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Market Commentary 08/16/2016

Half way through the month of August, and the equity markets are hitting new highs on a weekly basis. This isn’t your normal August! With the preponderance of late summer vacations, we expect a more thinly traded market, with volatility higher. What we are seeing is almost the anti-thesis of our usual August market.

Some issues which may support these increasing levels are:

  • Chance of Fed raising rates in September – dropping due to mixed economic signals
  • Lower prices on bonds raising yields, interest not there… money moving to equities.
  • Industrial production numbers are recovering, showing slow growth.
  • Housing market – low mortgage rates and starts for July were higher than expected

What we’re NOT seeing in the economy is better employment levels (despite decreasing unemployment numbers, the under-employed and not employed are still at record highs).

We’re also NOT seeing growth in earnings. With most of the S&P 500 companies done reporting second quarter earnings, we’re seeing a decline in revenues, year-to-year, as well as some quarter-to-quarter pullbacks. This is most concerning to HRA, as earnings growth is the driver of our stock picking; we look for companies that have good earnings growth, but are still under-priced. Our average growth rate, aggregate for 800 companies, has dropped down to .089, which is the lowest it has been since 6/30/2010.

Although low, the earnings growth is still positive – it is NOT indicative of a recession, in fact this morning’s industrial production measurement shows growth of 0.7% in July, vs. the expected 0.3%. The real concern is in margins, low prices and continued low interest rates have pushed profitability down throughout the economy.

Halvorson Research Associates LLC (HRA) measures the relative value of stocks within the U.S. market, and continues to search for under-valued growth stocks. Despite the macro outlook, there are always companies that manage to maintain profitability and grow earnings. Even as share buybacks and financial engineering continue to contribute to all-time highs, pessimism within the market has driven investment to larger market-cap names and punished those unable to compete. A tighter, pessimistic environment means relatively more reward for those companies that excel in operating profitably.

Although US equity indexes are at record highs, with the current and expected interest rate environment, HRA feels that select equities and sectors are capable of continued growth

HRA maintains theoretical portfolios of individual U.S. stock selections. These growth-at-a-reasonable-price (GARP) selections are available on our website for a subscription fee and are used to drive real-world investments in individual client accounts. They are the Favorite 30, Realistic Growth 12, and Tiny 6.

As of 8/15/16: *

1-Month

YTD

1-Year

Favorite 30

-1.12%

-3.12%

-3.54%

RGP 12

0.04%

0.48%

3.62%

Tiny 6

2.10%

-6.75%

-9.12%

S&P 500

1.31%

7.15%

4.71%

*(The Realistic Growth Portfolio did not come into existence in its current form until 12/31/13)

*(Note: the HRA Favorite 30, Realistic Growth, and TINY stock picks are treated as theoretical portfolios; they do not include any costs of trading, make certain assumptions i.e. pricing at close, and do not include any portfolio management expenses or dividends. See our Performance page for full disclosure.)

Past experience cannot predict future returns. Yet historically, looking at the longer term, current markets are showing a 10-year T-bill rate of 1.55%, a 10-year (historical) average return on equities of 5.47% as measured by the S&P 500 Index (including the 2008 financial bubble). Our Favorite 30 is showing an average 5.58% 10-year annual increase, and our TINY 6 portfolio is showing an average 2.84% 10-year annual increase.* *(Note: the HRA Favorite 30, Realistic Growth, and TINY stock picks are treated as theoretical portfolios; they do not include any costs of trading, make certain assumptions i.e. pricing at close, and do not include any portfolio management expenses or dividends. See our Performance page for full disclosure.)

What does this mean to HRA and the average investor?

HRA’s GOPF index measures how much market sentiment will affect the near-term investment returns of the U.S. equity market. Our 30-year history of measuring the market using actuarial methodology has produced our HRA GOPF Index, or OU-P factor (under- or over-priced measure of the equity market), which we use to determine how attractive the equity market is for investment. The current GOPF measurement is positive, up to 1.09 for a 17.6% over-priced condition, which continues to be in the highest range it has been since early in 2002. Again, we continue to consider this rather rarified position as a caution signal when regarding overall investments, and HRA suggests that a careful repositioning should take place despite the record levels in the equity market.

HRA is back to an approximate 90% equity investment level for our most aggressive portfolios, yet we remain cautious about our individual selections. HRA believes that using a tactic of purchasing stocks on a regular basis, or dollar-cost-averaging, can help to reduce overall investing expense (buying when prices are both low and high averages over time), and allow an investor to be invested over time, with general expectations of an overall rising market environment for US equities.

We continue to see value in individual companies across many sectors and remember that a quality selection strategy is necessary to maximize the possibility of long-term returns under any type of broad market conditions.

Where are we investing? Tech and Building Materials lead our portfolio higher.


Information Technology has been one of the leading sectors in our Favorite 30 stock selections. Data management and IT infrastructure continue to be an area of focus in our portfolios. This sector showed price growth of almost 15% in one month, according to TDAMERITRADE SECTOR AND INDUSTRY activity as of 8/15/16.

(https://invest.ameritrade.com/grid/p/site#r=jPage/https://research.ameritrade.com/grid/wwws/Research/Markets/SectorsIndustries/Overview?c_name=invest_VENDOR )

Industrial goods companies that manufacture and distribute building materials continue to lead our portfolio returns as the building and home renovation sector continues to draw the consumer’s dollar. Signs of a solid housing market continue to be reported, further strengthening this sector.

HRA’s Sell-Buy system has not identified many healthcare-related stocks for our Favorite 30, and the sector appears more and more underpriced after suffering a year of disfavor. Reports on the effects of the Affordable Care Act are expected shortly, and are forecasted to show increased spending and cost in the healthcare field. Investments in this field, including biotech stocks, are extremely volatile, as they react to political and external factors on an almost daily basis, and hence are extremely risky.

Financials are also slowly showing some price growth, yet earnings for this group are not consistent between banks and financial service providers. We’ve been avoiding the banking sector, and sticking to the financial services companies until we see a more stable interest rate market.

In the long-run, HRA believes that the average investor will continue to want to be invested primarily in U.S. stocks, with earnings and capital appreciation, as well as dividend returns, driving their investment decisions. We like to believe that the strength of the U.S. economy will be the driving factor in market valuations over the year, despite changes in the Federal Reserve interest rates, as other markets continue to ease monetary policy and adjust their currency values.

HRA believes that the earnings generation ability of growth stocks that are reasonably (or under-) priced will be rewarded by increases in price going forward. To see our Favorite 30, Realistic Growth 12, and Tiny 6 theoretical portfolios Subscribe Now or send us an email.

This investing style fits a portion of every investor’s portfolio needs, and has shown the best annualized average returns over time of almost all investing disciplines, with a 20-year average return for the HRA Favorite 30 stock picks of 10.03%, versus the S&P 500 Index’s 6.16% 20-year average annual return (as of 8/15/2016).

On the more personal side, all investments should be based on the individual investor’s risk tolerance – if you want to be aggressive, and can live with volatility over the short-term, then investing in stocks over the long-term may provide increased returns along with that higher level of risk.

Remember, not all investments are suitable for all investors – check with a financial advisor if you plan to make major changes in your portfolio. Also, remember that historical returns are not predictors of future returns, and HRA does not believe that you can time the market. With those qualifiers, we at HRA wish you luck in your investing, and are here to answer your questions!

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HRA focuses on buying long-term growth stocks but we have generated a host of fundamental information that may be useful in other types of investing. Welcome to HRAstockpicks.com! Whether you are a Buy-To-Hold stock investor like we are or not, our research data can be used by all types of investors. At HRA, (Halvorson Research Associates LLC), we use our massive database of information collected over 20 years to select undervalued growth stocks. The key data items we are looking for include potential price increase (PPI) and this is calculated using earnings estimates now (calculates current theoretical market price or CTMP) or projections for future earnings (used to calculate future theoretical market price or FTMP). Another key datapoint is our 4 year aggregate earnings growth rate where the most recent years carry more weight than earlier years. Each of the 800 stocks we follow can be called up by its stock symbol and all its information displayed.

The newest research we have developed is the sector indices. Here we have broken down the 800 U.S. stocks we track and have divided them into 19 main categories of industry codes that can be researched quarterly for the last 8 quarters (2 years).... Each index can be plotted by our subscribers on a line graph and compared to the other sectors or the overall U.S. market index or do them all at the same time. These sector readings can be used to give a relative indication of over or under-pricing as compared to the theoretical price values collectively in the sector.

The latest tool we have developed is a sorting page where you, as a subscriber, can select the research variables of choice (up to 4 at a time) and sort in ascending or descending order with prioritization or set the variable to be sorted to a specific value. You can sort all stocks in general, in a specific sector, or by Buy/Sell/Hold classification. Variables you can use include:

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Long Term Focused - Our goal is realistic price growth, by picking low priced growth stocks. If you rotate constantly into the "hot sectors" your taxes and trading costs will be higher. The best market days are quiet, and when you least expect it, so we believe in staying invested in undervalued growth stocks as most gains come at the beginning of a bull run.

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