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Market Commentary 09/16/2016

We at HRA are truly sad to announce the passing of our Founder, William A. Halvorson FSA, the first week of September. The loss of our mentor and guiding light will be felt by many over the coming years. He established our growth model and we hope to honor him by extending his work into new depths and frontiers.

HRA tracks broad based metrics of our data set, or ‘Universe’, of 800 domestic exchange listed public companies. One metric we track is the current-weighted Average Earnings Growth Rate (AGR).

  • The AGR of our data set cycles every 5 years. This is to mean that over the past 30 years the earnings-growth-rate of our ‘universe’ has gone through 6 major cycles.
  • The last trough of this cycle was 6.25 years ago (June 2010), meaning that on average we are overdue for the inflection point where growth rates begin to rise.
  • The cycle also has a typical shape wherein the AGR tends to peak early and bleed down gradually over time; this is a function of the current-weighted nature of the metric as well as the principle of diminishing returns. The current cycle peak was 5.4 years ago (April 2011) and we have been bleeding downward ever since.

The abnormally low-interest rate environment certainly has something to do with the extended AGR cycle. The AGR is not in ‘real dollars’ meaning it has not been adjusted for inflation. Hence, a given AGR reading is more favorable in a low-interest environment.

All of the relevant economic news of late has indicated flat to negative growth:

  • Industrial output weakened in August.
  • Retail sales dropped more than expected in August.
  • Jobless claims increased the first week of September.
  • Inflation is flat.
  • Chance of Fed raising rates in September should be almost nil due to UK Central Bank holding with expectation to lower in November.
  • Eurozone trade surplus narrows
  • Eurozone industrial output dropped in July
  • Treasury yields retreat as oil slides and import prices drop

HRA feels that select equities and sectors are capable of continued growth, albeit at a slow rate this year. Once the political environment settles in November, we expect a reshuffling of growth expectations based upon the presidential winner: we expect growth forecasts to climb if Mr. Trump is elected, or to fall if Mrs. Clinton is elected.

U.S. equity indexes are fluctuating at record high levels mostly based on two factors.

  • expectations of the interest rate environment and Fed actions change.
  • the supply and the value of oil and gasoline. Recent reports of excess production drove market prices down, but recovery in the price of oil has been almost instantaneous as well.

Halvorson Research Associates LLC (HRA) measure 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.

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 9/15/16: *

1-Month

YTD

1-Year

Favorite 30

-2.14%

-5.19%

-2.13%

RGP 12

-3.82%

-3.36%

3.29%

Tiny 6

-4.28%

-10.74%

-8.62%

S&P 500

1.31%

5.05%

8.55%

*(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 1.7%, a 10-year (historical) average return on equities of 4.99% as measured by the S&P 500 Index (including the 2008 financial bubble). Our Favorite 30 is showing an average 5.80% 10-year annual increase, and our TINY 6 portfolio is showing an average 2.96% 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 0.57 for a 9.3% over-priced condition, dropping from the August month-end 19% over-priced level.

HRA is showing a 100% 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.

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.

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.

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 9.70%, versus the S&P 500 Index’s 5.91% 20-year average annual return (as of 9/15/2016).

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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Market sentiment data for 19 individual sectors showing how under- or over-priced each one is will be available for our subscribers. The calculated theoretical price of companies in that sector will be charted against their actual pricing giving a quarterly market sentiment reading for each sector back the last 8 quarters. These will be similar in format to our current GOPF Index that shows the under- or over-pricing currently in the overall US stock market. All of these measurements are based on historic evaluation of over 30 factors and are dynamic in that results from today affect our measurements in years past.

You are also able to sort all the 800 companies in our database by up to 4 prioritized variables at a time using ascending or descending order or equal to (certain variables such as Buy/Sell/Hold, sector #, earnings trend) to identify stocks that meet YOUR criteria. These sortable factors include 1, 3 and 6 month price changes, current and future theoretical price increase/decrease potential, 4 year projected earnings growth rate, and dividend rate.

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:

  • current potential price increase %
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All of our data at our website is updated regularly each month.

So that you can quickly differentiate our stock pick service, this is how we differ from the other "stock pickers":

No Penny Stocks - We only analyze and recommend stocks with at least 2.25 years of ACTUAL earnings and all are generally more than $5.

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.

Invest in Stocks You Know - Our stock recommendations are predominantly mid to large cap U.S. stocks whose expected earnings are estimated by multiple sources.

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Relax, turn off the TV, and become a disciplined investor who is confident that your stock holdings are fundamentally sound, and in time, will provide you with your best chance for a market beating performance, low trade cost, and peace of mind.

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