Every month, The Prudent Speculator produces a newsletter that includes a market summary, helpful charts and graphs, recent equity market news, economic outlook and specific stock investment strategies focused on value stock investing. This month, our Graphic Detail feature takes a look at Q4 corporate earnings while our Editor’s note pays homage to our founder Al Frank as we celebrate our 47th year of publication. Note that the entire list is available to our community of loyal subscribers only.
Editor’s Note: Q4 Earnings, Case for Value, U.S. Equities
The Prudent Speculator celebrates its 47th year of publication this month, so we thought it timely to dust off the obituary of Al Frank penned by James K. Glassman following the passing of our founder in 2002. He wrote, “I followed his newsletter for a long time. I liked his style. He had an effective method for finding underdogs that might succeed, and he stuck to it, despite what the establishment was saying. Frank was a value guy, and a raging optimist, to the end.” Indeed, Al was diagnosed with terminal cancer in November 2001 and after sharing the news with your Editor, the next words out of his mouth were, “Let’s buy some stocks!”
Needless to say, Al had an unwavering faith in equities that few outside of Nebraska have been able to match, with Warren Buffett reminding a week ago: “I can’t remember a period since March 11, 1942 – the date of my first stock purchase – that I have not had a majority of my net worth in equities, U.S.-based equities. And so far, so good. The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I ‘pulled the trigger.’ I was down about $5 by the time school was out. Soon, things turned around and now that index hovers around 38,000. America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”
Of course, sitting quietly is easier said than done, so we are glad that more than a few folks find value in the countless facts and figures we provide to support our constant admonition that time in the market trumps market timing. After all, the Oracle of Omaha had the following to say in the 2023 Berkshire Hathaway Annual Report: “Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.”
Sadly, not even the aforementioned Mr. Glassman could resist the temptation to move in and out of the markets. Believe it or not, the author of the infamous Dow 36,000 book published back in 1999 when the popular index was around 10,000 wrote Safety Net (The Strategy for De-Risking Your Investments in a Time of Turbulence) in 2011 when the Dow was at just 12,000. Al Frank had it right: “Successful speculating is more a matter of character than mathematics, analysis or luck.”
It is easy to be sanguine about stocks with the Dow at 39,000, but whether it is dysfunction in Washington, conflict in the Middle East, war in Ukraine or China/Taiwan tensions, we know that there is plenty to trouble investors. Throw in the yield on the 10-Year U.S. Treasury having risen from 3.88% at the start of the year to 4.27% two months later, the betting on the first Federal Reserve interest rate cut being pushed out to June, rich valuations for some stocks or even the Kansas City Chiefs winning the Super Bowl, and we suspect some might be rethinking their equity exposure.
While we would argue that there have always been numerous bricks in the proverbial Wall of Worry that stocks long have been climbing, and downside volatility is always part of the investment equation, we think more peaceful slumber can be had by gravitating toward inexpensively valued equities. After all, TPS Portfolio sports a forward P/E of 14 and dividend yield of 2.6%, while we see corporate profits expanding this year, U.S. GDP showing growth and interest rates likely coming down.
Many thrill-seekers are wanting to roll the dice these days, but we think the odds are now far more in favor of the Value investor. As Mr. Buffett concludes, “Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”
“If you are willing to get rich slowly, the market is the place to be to make or maintain a fortune.”
— Al Frank
Graphic Detail: Earnings Scorecard
Q4 Season
Economic data in the period generally exceeded expectations and real (inflation-adjusted) U.S. GDP growth came in at a solid 3.2% in Q4, supporting solid revenue and net income tallies from Corporate America, even as management teams engaged in their usual tempering of guidance. Impressively, the number of S&P 500 companies that exceeded bottom-line forecasts was 75.6%, above the usual “beat” rate, and 55.3% eclipsed top-line projections. Of The Prudent Speculator’s 96 stocks below, 69% topped EPS expectations, though the average one-day price reaction was a loss of 0.3%, yet the average two-month gain since 12.31.23 was 2.1%.
Standard & Poor’s projects (as of 02.29.24) that after dipping from $208.21 in 2021 to $196.95 in 2022 (that figure includeed a massive $66.9 billion ($4.74 per share) “unrealized investment” loss from Berkshire Hathaway in Q2), bottom-up operating EPS for the S&P 500 rose to $213.73 in 2023, with $240.74 the guess for 2024. Estimates are subject to change (current forecasts are a lower than those three months ago) and many still believe a recession may occur this year, but anything close to that ‘24 EPS level should support higher stock prices.
Recommended Stock List
In this space, we list all of the stocks we own across our multi-cap-value managed account strategies and in our four newsletter portfolios. See the last page for pertinent information on our flagship TPS strategy, which has been in existence since the launch of The Prudent Speculator in March 1977.
Readers are likely aware that TPS has long been monitored by The Hulbert Financial Digest (“Hulbert”). As industry watchdog Mark Hulbert states, “Hulbert was founded in 1980 with the goal of tracking investment advisory newsletters. Ever since it has been the premiere source of objective and independent performance ratings for the industry.” For info on the newsletters tracked by Hulbert, visit: http://hulbertratings.com/since-inception/.
Keeping in mind that all stocks are rated as “Buys” until such time as we issue an official Sales Alert, we believe that all of the companies in the tables on these pages trade for significant discounts to our determination of long-term fair value and/or offer favorable risk/reward profiles. Note that, while we always seek substantial capital gains, we require lower appreciation potential for stocks that we deem to have more stable earnings streams, more diversified businesses and stronger balance sheets. The natural corollary is that riskier companies must offer far greater upside to warrant a recommendation. Further, as total return is how performance is ultimately judged, we explicitly factor dividend payments into our analytical work.
While we always like to state that we like all of our children equally, meaning that we would be fine in purchasing any of the 100+ stocks, we remind subscribers that we very much advocate broad portfolio diversification with TPS Portfolio holding more than eighty of these companies. Of course, we respect that some folks may prefer a more concentrated portfolio, however our minimum comfort level in terms of number of overall holdings in a broadly diversified portfolio is at least thirty!
TPS rankings and performance are derived from hypothetical transactions “entered” by Hulbert based on recommendations provided within TPS, and according to Hulbert’s own procedures, irrespective of specific prices shown within TPS, where applicable. Such performance does not reflect the actual experience of any TPS subscriber. Hulbert applies a hypothetical commission to all “transactions” based on an average rate that is charged by the largest discount brokers in the U.S., and which rate is solely determined by Hulbert. Hulbert’s performance calculations do not incorporate the effects of taxes, fees, or other expenses. TPS pays an annual fee to be monitored and ranked by Hulbert. With respect to “since inception” performance, Hulbert has compared TPS to 19 other newsletters across 62 strategies (as of the date of this publication). Past performance is not an indication of future results. For additional information about Hulbert’s methodology, visit: http://hulbertratings.com/methodology/.
Portfolio Builder
Each month in this column, we highlight 10 stocks with which readers might populate their portfolios: American Tower (AMT), Devon Energy (DVN), Newmont (NEM)
