Author: Robert Gay, GEARS
Model: Speedboat
Disclosure: Long LYTS
The Speedboat model is financially leveraged as a matter of policy. This characteristic can produce a higher degree of performance volatility, but is designed to contribute to superior returns over time. This return pattern is evident in the performance chart above.
The model invests in rapidly accelerating companies. The stocks of these companies tend to be more volatile, so the more aggressive strategy, incorporating leverage, contributes to the overall volatile return pattern of the model.
With the most recent quarterly financial statements from the large majority of the capital value of the stock market now accounted for, I see a continued powerful and now leveraged acceleration in corporate wealth. The capital-weighted average sales growth rate of SEC-filing companies increased for the fifth consecutive quarter.
The strongest and fastest recovery in sales growth on record keeps getting stronger. Average sales growth is well above average, and consistent with the great bull markets in the record- 1995 to 1999 and 2002 to 2007. The frequency of rising sales growth fell, as we knew it must, but we remain with a higher frequency of improving top line then in any other pre-crisis period since 1995. Our data for these figures and our updated macro report on equities vs. long bonds is here.
Gross profit margins rose less frequently in the annual period, but the average gross margin advanced for the first time in a year. Corporate fixed costs (SG&A to sales) fell and now lower interest costs are adding operating and financial leverage to a strong top line.
Companies are producing accelerated cash flow and recently, with the huge flush of liquidity, are accumulating cash. More dividends, more aggressive share repurchase and acquisitions are sopping up some cash, but many companies are accumulating securities. I am looking for the capital expenditures cycle to kick in soon, but so far capital expenditures continue to fall relative to sales.
Among smaller companies the capital expenditure cycle is more evident, with CapEx relative to sales up in the smaller company Russell 2000 index for the first time in two years. Our macro report on the Russell 2000 index is here.
Stocks have advanced broadly and strongly, so the population of share prices trading at a premium to their historical volatility range is large. That broadly extended share price makes this a good time to focus on sell decisions. As the recovery becomes less unanimous, stock selection becomes more important and the companies with stable or falling growth will perform poorly. Many of those companies trade now at premium prices and should be sold.
I have been reducing leverage in the Speedboat model by making sell decision for Thoretec Corp. (THOR), DR Horton Inc. (DHI), MDU Resources Group (MDU), Computer Associates (CA) and Power Integrations Inc (POWI).
The population of companies that are accelerating shareholder wealth remains quite large, but the number that also trade at depressed share prices has declined in the strong market advance of recent months. I have added LSI Industries (LYTS) to the model and continue to monitor daily for new stocks to buy.
To create a successful stock portfolio requires attention, consistency and discipline. Most of all, it requires an information edge. Years of research have shown that shares of companies that are profitable with rising shareholder wealth perform better.
I have created ISPACE–Investors Space for Truth. I invite you to take advantage of our free registration.
Sources:
“GEARS Total Market” Robert Gay, GEARS. http://www.the-gears.com/pdf_files/igetpdf.aspx?pdf=ddow
“GEARS Russell 2000 Index” Robert Gay, GEARS. http://www.the-gears.com/pdf_files/igetpdf.aspx?pdf=rs2z
