitability and Growth (using 8 criteria for each of the four attributes).  Investment Grade is defined as a rating of BBB4 or better. (see explanation of rating levels)

  • (GILD) Gilead Sciences [ABA15]
  • (ACT) Actavis [ABC6]
  • (BIIB) Biogen [AAA16]
  • (ABBV) AbbVie [ABA19]
  • (ALXN) Alexion Pharmaceuticals [AAA20]
  • (VRTX) Vertex Pharmaceuticals [ABNN]
  • (TEVA) Teva Pharmaceutical Indust. [ABB5]
  • (VRX) Valeant Pharmaceuticals Intl [ADNN]
  • (HCA) HCA Holdings [ALNN]
  • (JAZZ) Jazz Pharmaceuticals [ABC20]
  • (HTWR) Heartware International [LBNN]

Links to Yahoo key statistic data, Morningstar key ratios, BarChart short-term technical rating, and StockCharts price chart with some averages and technical indicators and the StockCharts Technical Rank for each of the 12 stocks are available here:

  • (GILD) Gilead Sciences || Y, M, B, S ||
  • (ACT) Actavis || Y, M, B, S ||
  • (BIIB) Biogen || Y, M, B, S ||
  • (ABBV) AbbVie || Y, Mo, B, S ||
  • (ALXN) Alexion Pharmaceuticals || Y, M, B, S ||
  • (VRTX) Vertex Pharmaceuticals || Y, M, B, S ||
  • (TEVA) Teva Pharmaceutical Indust. || Y, M, B, S ||
  • (VRX) Valeant Pharmaceuticals Intl || Y, M, B, S ||
  • (HCA) HCA Holdings || Y, M, B, S ||
  • (JAZZ) Jazz Pharmaceuticals || Y, M, B, S ||
  • (HTWR) Heartware International || Y, M, B, S ||

For those who want health care exposure, don’t need strong dividend income,  don’t want to research and monitor individual stocks positions, and want active management; the three identified mutual funds are an interesting choice.

For those who want health care exposure,  don’t need strong dividend income, and prefer to invest in individual stocks; some of the top 12 consensus stocks may be an interesting choice.




5-Yr Projection of Mean Reversion for S&P 500 Price, GAAP Earnings and Dividends

Monday, July 28th, 2014

One approach to seeking fair value, or simply what is most likely, over the intermediate-term to long-term is the assumption of mean reversion.  That approach basically assumes that long-term means act a bit like gravity or a magnetic attraction that pulls on prices, earnings or dividends to return to the mean growth level.

It may take a lot of patience for that approach, and if there is a permanent structural change in markets, the former mean may not continue to serve as gravitational or magnetic attraction.   On the other hand structural changes are few and far between, making mean reversion a pretty good bet more often that not.

So, lets discover the long-term means for S&P 500 prices, GAAP earnings and dividends; and then apply those means to make reasonable 5-year projections of those dimensions into the future.

Let’s use the S&P monthly data available from Professor Shiller at Yale (you can download the data for yourself to do various studies on your own).  That data begins in the 1800’s using precursors to the S&P 500, such as the Dow Industrials and other data, but we will confine our study to actual S&P 500 data from its inception in 1957 (more than 57 years of data).


The long-term compound growth rate of the price of the S&P 500 is 6.88%.  Continuing that growth curve out 5 years comes up with a future  price projection in the vicinity of 2700.  That is around 36% to 37% above the current level.



The long-term compound growth rate of the GAAP earnings for the S&P 500 is 5.90%.  Continuing that growth out 5 years comes up with a future earnings level projection in the vicinity of $115 per index share. That is around 14% above the most recent 2-month trailing earnings levels.



The long-term compound growth rate of dividends for the S&P 500 is 5.37%.  Continuing that growth out 5 years comes up with a future earnings level projection in the vicinity of $45 per index share.  That is around 20% above the most recent 12-month  trailing dividend level.



Now let’s look at the growth trends since the effective beginning of the internet era in 1995, and also use the long-term growth factors from that beginning to see where that ends up.

In 1995, HTML had been around for a few years, and eventually it included ways to add images, not just text. That image capability was added and expanded to browser capability when Mark Andreesen released the Netscape browser in November 1994.  The internet rapidly transformed from a Geeky academic and military technology, to a personal and commercial technology.  It has been disruptive and transformative in business and for stocks ever since.

Keep in mind that if January of 1995 was particularly high or low relative to fair value, the projection would be comparably high or low.  For reference and to make your own judgment about that, here are the multiples at as of December 30, 1994:

  • GAAP earnings yield 5.95% (P/E ratio 18.81)
  • Dividend yield 2.90%
  • Moody’s long-term Baa corporate bonds 9.1%
  • 30-yr Treasuries 7.89%
  • 10-yr Treasuries 7.81%
  • 5-year Treasuries 7.81%
  • 2-yr Treasures 7.69%
  • 3-mo Treasuries 5.6%

The yield curve was essentially flat, while today it is steep. and the Fed was not such an intrusive player.


These charts have two 5-year projections.  The black dotted plot is a simple exponential trendline on the data from the beginning of 1995 projected out 5 years.  The red solid line is a projection from the beginning of 1995 at the long-term growth rate of the price of the S&P 500.

The exponential trend line is heavily influenced by the extremes of the dot-com bubble, while the long-term growth rate projection is impacted by the degree of “normalcy” of the starting point multiple.

The exponential projection suggests there is little if any price growth in the 5-year future of the S&P 500.  The long-term growth rate applied to the internet era suggests a price level 5 years out in the vicinity of 2900, or about 31% to 32% cumulative price change over the next 5 years.

At a minimum, the explosive growth of the past few years driven by both earnings recovery from the deep 2008 crisis, and by P/E multiple expansion.  Those forces are behind us, not in front of us.


There are many optimists among the analyst community, and there are long-term optimists who expect a correction, but there is a much more limited number of outright long-term pessimists.

Two prominent pessimists are Bill Gross of PIMCO and Jeremy Grantham of GMO.

  • PIMCO, as you may know, is predicting stock price appreciation in the 3% to 5% range over the next several years.
  • GMO is another important voice expressing concerns. Their quarterly asset class 7-year forecast is for negative 1.7% rate of return for US large-cap stocks (essentially the S&P 500), negative 5.2% return for small-cap stocks (essentially the Russell 2000), and positive 2.8% for high quality stocks. They see positive 3.6% returns for emerging market stocks,

As to High Quality Stocks, we suspect for the most part GMO was thinking about large-cap stocks that have not participated fully in this momentum market, and which are particularly strong otherwise – such as with consistent but modest revenue and dividend growth, low leverage and strong Balance Sheets, and wide business moats.  See our post of high quality stocks.)


The exponential trendline from the beginning of 1995 suggests earnings are already too high by about $10 per index share ($100 versus a 5-year projection of about $90).  Let’s hope that is not a good forecast, because the absolute level of earning and the associated negative growth rate would probably crush the stock market.

We do have historically high profit margins, historically low corporate borrowing costs, stagnant wages, above historical earnings growth rates, above average P/E multiples, and stock market capitalization that is at an historically high ratio to US GDP.  Those are key fundamental risk factors that should be evaluated.

The long-tern earnings growth rate applied to the earnings at the beginning of 1995 projected out 5 years, suggests earnings of about $122 per index share, or about 21% above current levels.

Standard & Poor‘s forecasts 2014 GAAP earnings of $119.87 (basically the 5-yr projection level at the long-term growth rate); and $136.39 for 2015.  The 3-year period leading up to the end of 2015 would have a compound earnings growth rate of 16.39% (about 2.5 times the long-term earnings growth rate).  They may be right, but if they are way wrong, there will be major market problems.



The exponential 5-year projection for S&P 500 dividends goes to about $40 per index share (about a cumulative 7% growth).  The long-term dividend growth rate applied from the beginning of 1995 suggests a 5-year projected cumulative growth of about 22% to about $46 per index share.


On balance, we have a greater faith in the growth of dividends than in the growth of either earnings or index price.  We also share GMO’s prediction that high quality stocks will do better over the next few years than large-caps in general.  Additionally, our client basis is at or near the end of the accumulation stage of their financial lives, where assets cannot be replaced easily or at all from new wages or business profits.  That means asset preservation is key, further pushing us in the direction of dividend and high quality bias within the stocks allocation, along with some amount of allocation to partially market neutral assets, such as long/short funds or positions.


Smart Money vs Dumb Money Sentiment Shows Strong Divergence Of Opinion

Friday, July 25th, 2014

There is a lot of talk about correction or melt-up.  Opinions are divided, and both can occur with either occurring first.

Corrections (10% declines) are inevitable within a Bull market, but when is not possible to predict.  Often times they are primed to happen due to valuation, or weakening operating performance, but triggered by an outside event of some sort.  We have had some big geopolitical events recently that have not had much impact.

The most important event in some people’s minds is a change in Fed interest rate policy (do note that stocks have done well in rising rate environments up to about 5% to 6% Treasury 10-year yield). The initial surprise of a directional change in interest rates, however, could cause some immediate negative stock reaction depending on what is done, and how much is done with rates.

In an attempt to gauge sentiment, surveys are constantly conducted, but opinions are not as reliable as investors putting their money on the line.

One way to dissect sentiment, is to separate the decisions of institutional investors (presumably smarter and/or more logic based decisions) versus retail investors (presumably not as smart and/or more emotional decisions). The best indicator of the view of those two groups is to see the ratio of Put buying (protective) to Call buying (gain seeking) of each.

Institutional investors dominate the options market for indexes (such as the S&P 100), while retail investors dominate the options market for individual stocks.

This chart shows the ratio of Puts to Calls (the “Put/Call Ratio”) for the S&P 100 index and for individual stocks as a whole.

Smart vs Dump OR Logical vs Emotional


No indicator is perfect, nor should any be taken as a sole indicator, but this particular sentiment indicators suggests that professional investors are more in the camp that says a correction is due, while retail investors (who have been piling in lately) are more in the melt-up came (or at least “I’ve got to catch up camp”)

The clear opposite direction of change in the two Put/Call ratios shows the divergence of views between professional and retail investors.

This does not mean Bear market, but simply that a correction is viewed as likely (if not needed to wash out weak hands) in the minds of institutional investors.

We believe the longer term factors for the stock market are still positive, if less extreme that when we came out of the depths of 2009.



Move Toward High Quality Stocks For Late Stage Bull Market (27 stock selections)

Tuesday, July 15th, 2014

A basic investment concept is to that high quality stocks fare better in down markets than low quality stocks, and therefore in late stages of a Bull market with generally fully valued stocks, tilting equity allocations toward high quality is prudent.

Accordingly, we set out to identify high quality stocks.  We know that sources such as S&P and ValueLine render quality ratings, but they are each a “black box” to a great extent, and we wanted to test quality using some other criteria as well.

We made the assumption that high quality could be identified by:

  • trading liquidity
  • strong balance sheets
  • revenue growth
  • long unbroken strings of dividend payment and increase
  • wide moats against competition.

With those conceptual criteria in mind, we applied these specific filter criteria to all stocks traded in the United States:

  • Wright’s investment grade rating minimum “BBB4” (see ratings description) for liquidity, financial strength, profitability and growth, based on 32 factors (577 passed filter)
  • Member David Fish’s Dividend Champions, Challenger or Contenders (“CCC”) – stocks that paid and increased dividends each year for at least 5 years; some did for decades (543 passed filter)
  • Morningstar “Wide Moat” designation (258 passed filter)
  • Revenue growth over each of 5, 3 and 1 years at least 3% (1796 passed filter)
  • Dividend growth over each of 5, 3, and 1 years at least 3% (657 passed filter)
  • Four part Balance Sheet  filter (1454 passed filter)

Four part Balance Sheet filter:

  • Tangible equity increased at minimum 3% annualized rate from 5th prior fiscal year to most recent completed fiscal year
  • Total Liabilities/Tangible Assets not more than that ratio 5  fiscal years ago
  • Current Ratio >= 0.9
  • Quick Ratio >=0.7

To understand the size of the universe we filtered, consider these sources with more than a combined 8,500 stocks:

  • NYSE has 4,668 listings (almost entirely stocks)
  • NASDAQ has 2,735 stocks
  • NYSE/AMEX has 425 listings
  • OTC BB has 836 stocks

From that universe, when we applied all of the criteria simultaneously, only 9 stocks passed, which we called our highest quality scenario.

We cross-referenced our list with quality ratings from S&P and from ValueLine, and found agreement.  The difference is that our list is much shorter than their lists.  Our criteria are more restrictive than those for S&P and ValueLine, resulting in the limited number of selections.

Highest Quality Scenario (9 stocks):

Pass All Filter Criteria

GGG Graco Inc. Capital Goods
GWW W.W. Grainger, Inc. Consumer Cyclical
MMM 3M Co Capital Goods
MON Monsanto Company Basic Materials
MSFT Microsoft Corporation Technology
QCOM QUALCOMM, Inc. Technology
SXL Sunoco Logistics Partners L.P. Energy
TIF Tiffany & Co. Services
UNP Union Pacific Corporation Transportation

If we did not apply the Balance Sheet criteria, but applied all of the others, 18 stocks  in addition to the highest quality 9 passed the filter.  These 18 stocks also substantially agree with quality ratings from S&P and ValueLine.

Best Performing Scenario (18 stocks):

Pass all criteria except Balance Sheet

ABC AmerisourceBergen Corp. Health Care
ADP Automatic Data Processing Services
BAX Baxter International Inc. Health Care
BEN Franklin Resources, Inc. Financial
BF-B Brown-Forman Corporation Consumer Non-Cyclical
CHRW C.H. Robinson Worldwide, Inc. Transportation
CLB Core Laboratories N.V. Energy
COST Costco Wholesale Corporation Services
EFX Equifax Inc. Services
EV Eaton Vance Corp Financial
FAST Fastenal Company Capital Goods
FDS FactSet Research Systems Inc. Technology
JKHY Jack Henry & Associates, Inc. Technology
MCK McKesson Corporation Health Care
NKE Nike Inc Consumer Cyclical
OKS Oneok Partners LP Utilities
SYK Stryker Corporation Health Care
TROW T. Rowe Price Group Inc Financial

If we required only the Wright’s investment grade rating, the Dividend CCC membership, and the Morningstar Wide Moat, there were an additional 38 stocks, for a total of 65 out of over 8,500 that passed some level of our high quality screen. A few of the stocks in this last group had only average quality ratings from either S&P or ValueLine, but most were high quality by those two independent sources as well.

Of those last 38, there were 17 that passed 1 or more of the additional criteria; and 21 that passed only the three minimum criteria — however, those 3 minimum criteria are quite important and powerful as they reduced over 8,500 stocks to merely 65.

Let’s look into the 27 stocks in the top group of 9 and second group of 18 high quality stocks.

If the 27 stocks were purchased in equal weights 10 years ago (as of June 30, 2014) and then rebalanced monthly — as might be done in a tax exempt or tax deferred account, but probably not in a taxable account — this chart compares the level of value accumulation of the S&P 500 versus the value accumulation by the 27 high quality stocks.


Basically, the blew the doors off of the S&P 500.  A criticism of this backtest is the benefit of hindsight.  Stocks that have only paid and increased dividends for 5 to 9 years as of today, would not have been selected 10 years ago based on the filter criteria, and their revenue and growth over the past 5, 3 and 1 years may not resemble those stats 10 years ago.

Let’s look at that in a more granular way to see recent periods where the filter is more likely to have selected these stocks.

This histogram shows how a monthly rebalanced, equal weight portfolio would have done versus the S&P 500 on a quarter-by-quarter basis.


Over the past 3, 2 and 1 years, the 27 stocks would have outperformed, but during this recent melt-up they generated less alpha than in prior periods.  Our hypothesis is that in a correction or worse, they would be better relative performers.

Let’s look now at their risk adjusted returns through the lens of Sharpe Ratios.


They have higher volatility than the S&P 500 as an equal weighted group, but superior risk adjusted returns.  The higher volatility, which is not major in significance, may be the result of a less diversified portfolio than the S&P 500.

Before, we move on to a look at the performance of the different subgroups of the 65 filter survivors, here is a high level view of the 27 by market-cap, style, and economic sensitivity.


They are large-cap and mid-cap, growth or value/growth blend by style; with a balance of cyclical, defensive and moderately economically sensitive stocks.  The standout data point is that small-caps didn’t produce any survivors.

Now let’s look at different filter survivor sub-groups.

Referring to the selection process as scenarios, we have identified 5 slices of the survivors:

  • Scenario I: Dividend CCC, Wright investment grade and Morningstar Wide Moat only (23 stocks)
  • Scenario II:  Scenario I criteria plus Balance Sheet criteria (15 stocks)
  • Scenario III: Scenario I criteria plus revenue and dividend growth criteria (18 stocks)
  • Scenario IV: Scenario I plus revenue and dividend growth and Balance Sheet criteria (9 stocks)
  • Scenario V: All stocks in Scenarios I-IV (65 stocks)

This first table calculates the “price only” IRR of each scenario of equal weighted stocks in  “buy and hold” portfolios (no rebalancing this time).

Scenario IV (all criteria met) is the superior price performer in all periods including 10, 7, 5, 3, 1 years and 6 months year-to-date 2014.

Scenario III (revenue and growth requirement, but not Balance Sheet) came in second and  outperformed the S&P 500  for 10, 7, 5 and 3 years; but fell behind the S&P 500 over that 1-year and 6-month periods.  In that 1-year and 6-month periods, Scenario II (Balance Sheet requirement, but not revenue or dividend growth) pulled into second place, beating the S&P 500.

Is the slight rotation from growth focus to Balance Sheet focus related to a concern about the impact of expected interest rate rises?


As an alternative way to examine the same price-only IRR data, this table presents the return spread between the Scenarios and the S&P 500.


Here is a table of 7-year and 5-year annualized growth of sales, reported earnings per share and dividends.

In this case, Scenario III (the revenue and dividend growth factors) understandably have somewhat stronger growth characteristics.  There has been a huge earnings recovery in the S&P 500, but that includes the effect of coming out of a large earnings hole.  The high quality stocks have lower 5-year earnings growth, because they did not have the earnings hole experienced by the S&P 500 in its entirety.


Looking at valuation (as of June 30, 2014), the high quality stocks have higher valuation multiples, but when we get to the PEG ratio (forward P/E divided by estimated 5-year forward earnings growth rate), the valuations for Scenarios II, III and IV are  in the reasonable range (basically 1x to 2x).

Scenario I (Dividend CCC, Wright’s investment grade, and Morningstar Wide Moat alone, is expensive  with a PEG of 3.63x (lacks sufficient growth).


These two tables present valuation data for the 9 and 18 stocks discussed above.




If you are interested in the current technical condition, potentially for deciding when to enter one or more of the stocks, you might want to be aware of opinions such as those from BarChart or

Not all of these are in good technical shape, but from a fundamental perspective most of these are probably a pretty good go-to list for high quality.

Here are links to each with technical ratings (change the symbol on the linked pages for the security you want to see):


Disclosure:  We own 13 of the 27 stocks in this blog post and may buy more.