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The ValuEngine Weekly is an Investor Education newsletter focused on the quantitative approach to investing and the tools
available from ValuEngine. In today's fast-moving and globalized financial markets, it is easy to get overloaded with information.
The winners will adopt an objective, scientific, independent and unemotional approach to investing.
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MARKET OVERVIEW
SECTOR OVERVIEW
Consumer Consumer Services is now the leading sector in terms of YTD return.
Within Consumer Services, Food Retailers are the big winners so far this year.
VE Premium Website Stock Analysis subscribers can find complete Industry valuation
and component stock data HERE.
Top-Five Most Overvalued Consumer Services Sector Tickers
Ticker Name Mkt Price Valuation (%) Industry
BKS BARNES & NOBLE INC. 20.16 300 RETAILING GOODS
VISN VISIONCHINA MEDIA INC 5.07 293.21 COMMUNICATIONS
TUES TUESDAY MORNING CORP 6.51 275.58 RETAILING GOODS
MOV MOVADO GROUP INCORPORATED 13.44 269.87 RETAILING GOODS
KHD KHD HUMBOLDT WEDAG INTL LTD 13.56 265.98 UNDESIG CONR SVC
VE Premium Website Stock Analysis subscribers can find complete valuation, forecast,
and ratings data on the above tickers as well as the rest of the Consumer Services Sector
components HERE.
Not a ValuEngine Premium Website member? Then please consider signing up for our
no obligation, two-week free trial today.
Training Tip
--The ValuEngine Ratings Model
ValuEngine's Ratings Model rates stocks on a 1-5 “engine” or Buy/Hold/Sell scale. The
engine rating is an overall assessment of a stock's attractiveness. It combines the following
five factors:
• Valuation
• P/E Ratio
• Momentum
• Market Capitalization
• Forecasted Future Returns
The model evaluates each of the above criteria for each ticker in our 400 stock
universe every single day and then assigns it an overall composite score. In this manner, it
takes outputs from both the Forecast and Valuation Models to derive a rating. Then, the
ratings are assigned as follows:
The ratings are assigned on a hard bell curve. That means that the Ratings Model
assigns the stocks according to each rating regardless of overall market direction. Thus, in a
strong Bull market, where all stocks are going up, some will still be rated to underperform the
market on a relative basis--and vice versa.
This is a factor that can often cause confusion for both individual and professional
investors because stocks may be rated as outperform or "Strong Buy" even though they
may exhibit an overvalued condition on the calculations from the Valuation Model or a
negative forecast calculation from the Forecast Model. If a stock is ranked highly in terms
of Momentum--LTM return, P/E Ratio, and Size--Market Cap, these individual factors may be
enough to overcome a poor valuation or forecast return calculation.
You may find many stocks ranked "outperform" right now that show negative forecast
figures for the one year time frame. However, other factors are favorable so the ratings model
will assign them a "Buy." A few months ago, it was more typical to find stocks with good
forecast return figures but contradictory valuation numbers. Consider this a "hangover" from
the wild ride the market has had over the past few years. Almost all tickers have experienced
a roller coaster ride in terms of actual earnings, projected earnings, and share price.
The important thing to remember is that over time, this ratings system has been
extensively back tested and tracked going forward both internally here at ValuEngine and by
outside auditors. The results have indicated that the ratings system is both symmetric and
predictive. This means that the "5-Engine" stocks taken as a group provide higher returns
than the 4s, 3s, 2s, and 1s. Portfolios that are constructed with just the "5-Engine"
stocks and then rebalanced once a month since 2000 have returned an average of 28%
on an annual basis!
In almost every year dating back to 1991, our system holds up. "Strong Buys" beat
"Buys" which beat "Holds," etc. The system may falter when there is a major market crash or
a so-called "garbage rally," but the important thing to remember is that it is always rating
tickers relative to the rest of the database.
Once you are aware of how the ratings model works it then becomes much easier to
analyze any given stock. If you find that a ticker is rated highly yet exhibits a negative
forecast or poor valuation, it is a very easy to use our screening functions to come up with a
target that exhibits more favorable individual characteristics within a given rating category.
Simply search for tickers in the same industry or sector that have similar ratings and then sort
them by the problematic data point. In this manner, you can easily find the best target of
all-- a stock that is rated to "outperform" which is both undervalued in terms of the Fair
Value calculation and forecast to provide positive returns in the short and long term.
What's Hot
--Banking Woes Continue
Suttmeier Predicts More Trouble Ahead Based on Latest FDIC Data
ValuEngine Chief Market Strategist Richard Suttmeier is an expert on the US Banking
System and uses the health of the system as a leading economic indicator. This week he
published the latest edition of our ValuEngine FDIC Report.
Suttmeier notes that the FDIC closed two community banks on last Friday. One of the
closed institutions, Rainier Pacific Bank (RPFG), had been tracked by our ValuEngine List of
Problem Banks--which is available in our FDIC Report.
Suttmeier also notes that the latest from the FDIC suggests that the credit crunch and
liquidity crisis that began with the peak in the housing stocks in mid-2005 will continue right
through the new decade. Community banks peaked in December 2006 and the regional
banks peaked in February 2007. Stress continues to build in the banking system as the
number of bank failures rise.
Key points for VE's Suttmeier include the following:
• The number of banks on the FDIC List of Problem Banks is up 824% since the end of 2007 to 702.
• The assets among the Problem Banks are up 171% to $402.8 billion
• Nonfarm, non-residential real estate loans have not yet begun to deteriorate as there appears to be a
balance for loans of owner-occupied properties collateralized by business revenue (sales of goods and
services) and business expenses (payroll, supplies and debt services). This is a fragile balance and a
reason for the lack of job creation.
• If you assume Derivatives were a cause of "The Great Credit Crunch" consider this - since the end of
2007 the Notional Amount of Derivative Contracts produced by our nation's Banks is up $48.8 trillion, up
29.6% to $213.6 trillion. Suttmeier finds that there has been little reduction in derivative exposures
despite it being an oft-stated policy and regulatory goal.
We have updated the FDIC Report to include the latest VE datapoints on all problem
banks as well as Suttmeier's latest predictions for the US banking system and economy. After
reviewing the Q4 2009 FDIC QBP, Suttmeier finds that the US banking system remains under
considerable stress. He now believes that we will not see an end to the credit crisis that
began with the deflation of the housing market bubble for another four years—at least.
Suttmeier also predicts a Double-Dip recession.
A critical portion of this report is the ValuEngine List of Problem Banks. Problem banks
are publicly traded FDIC insured financial institutions who are overexposed to Construction &
Development Loans and/or Nonfarm nonresidential real estate loans, with “1-Engine”--Strong
Sell, or “2-Engine”—Sell. The report also includes a listing of all other engine-rated banks--
and those with “n/a” ratings but forecast figure data points according to our models-- in
violation of FDIC guidelines vis-a-vis loan exposures.
As of March 1, 2010, there were 221 banks overexposed to C&D and/or CRE
loans in the ValuEngine database with full data coverage.
This means that there are currently 138 banks rated Sell or Strong Sell that are
also overexposed to C&D and/or CRE loans.
There are 188 overexposed institutions with only partial ValuEngine coverage
and thus those banks have no rating.
There are 345 additional institutions listed as a problem bank list but do not
appear in the ValuEngine database but are carrying C&D and/or CRE loans in excess of
the FDIC guidelines.
Our latest ValuEngine FDIC Report for Q4 2009 is now posted. The report
contains loan exposure and/or ValuEngine datapoints on valuation,
forecast, and ratings for all of the institutions on our List of Problem
Banks. Subscribers may download it now HERE.
Others interested in the report may find out more on our website by
clicking the image below.
Suttmeier Says
--Commentary and Analysis from Chief Market
Strategist Richard Suttmeier
Major Indices
Pending Home Sales Show Another Measure of Drag on the Housing Market. Some
blame the snow storms; some like me blame the pending end to the home buyer tax rebates.
The window to going to contract closes at the end of April and for closings at the end of
June. The National Association of Realtors reported that their Pending Home Sales declined
7.6% in January to a reading of 90.4, the lowest since last April when the first time home
buyer incentives began to take off. Keep in mind that cancellations are not adjusted from the
index.
FDIC Chair Sheila Bair is looking through rose colored glasses! The FDIC Chair says,
“After three long and difficult years for housing and mortgage finance, I think we're seeing
some progress in stabilizing our housing markets.” She cited the improvement in the Case-
Shiller Home Price Index, which I say is set to decline again. She talks about rising home
affordability, based upon lower prices and low interest rates. While this may be true, mortgage
rates are not low enough for most to refinance, home prices are still 50% above the levels of
1999, and property taxes are up as is home insurance rates. Then she takes off the rose
colored glasses to state that problem mortgages and long-term stability of the housing
Markets are not out of the woods. “Problem mortgages continued to grow through year-end,
while new sources of credit distress have emerged. The Mortgage Bankers Association
reports that total past due mortgages amounted to just under 9.5 percent of outstanding loans
at year end.” She realizes that interest-only and negative amortization mortgages will reset to
higher monthly payments right though 2012. She referenced a Moody’s estimate that almost
16 million US mortgages are underwater.
--The ValuEngine View Newsletter
It can be a big job sorting through which stocks in the ValuEngine universe represent
the best risk/reward. Some investors like to do it themselves, but others would prefer having a
professional money manager do the heavy lifting. That’s why we offer the ValuEngine View
newsletter.
December was one of the View's best months ever. Five of Stokes' picks provided
double digit gains and the overall portfolio gained over 7%! Stokes beat the S&P 500
benchmark by a large margin. Results for this month's portfolio also look promising. So if
you want some help making sense of our quantitative analysis then you might find that the
very best return on your investment comes from subscribing to the ValuEngine View.
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