Forward Guidance: Alexander Green on the Blue-Collar Billionaires of Value Investing

On this week’s episode of Forward Guidance, we’re joined by Alexander Green, the Chief Investment Strategist of The Oxford Club and Investment U. He’s also the Editor of The Oxford Communiqué, The Momentum Alert, The Insider Alert and The True Value Alert.

Alex is discussing the remarkable story of four blue-collar workers who became multibillionaires through the use of simple value investing techniques. He’s giving a special webinar chronicling their successes this Wednesday.

I start by asking Alex who these men are, and how he found them. Alex concedes that it was largely our research department who tracked them down. But he adds that the stories of these blue-collar billionaires mirror an experience he had early in his money management career.

During a minor slump in the performance of his company’s recommendations, Alex read a story in The Wall Street Journal about three men who were consistently beating the market – Warren Buffett, Peter Lynch and John Templeton.

He quickly discovered a commonality amongst these high-powered investors – they ignored conventional market-timing logic, and instead focused on identifying undervalued companies.

According to Alex, the four billionaires who will be profiled in Wednesday’s webinar did exactly the same thing. They all came from humble origins – none were exceptionally educated, and none had extensive backgrounds in finance. But they consistently beat the market with simple value investing techniques.

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I then ask Alex whether these four men have any behaviors or characteristics in common – as we discussed in our last conversation about the average American millionaire.

He then reprises one of his points from the “luck vs. skill” podcast – successful people do not believe that economic success is just a matter of luck. They understand that smart choices and habits lead to success, and they change their behavior accordingly.

In the case of these four investors, that meant adhering to disciplined value investing techniques that outperformed the market.

One of these techniques is minimizing downside risk and maximizing margin of safety. Alex explains that it’s far less risky to buy a depressed company than one that is trading at hundreds of times its earnings.

Alex goes on to explain that value investing is a particularly prudent technique in a late-stage bull market like this one. He notes that growth stocks like Netflix (Nasdaq: NFLX) and Amazon (Nasdaq: AMZN) have beaten value stocks by large margins in recent years.

As a result, value stocks and funds have become even more undervalued than usual. This is setting the stage for a major rally in value stocks in the near future.

To learn more about the powerful value investing techniques of Alex’s blue-collar billionaires, sign up for his webinar this Wednesday.
Thoughts on this article? Leave a comment below. …read more

A Surefire Way to Beat Normal Stock Returns

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It’s always a bumpy ride for small cap stock investors… but it’s been worth it since the turn of the millennium. Small cap stocks have almost doubled the performance of the S&P 500.

Small caps in general have better opportunities to grow compared to large companies. And when you add a value component, returns really shoot to the moon.

Small cap value stocks are up 464% since 2000. They’ve more than tripled the S&P 500. That’s huge! And you can gain access to these returns.

There are many low-cost small cap value funds… but some are better than others. So I’ll list a couple of my favorites below.

But first, let’s take a closer look at small cap value stocks…
Small Cap Value Stocks
One powerful model that analysts use to value stocks is the Fama-French three-factor model. It incorporates market risk, value and market cap components.

The creators, Eugene Fama and Kenneth French, back-tested thousands of random stock portfolios. They found that the three factors explained 95% of a portfolio’s return compared to the market as a whole.

The research showed that small cap stocks outperform large cap stocks… and that value stocks generally have higher upside potential than growth stocks do.

The main downside for small cap value stocks is the short-term volatility. To capture the big returns, you have to weather the short-term swings.

But over the long term, small cap value stocks are outstanding investments. The chart above shows you proof of that. Yet few folks allocate a portion of their portfolio to them.

When optimizing your portfolio, you should first look at your long-term goals. This will help you determine if small cap value stocks are a good fit. The Oxford Wealth Pyramid gives you more insight into asset allocation.

If you determine small cap value stocks should play a part in your portfolio, the funds below are a good place to start…

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Two Funds for Outsized (Long-Term) Returns
Vanguard Small Cap Value Index Fund (VISVX): Vanguard is known for its low-cost funds, and this one doesn’t disappoint. Its expense ratio comes in at 0.19%. That’s 85% lower than the average expense ratio of funds with similar holdings.

SPDR S&P 600 Small Cap Value ETF (NYSE: SLYV): This fund includes stocks with market caps between $400 million and $1.8 billion. The stocks also have strong value characteristics based on price-to-book value ratio, price-to-earnings ratio and price-to-sales. The expense ratio comes in at a low 0.15%.

Both of the funds above are a great way to invest in small cap value stocks. If you have a long-term investment horizon, you should consider adding them to your portfolio.

Good investing,

Brian
Thoughts on this article? Leave a comment below.
P.S. On Wednesday, Chief Investment Strategist Alexander Green is giving an exclusive presentation on how some of history’s most successful value investors made their fortunes. If you’re interested in the kind of long-term strategy outlined above, you should definitely sign up now. …read more

Growth vs. Value: The Difference Between Gambling and Investing

Most investors realize that nothing outperforms a portfolio of common stocks over the long haul. (Not cash, not bonds, not real estate, not commodities nor precious metals.)

This assumes, of course, that you reinvest your dividends and stick with the program during the down times, two rather significant “ifs.”

However, it’s important to note that different classes of stocks give very different returns.

For example, Bank of America did a recent study and found that since 1926, growth stocks – companies with faster appreciation in earnings per share – returned an average of 12.8% annually. But value stocks – companies that are inexpensive relative to sales, net income and book value – generated an average return of 17% over the same period.

Compounding at these rates, $10,000 invested in growth stocks would be worth $194,294 in 25 years. The same amount invested in value stocks would turn into $506,578.

The difference is not insignificant. Value beats the heck out of growth over the long term.

Yet as I reported in my last column, value investing is on the wane. Goldman Sachs even recently called it “dead.”

Why? Because over the past decade, the performance of U.S. growth stocks has been almost three times better than that of value stocks. Index fund giant State Street Global Advisors calls it “the longest period of underperformance for value since the late 1940s.”

Morningstar reports that investors have pulled $116 billion from U.S. large-cap value funds over the past 10 years. More than a quarter of that outflow has occurred over the past 12 months.

Every asset class moves in up and down cycles, of course. There is no reason to believe that value won’t outperform again in the future.

So why are investors bailing out of the long-time champion wealth creator at precisely the wrong moment?

Blame it on what psychologists call the “Recency Bias.” This is the tendency of investors to extrapolate recent events into the future indefinitely.

When technology and internet stocks were hot in the late 90’s, for example, investors began talking of a “New Era” of limitless technological growth.

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Technological innovation does tend to increase steadily. Alas, the same cannot be said of technology stocks.

Years of rising prices lulled investors into a false sense of complacency. And when the dot-com bust came the technology-laden Nasdaq index lost over three-quarters of its value – and took a full decade and a half to recover.

The lesson? Buying value stocks is far smarter and safer than chasing the hot sector du jour.

Buy a stock at the right price and not only is your upside greater. Your downside is less.

The key is to avoid “the value trap.” This is the mistaken notion that, for instance, a stock that was trading at $50 but now sells for $20 is a “value.”

It is indisputably “cheaper.” But only time will tell if it was a genuine value.

Personally, I’m not interested in middling companies with flat sales, thin margins and declining profits. I’m happy to leave “deep value” and “vulture investing” to specialists with far greater appetites for risk.

I’m more …read more

Should You Buy Autodesk Stock Before Earnings?

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Autodesk (Nasdaq: ADSK) is a large cap company that operates within the software industry. Its market cap is $25 billion today, and the total one-year return is 76.37% for shareholders.

Autodesk stock is beating the market, and it reports earnings next week. But does that make it a good buy today? To answer this question, we’ve turned to the Investment U Stock Grader. Our Research Team built this system to diagnose the financial health of a company.

Our system looks at six key metrics…

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✓ Earnings-per-Share (EPS) Growth: Autodesk reported a recent EPS growth rate of 21.33%. That’s above the software industry average of 3.96%. That’s a great sign. Autodesk’s earnings growth is outpacing that of its competitors.

✗ Price-to-Earnings (P/E): Autodesk’s price-to-earnings ratio is negative due to negative earnings. That’s not good.

✗ Debt-to-Equity: The debt-to-equity ratio for Autodesk stock is 293.54%. That’s above the software industry average of 45.73%. That’s not a good sign. Autodesk’s debt levels should be lower.

✗ Free Cash Flow per Share Growth: Autodesk’s FCF has been lower than that of its competitors over the last year. That’s not good for investors. In general, if a company is growing its FCF, it will be able to pay down debt, buy back stock, pay out more in dividends and/or invest money back into the business to help boost growth. It’s one of our most important fundamental factors.

✗ Profit Margins: The profit margin of Autodesk comes in at -26.68% today. And generally, the higher, the better. We also like to see this margin above that of its competitors. Autodesk’s profit margin is below the software average of 5.04%. So that’s a negative indicator for investors.

✗ Return on Equity: Return on equity tells us how much profit a company produces with the money shareholders invest. The ROE for Autodesk is -55.97%, and that’s below its industry average ROE of 9.9%.

Autodesk stock passes one of our six key metrics today. That’s why our Investment U Stock Grader rates it as a Sell.

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers more than a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth.

If you’re interested in finding Strong Buy stocks yourself, check out 3 Powerful Technical Indicators for Smarter Investing. We’ll show you how to eliminate emotional bias from your trading process with three powerful technical tools you can start using to boost your trading profits immediately. Click here to learn more.  …read more

A Scandalous Opportunity in Brazil

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The chart below shows what “crisis investing” looks like… Take a close look.

It superimposes the current trajectory of the Brazilian stock market over the trajectory of the U.S. stock market during the Watergate era. As you can see, the two are remarkably similar…

Therefore, if we are to trust the implied message of this chart, Brazilian stocks are a buy… just like U.S. stocks were in 1974 at the depths of the Watergate crisis.

The broader message of this chart is that crisis creates opportunity. That’s because a crisis causes selling panics that push share prices down to deeply depressed levels.

The opposite is also true. During times of peace and prosperity, stocks can become fat and happy – rising to levels that greatly exceed any fundamental rationale. At these levels, stocks typically offer a much greater possibility of capital loss than of capital gain.

To illustrate these opposing phenomena, let’s briefly compare today’s U.S. stocks to Brazilian stocks. The S&P 500 Index has notched 30 new all-time highs this year. The Brazilian stock market has not. In fact, it is trading more than 50% below the all-time high it hit six years ago.

As a result of these divergent trends, the S&P 500 Index commands a valuation that is nearly double the valuation of Brazilian stocks – based on price-to-EBITDA ratios, price-to-sales ratios or price-to-book ratios.

Let’s take a closer look…
From Bad to… Less Bad
Brazil’s stocks and currency are depressed for several reasons. During the five-year stretch from 2011 to 2016, commodity prices plummeted, which caused the growth of this resource-powered economy to shift into reverse.

Meanwhile, a massive multibillion-dollar fraud scheme rocked Petrobras (NYSE: PBR), the national oil giant that accounts for about 10% of the country’s GDP. The fraud, dubbed “Operation Car Wash,” was a massive kickback scheme that lined the pockets of dozens of Petrobras executives and highly placed Brazilian politicians.

To top off Brazil’s toxic economic brew, Dilma Rousseff, the country’s president from 2011 to 2016, was impeached one year ago.

As a result of these economic and political stresses, Brazil’s benchmark Ibovespa Brasil Sao Paulo Stock Exchange Index tumbled nearly 80% (in U.S. dollar terms) from its 2011 high to its 2016 low. The value of Brazil’s currency, the real, also dropped sharply.

But the negative trends that buffeted the Brazilian economy for five long years have begun to reverse.

The prices of many commodities have been trending higher for more than a year, which has contributed to an improving economic climate. At the same time, the country’s chaotic political situation has become less chaotic. Dilma Rousseff’s successor, Michel Temer, has established a period of relative stability.

Thanks to these “less bad” economic and political conditions in Brazil, its stocks have been trending higher for more than a year. But the benchmark Ibovespa Stock Index is still 50% below its 2011 highs (in dollars). And on most valuation measures, the Ibovespa is trading well below its 10-year average levels.

So there is ample opportunity to achieve large capital gains from the current price level. And the depressed …read more

Why You Might Be Using Price-to-Earnings Wrong

On Sunday, my wife and I went to the farmer’s market. We picked up a small batch of olive oil that we like and some grilling supplies.

But I’ll be honest… those weren’t the real reasons I wanted to go.

No, the real reason is that a local pie company owned by a Food Network alum has a booth there. And I really love the pies.

Even better, I know that a whole pie costs significantly less at the farmer’s market – $25 – than going to one of the company’s shops in D.C. or Baltimore where I would spend $30.

Or I can buy a big wedge slice for $5, which is also a discount compared to the store price. (Obviously, the whole pie is the best value. But sometimes, I just can’t trust myself with an entire pie.)

As an added bonus, going to the farmer’s market instead of traveling into Chinatown or Northeast D.C. saves me a 30-minute drive.

The point I’m trying to make is this…

At our heart, so many of us are bargain hunters. We buy marked-down items from the supermarket and clothing outlets. Clearance sales draw us in like moths to a flame.

But as investors, it’s important that we know and understand the difference between temporarily undervalued shares and those that are permanently in decline.

Today, I’m going to share a unique technique I use to determine the value of high-growth opportunities. It starts with price-to-earnings (P/E) ratios…
“What’s an Ideal P/E Ratio?”
A lot of investors make noise over P/E. I’ve listened to folks complain that they won’t buy shares of a certain company because its P/E ratio is too high. In their view, it means shares are way overvalued. But that’s not quite right.

To begin, a company’s P/E ratio is backward-looking. You’re looking at how the shares are priced compared to its performance over the last 12 months.

However, the market is forward-looking. This is why a company can beat on earnings but shares get pummeled on guidance.

The past is the past. The future is what’s important.

Beyond this, some sectors simply have low P/E ratios (like utilities). Others have high ones (like technology stocks). There is no “perfect” P/E ratio. Yet it’s a question I get often… “What’s an ideal P/E ratio?”

My answer? “It depends.”

Benjamin Graham and Warren Buffett abide by this formula: The ideal P/E multiple equals “8.5 times earnings, plus two times the growth rate of earnings.”

Others claim investors should buy only stocks with P/E ratios lower than 8.0 because they’ll provide the best returns over the next 12 months. Here are some examples of sub-8.0 stocks…

American Airlines (Nasdaq: AAL) – 5.14
Ford (NYSE: F) – 6.12
General Motors (NYSE: GM) – 5.70
GameStop (NYSE: GME) – 6.28.

This strategy is pretty much akin to buying the “Dogs of the Dow.” They’re the worst-performing blue chips and stocks. The idea is that they’ll rise over the next year because things can’t get any worse.

Maybe some of those companies will have a better 2018. Then again, maybe some of them are heading the way of Blockbuster and RadioShack.

For me, …read more

Why HP Stock Is Rated a "Hold With Caution" Before Earnings

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HP (NYSE: HPQ) is a $33 billion company today. Investors that bought shares one year ago are sitting on a 35.39% total return. That’s above the S&P 500’s return of 15.26%.

HP stock is beating the market, and it reports earnings next week. But does that make it a good buy today? To answer this question, we’ve turned to the Investment U Stock Grader. Our Research Team built this system to diagnose the financial health of a company.

Our system looks at six key metrics…

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✗ Earnings-per-Share (EPS) Growth: HP reported a recent EPS growth rate of -13.16%. That’s below the technology hardware industry average of 82.46%. That’s not a good sign. We like to see companies that have higher earnings growth.

✓ Price-to-Earnings (P/E): The average price-to-earnings ratio of the technology hardware industry is 27.75. And HP’s ratio comes in at 13.33. It’s trading at a better value than many of its competitors.

✗ Debt-to-Equity: The debt-to-equity ratio for HP stock cannot be calculated. That’s not good.

✓ Free Cash Flow per Share Growth: HP’s FCF has been higher than that of its competitors over the last year. That’s good for investors. In general, if a company is growing its FCF, it will be able to pay down debt, buy back stock, pay out more in dividends and/or invest money back into the business to help boost growth. It’s one of our most important fundamental factors.

✗ Profit Margins: The profit margin of HP comes in at 4.51% today. And generally, the higher, the better. We also like to see this margin above that of its competitors. HP’s profit margin is below the technology hardware average of 9.86%. So that’s a negative indicator for investors.

✗ Return on Equity: Return on equity gives us a look at the amount of net income returned to shareholders. The ROE for HP is -58.54%, and that’s below its industry average ROE of 7.94%.

HP stock passes two of our six key metrics today. That’s why our Investment U Stock Grader rates it as a Hold With Caution.

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers more than a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth.

If you’re interested in finding Strong Buy stocks yourself, check out 3 Powerful Technical Indicators for Smarter Investing. We’ll show you how to eliminate emotional bias from your trading process with three powerful technical tools you can start using to boost your trading profits immediately. Click here to learn more.  …read more

An Investment Guide to War With North Korea

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“Buy to the sound of cannons, sell to the sound of trumpets.” – Lord Nathan Rothschild

President Trump and North Korean Supreme Leader (or whatever the heck he calls himself) Kim Jong Un have been talking tough and perhaps bringing the two nations to the brink of war.

We should never lose sight of the fact that war inevitably means death and misery for many innocent people.

That being said, Investment U is not a political site, it’s an investing site. And many of our readers want to know if they need to get defensive with their investments… or if there will be buying opportunities if war breaks out.

You may be familiar with Lord Nathan Rothschild’s famous quote above. Often, when war breaks out, investors take their risk off the table by selling their investments. They’re understandably worried about the worst happening.

But for those who can handle some added risk and volatility, it’s usually a good time to pick up those beaten-down investments.

So here are some investment ideas to consider if Kim Jong Un is stupid enough to keep poking the U.S. with a stick…
Real Estate
There are two reasons I like real estate if war breaks out.

Investors will likely flee to safety, which means buying U.S. Treasurys. As a result, the yield on Treasurys should decline, and that should bring down mortgage prices.

Additionally, some potential homebuyers may get scared off and decide to wait until things calm down to make such a major purchase. Less demand means prices will fall.

So real estate buyers may be able to pick up houses cheaper and with lower interest rates on their mortgages.
Defense Contractors
This one is a bit obvious… but these companies should do well.

Each Tomahawk missile made by Raytheon (NYSE: RTN) – the kind dropped on Syria earlier this year – costs about $1 million.

We fired 59 missiles at Syrian targets in what was essentially a slap on the wrist for the Assad regime. If we’re looking to really slap Kim Jung Un around, there will be a lot more than 59 missiles dropped on his weirdly coiffed head.

That would likely lead to big orders from Raytheon and other contractors that provide weapons, technology and services to the U.S. government.

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Biotech
I’m a big fan of the biotech sector in general. With the baby boomers hitting their senior years, the demand for existing drugs and new cures is going to be enormous.

What I like about the sector is that it is completely uncorrelated with a potential war with North Korea.

If North Korea attacks Guam, or the U.S. military bombs Pyongyang, it should have no impact on whether Amgen (Nasdaq: AMGN) sells one more dose of its anemia drug Aranesp, or whether an early-stage company like Sage Therapeutics (Nasdaq: SAGE) will show that its postpartum depression drug is safe and effective.

The products produced by biotech companies are recession-proof and, for the most part, immune to geopolitical conflict.

The last time America went to war, when the U.S. invaded Iraq in March of 2003, both the S&P 500 and the biotech …read more

Buy or Sell Medtronic Stock Before Earnings?

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Medtronic (NYSE: MDT) is a $115 billion company today. Investors that bought shares one year ago are sitting on a -1.43% total return. That’s below the S&P 500’s return of 15.26%.

Medtronic stock is underperforming the market. It’s beaten down, but it reports earnings next week. So is it a good time to buy? To answer this question, we’ve turned to the Investment U Stock Grader. Our Research Team built this system to diagnose the financial health of a company.

Our system looks at six key metrics…

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✗ Earnings-per-Share (EPS) Growth: Medtronic reported a recent EPS growth rate of 7.59%. That’s below the healthcare equipment and supplies industry average of 11.52%. That’s not a good sign. We like to see companies that have higher earnings growth.

✓ Price-to-Earnings (P/E): The average price-to-earnings ratio of the healthcare equipment and supplies industry is 38.03. And Medtronic’s ratio comes in at 24.07. It’s trading at a better value than many of its competitors.

✗ Debt-to-Equity: The debt-to-equity ratio for Medtronic stock is 66.33%. That’s above the healthcare equipment and supplies industry average of 60.61%. That’s not a good sign. Medtronic’s debt levels should be lower.

✓ Free Cash Flow per Share Growth: Medtronic’s FCF has been higher than that of its competitors over the last year. That’s good for investors. In general, if a company is growing its FCF, it will be able to pay down debt, buy back stock, pay out more in dividends and/or invest money back into the business to help boost growth. It’s one of our most important fundamental factors.

✓ Profit Margins: The profit margin of Medtronic comes in at 14.69% today. And generally, the higher, the better. We also like to see this margin above that of its competitors. Medtronic’s profit margin is above the healthcare equipment and supplies average of 9.97%. So that’s a positive indicator for investors.

✗ Return on Equity: Return on equity gives us a look at the amount of net income returned to shareholders. The ROE for Medtronic is 7.87%, and that’s below its industry average ROE of 16.29%.

Medtronic stock passes three of our six key metrics today. That’s why our Investment U Stock Grader rates it as a Hold.

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers more than a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth.

If you’re interested in finding Strong Buy stocks yourself, check out 3 Powerful Technical Indicators for Smarter Investing. We’ll show you how to eliminate emotional bias from your trading process with three powerful technical tools you can start using to boost your trading profits immediately. Click here to learn more.  …read more

Is Jack Henry & Associates Stock Undervalued or Overvalued Before Earnings?

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Jack Henry & Associates (Nasdaq: JKHY) is a $9 billion company today. Investors that bought shares one year ago are sitting on a 20.68% total return. That’s above the S&P 500’s return of 14.02%.

Jack Henry & Associates stock is beating the market, and it reports earnings tomorrow. But does that make it a good buy today? To answer this question, we’ve turned to the Investment U Stock Grader. Our Research Team built this system to diagnose the financial health of a company.

Our system looks at six key metrics…

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✗ Earnings-per-Share (EPS) Growth: Jack Henry & Associates reported a recent EPS growth rate of 13.24%. That’s below the IT services industry average of 24.16%. That’s not a good sign. We like to see companies that have higher earnings growth.

✗ Price-to-Earnings (P/E): The average price-to-earnings ratio of the IT services industry is 30.42. And Jack Henry & Associates’ ratio comes in at 34.29. Its valuation looks expensive compared to many of its competitors.

✓ Debt-to-Equity: The debt-to-equity ratio for Jack Henry & Associates stock is 4.94. That’s below the IT services industry average of 116.95. The company is less leveraged.

✗ Free Cash Flow per Share Growth: Jack Henry & Associates’ FCF has been lower than that of its competitors over the last year. That’s not good for investors. In general, if a company is growing its FCF, it will be able to pay down debt, buy back stock, pay out more in dividends and/or invest money back into the business to help boost growth. It’s one of our most important fundamental factors.

✓ Profit Margins: The profit margin of Jack Henry & Associates comes in at 16.97% today. And generally, the higher, the better. We also like to see this margin above that of its competitors. Jack Henry & Associates’ profit margin is above the IT services average of 9.05%. So that’s a positive indicator for investors.

✓ Return on Equity: Return on equity tells us how much profit a company produces with the money shareholders invest. The ROE for Jack Henry & Associates is 27.07%, and that’s above its industry average ROE of 19.13%.

Jack Henry & Associates stock passes three of our six key metrics today. That’s why our Investment U Stock Grader rates it as a Hold.

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers more than a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth.

If you’re interested in finding Strong Buy stocks yourself, check out 3 Powerful Technical Indicators for Smarter Investing. We’ll show you how to eliminate emotional bias from your trading process with three powerful technical tools you can start using to boost your trading profits immediately. Click here to learn more.  …read more

The Worst Market Call of All Time... and What It Tells Us Today

On August 13, 1979, Businessweek famously had a cover story trumpeting “the death of equities.”

The article inside argued that after such a long period of poor performance by U.S. stocks, both individual and institutional investors were abandoning them for real estate, commodities, precious metals and other hard assets.

Relentlessly bearish, the article concluded with the words “The stock market is just not where the action’s at.”

In hindsight “The Death of Equities” – to the mortification of the folks at Businessweek – was perhaps the worst market call of all time. Within a matter of days, stocks began the greatest bull market in U.S. history, one that didn’t peak for more than two decades.

Why do I mention this bit of nostalgia? Because as Mark Twain famously noted, history may not repeat itself but it rhymes.

Last week’s Wall Street Journal reported that “value investing is mired in one of its worst stretches on record… Stocks that are cheaper than many peers relative to earnings or reported net worth… have significantly lagged behind their growth stock counterparts this year, compounding a gap that has persisted since the end of the financial crisis… [Value stocks] have fallen so far out of favor that Goldman Sachs in June questioned whether the markets are witnessing the death of value investing.”

Got that? Buying stocks that are inexpensive relative to their near-term business prospects is officially dead.

Instead most investors are chasing the same handful of superexpensive shares. I’m referring to companies like Amazon (Nasdaq: AMZN) at 182 times earnings, Netflix (Nasdaq: NFLX) at 206 times earnings and Tesla (Nasdaq: TSLA) at negative 70 times earnings.

This is hardly new. Every decade or so we get some variation on this same madness of crowds.

In the late ‘60s it was “the Nifty 50,” go-go stocks like Disney (NYSE: DIS), McDonald’s (NYSE: MCD) and Coca-Cola (NYSE: KO) that ended up underperforming for years. In the ‘70s, it was resource stocks that quickly went from boom to bust. In the ‘80s, it was Japanese stocks. (Twenty-eight years later, the Nikkei 225 is just half what it was in 1989.) In the late ‘90s, it was the dot-com bubble. (I’m sure you remember how that ended.) And last decade investors convinced themselves that “real estate always goes up” and flocked to mortgage-backed securities just before the meltdown.

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Of course, if you had invested in resource stocks in the ‘60s, Japanese stocks in the ‘70s, technology stocks in the ‘80s or real estate in the ‘90s, you could have made a fortune in each sector before it peaked.

Unfortunately, most traders and investors were busy buying whatever was hot instead.

With that lesson in mind, let’s return to “the death of value investing.”

The conventional wisdom is that stocks like Tesla and Amazon carry nutty valuations, but they will ultimately justify them down the road with spectacular earnings.

Growth stock bulls concede that the leading stocks “are priced for perfection” but that that’s OK in this “Goldilocks economy.”

Alas, in my short time on this little blue ball I’ve learned that perfection …read more

Forward Guidance: Ryan Fitzwater on Value Investing in a Mature Bull Market

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On this week’s episode of Forward Guidance, we’re joined by Ryan Fitzwater, The Oxford Club’s Director of Research. We’re discussing how the value investing techniques pioneered by Benjamin Graham can be applied to a mature bull market.

I start by asking Ryan about the basic idea behind value investing. He explains that value investing is based on the idea of “appraising” a stock based on its fundamentals.

Just as a property appraiser calculates a house’s price by examining its foundation, roof, neighborhood, etc… a value investor examines a company’s fundamental metrics to calculate its intrinsic value. Then they try to buy stocks that are trading at a discount to their intrinsic value.

This approach was pioneered by the early 20th century investor Benjamin Graham, who developed a formula for intrinsic value. Graham’s success won him many disciples, including Warren Buffett.

Ryan explains that this approach is often contrasted with growth investing, which is an approach based on buying “hot stocks” that are taking off. But the data clearly shows that value investors perform better than growth investors do over the long term.

I then ask Ryan which metrics are used to calculate intrinsic value today. He explains that price-to-earnings (both trailing and forward), price-to-book value and price-to-sales are classic valuation ratios. Investors can ascertain value by comparing a company’s valuation metrics to its historical norms – or to other companies in its industry.

Next, we discuss one of the most successful value plays in The Oxford Club’s history. Ryan cites Alexander Green’s decision to purchase Toyota (NYSE: TM) in the aftermath of the 2011 tsunami and Fukushima nuclear disaster.

The destruction caused a sell-off in Japanese stocks – but it didn’t really change the outlook of multinational companies like Toyota. Alex told his subscribers to buy Toyota at the bottom of this crash, and two years later, they were up 82%.

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The conversation then shifts to where to find value today. Ryan highlights telecoms like Verizon (NYSE: VZ) and financials as undervalued equities. He explains that the financial sector has a price-to-book value ratio of 1.4. That’s less than half of the S&P 500’s ratio of 3.

On a global scale, Ryan cites the Russian market as an example of an undervalued country. After a decade of economic and political turmoil, Russia’s stock market has a P/E ratio of 6.9 – well below the valuations of most Western markets.

Finally, I ask Ryan about the applicability of Benjamin Graham’s value investing techniques in this 8-year-old bull market.

According to Ryan, value investing is the best approach in a mature bull market. By focusing on stocks that are already trading below their true value, investors can protect themselves from a pullback in the broad markets.

He also notes that Alexander Green is working on a new presentation about the power of value investing – one that is perfectly suited to today’s market conditions.

Stay tuned for more.
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