March 18, 2015

VALUATION WATCH: Overvalued stocks now make up 56.64% of our stocks assigned a valuation and 19.85% of those equities are calculated to be overvalued by 20% or more.  Eleven sectors are calculated to be overvalued--with six at or near double digits.

--Three for Three

VE Forecast Market Neutral Newsletter Posts Double-Digit Gain for Third Month in-a-Row

Our portfolio posted yet another double-digit gain this month. Our 50/50 allocation picked up a whopping 11.36% versus the benchmark MLSAX's* loss of 0.59%. That's a huge beat of 1195 bps. The modified stop-lossed strategy with a suggested 60-40 allocation trailed slightly with a gain of 10.89%. The trailing 12 month percentage return is 16.26% for the newsletter and 7.68% for the MLSAX Long-Short Fund—and 11.59% for the SP500. Since inception, our portfolio has returned 128.75% vs the MLSAX return of 30.18%.

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Longs were decent this month with nine winners overall. We continued to ride 1800Flowers to another 20% pick up, but that big gain was surpassed by Argentine bank BBVA Frances with a huge 34% gain. Orbital ATK continued to impress with another double-digit gain as well. Our shorts also helped out due to the market volatility this month. We had a 75% hit rate there, with seven stocks at or near double-digit returns.

This marks the third month in-a-row we have scored a double-digit return with the VE Forecast MNS Newsletter. Our December/January portfolio returned 12.54%, the January/February edition returned 10.15%, and now we have the 11.36% gain this month. It's been quite a quarter for this newsletter.

Valuations are currently mixed. Each big up or down day shifts them around a bit. As of today, 56.64% of the stocks we can assign a valuation are calculated to be overvalued-- with 19.85% of them calculated to be overvalued by 20% or more. The big question for the market currently is impending Fed action.

All eyes are on Janet Yellen and her definition of “full employment.” That will have the greatest short-term effect on US equity pricing right now. We see a Fed that has had to re-adjust historic thinking because the decline in unemployment has not shown an increase in wage pressures (inflationary) at the same time the overall economic environment is deflationary and not showing sings of stress either.

Today's news from the Fed was good for stocks. Janet Yellen noted that the Fed is no longer so "patient"-- but re-affirming the 2% inflation rate as a benchmark for short-term rate hikes. According to the Wall Street Journal, Yellen noted that the “overall measures of equity valuations are on the high side but not outside of historical ranges.” Looking at overall financial stability, Yellen noted that “our overall assessment at this point is that threats are moderate.” She went on to say that a stronger labor market would increase her confidence that inflation will move up over time. But Fed officials still expect inflation to remain low because of downward pressure from energy prices and the dollar. 

All of this positive Fed news sparked a rally today..

Here are the primary long and short-side selections and their performance for the month.

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The ValuEngine View Newsletter is the product of a sophisticated stock valuation model that was first developed by ValuEngine's academic research team. It utilizes a three factor approach: fundamental variables such as a company's trailing 12-month Earnings-Per-Share (EPS), the analyst consensus estimate of the company's future 12-month EPS, and the 30-year Treasury yield are all used to create a more accurate reflection of a company's fair value. A total of eleven additional firm specific variables are also used. In addition, the portoflio uses top picks from our Forecast Model. In essence, the portfolio is constructed with the best picks from our main propiretary models

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