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New Quarterly Baker's Dozen UIT Launched

January 17, 2020: Starting this year, Sabrient’s Baker's Dozen Portfolios will be published quarterly rather than monthly. Commensurately, each portfolio is designed to be held for 15 months.

The 1st Quarter 2020 Baker’s Dozen UIT Portfolio (FNTXVX) was launched by First Trust Portfolios on January 17, 2020. This portfolio, like all Baker's Dozen portfolios, comprises 13 top-ranked stocks from a cross-section of market caps and industries based on our GARP approach, i.e., growth at a reasonable price. Sabrient believes each of these stocks is positioned to perform well for the next 15 months. The portfolio will terminate on April 20, 2021. For more information and a fact sheet please visit First Trust Portfolios

New Dividend UIT Portfolio Launched

January 3, 2020: A new Sabrient Dividend UIT Portfolio (Ticker: FJHYJX) – 30th in the series -- was launched by First Trust Portfolios on January 3, 2020. This UIT seeks companies with above-average total return through a combination of capital appreciation and dividend income. The stocks are selected through an investment strategy process developed by Sabrient. The portfolio will terminate on January 3, 2022. For more information, a prospectus, or a fact sheet, please visit First Trust Portfolios

07
Jan
2020

How to identify short candidates through anomalous insider selling activity

Dominic Finney  by Dominic Finney
  Senior Analyst & Chief Technical Editor, Gradient Analytics LLC (a Sabrient Systems company)

Perhaps the most reliable shortcut to identifying a company at elevated risk of a downturn in its share price is looking at how executives and directors use their equity instruments. This might sound too simple to be predictive – something that would be quickly understood by the market and integrated into investors’ thinking on a scale that would cause the “edge” to disappear. But there are complications that have prevented that from happening, on which I will elaborate shortly. But first, let’s look at some recent examples.

Over the past two years, Gradient Analytics has published five brief “snapshot” reports based on our Equity Incentive Analytics examining signs of unusual and concerning equity use by executives and directors. The subject companies were Amarin (AMRN), United States Cellular (USM), WW International (WW, or WTW when we wrote on it), Supernus Pharma (SUPN), and Magellan Health (MGLN). All five of the reports preceded significant declines in company share price, with four of the five stocks showing double-digit declines over the ensuing three months and all of them hitting double-digit declines over six months. Read on....

Author: gradient / Tag: forensic accounting, corporate insiders, earnings quality, equity incentives, insider trading, SEC Rule 10b5-1, AMRN, USM, WW, SUPN, MGLN, OSUR, MYRG / 0 Comments
13
Dec
2019

Sector Detector: Stellar year for stocks now suggests strong follow-through in 2020

  Scott Martindaleby Scott Martindale
  President & CEO, Sabrient Systems LLC

As yet another decade comes to a close, the US continues to enjoy the longest economic expansion on record. And as if to put a cherry on top, the economic reports last week hardly could have been more encouraging for the New Year, propelling the S&P 500 index into its third major technical breakout since the recovery from the financial crisis began well over 10 years ago. In particular, the jobs report blew away estimates with 266,000 new jobs, the prior month’s report was revised upward, and the unemployment rate fell to a 50-year low of 3.5%. Importantly, those new jobs included 54,000 manufacturing jobs. Indeed, a growing view is that the manufacturing/industrial segment of the economy has bottomed out along with the corporate earnings recession and capital investment, with an economic upswing in the cards, which has been a key driver for the resurgence in value and cyclical stocks with solid fundamentals.

The good news kept coming, with the Consumer Sentiment report jumping back up to 99.2 (and averaging 97.0 over the past three years, which is the highest sustained level since the Clinton administration’s all-time highs), while wages are up 3.1% year-over-year, and household income is up 4.8% (to the highest levels in 20 years). And with capital rotating out of pricey bonds into riskier assets, it all seems to me to be more indicative of a recovery or expansionary phase of the economic cycle – which could go on for a few more years, given a continuation of current monetary and fiscal policies and a continued de-escalation in trade wars.  

To be sure, there have been plenty of major uncertainties hanging over the global economy, including a protracted trade war with China, an unresolved Brexit deal, an unsigned USMCA deal, and so on. And indeed, investors will want to see the December 15 trade deal deadline for new tariffs on China postponed. But suddenly, each of these seems to have a path to resolution, which gave a big boost to stocks today (Thursday). Moreover, a pervasive fear that we are in a “late-cycle” economy on the verge of recession was becoming more of a self-fulfilling prophesy than a fundamental reality, and now there is little doubt that investor sentiment is starting to ignore the fearmongers and move from risk-averse to risk-embracing, which better matches the fundamental outlook for the US economy and stocks, according to Sabrient’s model.

In this periodic update, I provide a detailed market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings have turned bullish, while the longer-term technical picture remains bullish, and our sector rotation model also retains a solidly bullish posture.

By the way, you can find my latest slide deck and Baker’s Dozen commentary at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials, which provide details and graphics on two key developments:

  1. The bullish risk-on rotation since 8/27/19 is persisting, in which investors have shifted away from their previous defensive risk-off sentiment and back to a more optimistic risk-on preference that better aligns with the solid fundamental expectations of Wall Street analysts and Corporate America.
  1. We have developed and introduced a new Growth Quality Rank (GQR) as an enhancement to our growth-at-a-reasonable-price (aka GARP) model. It is intended to help provide better “all-weather” performance, even when investor sentiment seems “irrational.”  Read on….
Author: smartindale / Tag: ETF, sectors, iShares, volatility, inflation, GARP, China, trade war, federal reserve, small cap, S&P 500, SectorCast, technology, Financial, healthcare, energy, Consumer, Industrial, telecom, utilities, materials, SPY, VIX, IYF, iyw, IYJ, IYZ, IYC, IYK, IYH, IDU, IYM, IYE, IWM, XLK, XLE, TLT, MSFT, AAPL, KCE, FTXH, QTEC, PJP, QVM, DVLU, FTVA, XSVM, XRT, DFNL, PGF, KBE, PKW, IEIH, FXO, SYLD, CALF, PBE, MOAT, KNOW / 0 Comments
04
Dec
2019

Kraft Heinz: A Case Study of Soft Asset Write-Downs

Rachel Bradley  by Rachel Bradley
  Equity Analyst, Gradient Analytics LLC (a Sabrient Systems company)

While the accrual method of accounting has its usefulness, it also opens the door for companies to “manage” and even overstate earnings through various tactics – some merely aggressive, others more nefarious. There are a variety of levers that management can pull to either book expected revenue sooner than normal or push current expenses farther out into the future. However, earnings growth sourced this way is unsustainable. Unless the firm expects a massive boost in sales in the near future (such as from the rollout of a highly anticipated new product), sustaining the growth story would require not only continuing to pull revenue forward but to do so at an accelerating rate.

Pulling sales forward or pushing expenses farther down the road both overstate the firm’s sustainable earnings power and result in a presentation of financials that obfuscate reality. There is also a myriad of other tools available to dress up financial statements to present a firm that appears financially healthier than it truly is. A common way to pad the balance sheet is through so-called “soft assets,” i.e., goodwill and other intangibles like brands, logos, trademarks, corporate reputation, client lists, and contracts.

At Gradient Analytics we have a saying, “With soft assets, come soft profits.” Put another way, when a firm has material intangible assets and most of its valuation is tied to the terminal value dependent on a set of unrealistic assumptions, then earnings have a higher risk of write-downs. As an example, we take a deeper look at the financials of The Kraft Heinz Company (KHC), specifically examining some overly optimistic assumptions management used in valuing its soft assets. Read on….

Author: gradient / Tag: forensic accounting, earnings quality, accruals, intangible assets, soft assets, revenue recognition, goodwill, cash flow, KHC / 0 Comments
12
Nov
2019

Sector Detector: The ducks continue to line up positively for equities

  Scott Martindaleby Scott Martindale
  President, Sabrient Systems LLC

The market this year has been oscillating between fear and optimism, risk-off and risk-on. Until 8/27/19, risk-off defensive sentiment was winning, but since that date a risk-on sentiment has taken hold, and the historic divergence favoring secular growth, low-volatility and momentum factors, defensive sectors, and large caps (i.e., late-stage economic cycle behavior) over cyclical growth, value and high-beta factors, cyclical sectors, and small-mid caps (i.e., expansionary cycle behavior) continues to reverse, as fickle investors have become optimistic about at least a partial resolution to the trade war (including the lifting of tariffs), an improving outlook for 2020-21 corporate earnings, and resurgent capital investment. Investors have moved from displaying tepid and fleeting signs of risk-on rotation to full-blown bullish enthusiasm and reluctance to sell in a fear of missing out (FOMO), even though the short-term technical picture has become overbought.

The late-August risk-on rotation came in the nick of time. Last year at that same time of the year, the S&P 500 was marching higher until peaking on 9/20/18, but it was doing so on the backs of defensive sectors along with secular-growth Tech mega-caps, and I was opining at the time that the rally would fizzle if there wasn’t some rotation into the risk-on cyclicals and small-mid caps – which as you know didn’t happen, leading to the Q4 selloff. But, happily, this year has played out quite differently.

Nevertheless, a lot of successful fundamentals-based strategies (including powerhouse quant firm AQR Capital, discussed below) really took it on the chin for the roughly 14-18 months preceding 8/27, ostensibly due to fear that a “late-cycle” economy was on the verge of recession. And indeed it was becoming a self-fulfilling prophesy, as the dominos seemed to be falling one by one:  escalating trade wars creating uncertainty leading to a global manufacturing slowdown, a hold-off in corporate capital spending, and negative interest rates overseas, which pushed global capital into US debt, which temporarily inverted the yield curve, which brought out the doomsaying pundits – all of which was beginning to negatively impact the previously-bulletproof consumer sentiment that had been carrying US GDP growth.

But it was all based on false pretenses, in my view, and investors now seem to be convinced that the bottom is in for the industrial cycle and the corporate earnings recession, and particularly for prices of value/cyclical stocks with solid fundamentals. Results haven’t been as bad as feared, and some of the macro clouds are parting. Ultimately, stock prices are driven by earnings expectations and interest rates (for discounted cash flow valuation), and as the external obstacles hindering the free market are lessened or removed, the outlook brightens. And when investors focus on the fundamentals rather than the latest tweet, CNN headline, or single economic number taken out of context, it bodes well for Sabrient’s value-tilted GARP (growth at a reasonable price) portfolios, which of course includes our flagship Baker’s Dozen.

In this periodic update, I provide a detailed market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings still look neutral to me, while the longer-term technical picture remains bullish, and our sector rotation model retains a solidly bullish posture. Read on….

Author: smartindale / Tag: ETF, sectors, iShares, volatility, inflation, GARP, China, trade war, federal reserve, small cap, S&P 500, SectorCast, technology, Financial, healthcare, energy, Consumer, Industrial, telecom, utilities, materials, SPY, VIX, IYF, iyw, IYJ, IYZ, IYC, IYK, IYH, IDU, IYM, IYE, IWM, SLY, SLYV, SPYG, SPLV, EUFN, EWSC, XLF, XLU, TDIV, DFNL, PJP, DVLU, PGE, RIGS, IEIH, TAN, KCE, PGF, FTVA, QVM, PSCD, RYF, KNOW, CSML, PWC, CNCR, AAPL, MSFT, MA, V, ORCL, FB / 0 Comments
25
Oct
2019

Aggressive accounting of restructuring costs and other non-GAAP adjustments: Where is the SEC?

Ryan Frederick  by Ryan Frederick
  Equity Analyst, Gradient Analytics LLC (a Sabrient Systems company)

In 2003, the SEC first officially adopted rules (following Sarbanes-Oxley in 2002) related to the reporting of non-GAAP financial metrics. The new regulations called for a reconciliation of GAAP versus non-GAAP results to be included in various investor resources and to refrain from excluding non-recurring items from non-GAAP metrics if they are reasonably likely to reoccur, which is subject to wide interpretation. Since then, it seems the perceived importance among investors of non-GAAP financial performance has been elevated above traditional GAAP measures. Between 2015 and 2017, less than 10.0% of companies in the S&P 500 did not report a non-GAAP income calculation. However, the ability for management to subjectively decide what is or is not relevant to a company’s core business leaves plenty of room for earnings manipulation.

On the one hand, companies tend to justify their exclusion of various transactions as necessary for “comparability” to historical results, given that GAAP rules have changed over time. Fair enough. However, when an investor chooses to rely upon non-GAAP results when comparing a given company’s results to another’s, the comparisons can be deeply misleading as management has great leeway for subjective (and sometimes ad-hoc) adjustments in their exclusions – i.e., what one company concludes should be excluded in a non-GAAP calculation may not be consistent with what another company may exclude.

In fact, in 2010 former SEC chief accountant Howard Scheck identified non-GAAP performance metrics as a “fraud risk factor.” The SEC even created a taskforce to analyze non-GAAP earnings metrics that could be misleading. Then, in an effort to provide more clarity, the commission provided Compliance and Disclosure Interpretations (C&DIs) which detailed ways in which the SEC may find non-GAAP disclosures to be misleading, but more on that later.

Here at Gradient Analytics, our focus on earnings quality analysis (for both short idea generation and vetting of long candidates) regularly includes an examination of non-GAAP adjustments to determine whether they are appropriate in helping represent the true performance of the firm, or whether they are misleading. There is a plethora of unique adjustments a company could make to a non-GAAP income calculation; however, some are more common than others. One of the more frequent adjustments to GAAP income is the exclusion of restructuring costs. Read on….

Author: gradient / Tag: forensic accounting, earnings quality, SEC, restructuring costs, stock-based compensation, GAAP, non-GAAP, Warren Buffett, C&DIs, KO, MDT, HD, AMZN, BA, XOM, AAPL, COST, NKE / 0 Comments
16
Oct
2019

Sector Detector: Stocks are itching for year-end breakout rally, but who will lead it?

  Scott Martindaleby Scott Martindale
  President, Sabrient Systems LLC

The early weeks of September were looking so promising as a brief but impressive surge gave hope of a revival in the long-neglected market segments. This sustained risk-on rotation seemed to be marking a bullish change of market character from the risk-off defensive sentiment that I have been writing about extensively for the past 18 months (ever since the China trade war escalated in June of last year), specifically the massive divergence favoring the low-volatility, growth, and momentum factors, defensive sectors, and large caps over the value and high-beta factors, cyclical sectors, and small-mid caps. But then, for the next few weeks, those risk-on market segments were once again lagging, as fickle investors keep returning to stocks displaying stronger balance sheets, high dividend yields, and/or secular growth stories – in spite of high valuations – rather than the more speculative cyclical growth stocks selling at attractive valuations that typically lead an upside breakout. It appeared that the fledging bullish rotation was caput – or perhaps not. Suddenly, there have been positive developments in the trade negotiations and in the Brexit saga, and the past several days have brought back renewed signs of a pent-up desire to take stocks higher. Signs of a better than expected Q3 earnings season may be the final catalyst.

Of course, although YTD returns in US stocks are impressive, if you look back over the past year to when the major indexes peaked in 3Q2018, stocks really have made very little headway. As of the close on Tuesday, the S&P 500 is +21.3% YTD but only +1.7% since its 2018 high on 9/20/18, while the more speculative Russell 2000 small cap index is still more than -12% below its all-time high from over a year ago – way back on 8/31/18. The biggest difference this year versus the 9/20/18 high for the S&P 500 is that Treasury yields have fallen (from 3.1% to about 1.8% on the 10-year), which has allowed for P/E multiple expansion (from 16.8x last year to 17.2x today) despite the earnings recession of the past three quarters.

I suppose one can hardly blame investors for their trepidation at this moment in time, given the overabundance of extremely negative news, which only expanded during Q3. We have an intractable trade war with the world’s second largest economy, intensifying protectionist rhetoric, North Korean missiles, rising tensions with Iran, a brewing war in northern Syria, drone attacks in Saudi Arabia, riots in Hong Kong, China’s feud with the NBA (and the animated TV show South Park!), a slowing global economy, a US corporate earnings recession, flattish yield curve, surging US dollar, low-yield/high-volatility Treasury bonds, falling consumer sentiment, Business Roundtable’s CEO Economic Outlook Index down six consecutive quarters (as hiring is strong but capital investment and sales expectations lag), the steepest contraction in the manufacturing sector since June 2009, UAW strike against General Motors (GM), looming Hard Brexit, top-polling Democratic candidates espousing MMT and business-unfriendly socialist policies, and yet another desperate attempt to impeach the President before the next election. Need I go on?

But somehow the US economy has maintained positive traction while stocks have held their ground given a persistent economic expansion, supported by dovish central banks around the world and a rock-solid US consumer. Indeed, the very fact that stocks have held up amid such a negative macro environment suggests to me that investors are just itching for a reason to rotate cash and pricey bonds into stocks – perhaps in a big way. And from a technical standpoint, such a long sideways consolidation over the past several months suggests that an upside breakout may be imminent – and likely led by those risk-on market segments. Notably, every such bullish rotation has helped Sabrient’s various growth-at-a-reasonable-price (GARP) portfolios gain ground against the SPY benchmark, so a sustained rotation would be quite welcome!

And some good news this week is offering some hope, with strong Q3 earnings reports from JPMorgan Chase (JPM) and UnitedHealth (UNH), a resumption in trade talks, progress in the GM strike, and a possible breakthrough in the Brexit negotiations. Moreover, the highly cyclical semiconductor and homebuilding industries are on fire, with iShares PHLX Semiconductor ETF (SOXX) setting a new high, and Treasury yields are creeping up.

By the way, our Sabrient Select SMA portfolio (separately managed account wrapper) is available to financial advisors as an alternative investment opportunity. The portfolio actively manages 25-35 stocks based on our “quantamental” GARP strategy. Let me know if you’d like more information.

In this periodic update, I provide a detailed market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings now look neutral to me, while the technical picture remains bullish, and our sector rotation model retains a solidly bullish posture. Read on…

Author: smartindale / Tag: ETF, sectors, iShares, volatility, inflation, GARP, China, Brexit, federal reserve, small cap, S&P 500, SectorCast, technology, Financial, healthcare, energy, Consumer, Industrial, telecom, utilities, materials, SPY, VIX, IYF, iyw, IYJ, IYZ, IYC, IYK, IYH, IDU, IYM, IYE, IWM, SLY, SLYV, SPYG, SPLV, JPM, GM, UNH, SOXX, TDIV, IEIH, EWCO, LEND, PPH, IBB, CALF, ZMLP, FTVA, JETS, EASI, QVM, ILF, CNCR, EEB, PSCD / 0 Comments

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