BUY OF THE WEEK 8/19/2014

Posted on August 19, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why WR Berkley (WRB) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the week


Posted on August 15, 2014 | Stock Screens

YTD Return of Top Performers: Rule #1 Investing 50.3% — ADR Screen 35.1%

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August 2014 AAII MODEL PORTFOLIOS UPDATED – Signs of a Pullback

Posted on August 15, 2014 | Model Portfolios

The S&P 500 index declined 1.5% in July, putting a smile on the face of many a bear who have been wrong for so long. Still, the decline is too small to even qualify as a pullback. Global worries ranging from war in the Ukraine, Syria and Iraq to a possible recession in the European Union dominated headlines last month and weighed on the indexes. Even a solid jobs report in the U.S. could not push the markets higher in July. This resulted in a “risk off” month that impacted the model portfolios, but to different degrees. Still, despite all the negative headlines and the rotation out of small cap stocks, both the Shadow Stock Portfolio and the Model Fund Portfolio beat their benchmarks in July. The Model Fund Portfolio declined only slightly for the month, while the Model Shadow Stock Portfolio, which concentrates on small-cap stocks, dropped significantly. The Model Shadow Stock Portfolio can experience greater short-term volatilities because the portfolio is made up of stocks trading in the “shadows” of Wall Street and more likely to be mispriced. While there may be periodic negative periods in such a portfolio, over time the portfolio tends to significantly outperform the S&P 500. Short-term volatility is the price to be paid for higher long-term expected returns.

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SSR Portfolio Beats the Market

Posted on August 15, 2014 | Stock Superstars Report

According to a report from Merrill Lynch, health care and technology stocks have turned in the most second-quarter earnings and revenue numbers that beat consensus estimates, while the telecom sector has lagged.

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Have the Bears Been Sent Running?

Posted on August 15, 2014 | Dividend Investing

U.S. stocks continue to show resiliency. A week after nearly touching official pullback territory (a decline of at least 5%), large-cap stocks have rebounded nicely. The NASDAQ index enjoyed its strongest weekly performance since February, while the S&P 500 index had its best weekly performance since April.

The bond market is performing well too. Yields on the 10-year Treasury note fell to 2.34% today, the lowest closing yield of the year. To put this number in perspective, the benchmark note started 2014 with a yield of 3.03%.

Mr. Market is causing those who have made bearish forecasts to seem silly, as investors who have maintained their allocations to stocks and bonds have done well. But, while the bears may have been sent running this week, they have not been banished. That’s actually a good thing, because when sentiment runs too hot (which, at least for stocks, it currently is not) downside risks intensify.

Enjoy this week’s good returns, but remember that market conditions can change quickly.

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Are Smart Beta ETFs Smart Investments?

Posted on August 15, 2014 | Investor Update

The concept of smart beta funds has intrigued me. Smart beta funds use quantitative rankings to determine what stocks to hold and how to weight them. I agree with the general concept, but I wondered if smart beta exchange-traded funds (ETFs) actually delivered better performance. So I used the data in our ETF Guide to conduct an analysis.

This would seem to be an easy task: just line up the funds and compare the returns. After all, most funds, be they mutual funds or ETFs, can be quickly categorized as passive or active, small cap or large cap, domestic or international, etc. With smart beta ETFs, things weren’t so simple. In fact, I quickly found myself facing a quandary: What actually counts as a smart beta fund?

Morningstar does not designate funds as being smart beta in the data it supplies. (We use Morningstar’s data for our mutual fund guide, our ETF guide and our Quarterly Mutual Fund Update.) A search on Google for a list of smart beta ETFs didn’t turn up much either. This meant my first step was to create a list of smart beta ETFs.

The first few choices were easy. I knew there are ETFs based on Research Affiliates smart beta indexes, such as the PowerShares FTSE RAFI US 1000 (PRF). I included ETFs based on equal-weight market capitalization indexes, such as Guggenheim S&P 500 Equal Weight (RSP), even though equal-weight indexes were in existence before the term “smart beta” became popular.

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Finding Growth Stock Winners: Focus on 8 Fundamental Factors

Posted on August 14, 2014 | AAII Journal

There are eight tried-and-true key fundamental factors that drive stellar stock price performance and have stood the test of time.

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AAII Sentiment Survey: Big Changes in Optimism and Pessimism

Posted on August 14, 2014 | AAII Survey

Optimism surged and pessimism plunged in the latest AAII Sentiment Survey. The shift in attitudes about the short-term direction of stock prices as optimism experienced its biggest one-week gain in six months and pessimism experienced its largest two-week fluctuation in nearly a year.

Bullish sentiment, expectations that stock prices will rise over the next six months, surged 8.9 percentage points to 39.8%. This is the biggest one-week rise in optimism since February 13, 2014, when it jumped 12.3 percentage points to 40.2%. Bullish sentiment is now at its highest level since June 12, 2014 (44.7%). This week is also just the third in the past 22 weeks with optimism above its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose by 2.3 percentage points to 33.2%. The rebound keeps neutral sentiment above its historical average of 30.5% for the 32nd consecutive week. This is the third-longest streak of consecutive weekly readings above 30.5% in the survey’s history.

Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 11.3 points to 27.0%. The drop puts pessimism at a six-week low. It also puts bearish sentiment below its historical average of 30.5% for the 37th time in the past 44 weeks.

This week’s 11.2 percentage point drop in bearish sentiment follows last week’s 7.1 percentage point rise. A fluctuation of comparable size has not occurred since August 2013. Pessimism jumped 14.7 percentage points to 42.9% on August 22, 2013 and then pulled back by 12.1 percentage points to 30.7% on August 29, 2013.

The big change in sentiment this week occurred as both large-cap and small-cap stocks rebounded from their recent lows. Changes in the composition of AAII members taking the survey this week relative to last week may have also had an effect. (We send out reminders to take the survey to a rotating group of AAII members each week.) Other factors include second-quarter earnings, sustained economic growth and the Federal Reserve’s tapering of bond purchases. Keeping some individual investors pessimistic are prevailing valuations, the failure of the S&P 500 to set new highs, events in the Middle East and Ukraine, the pace of economic growth and Washington politics.

It should be noted that despite this week’s big changes, both optimism and pessimism remain well within their respective typical ranges. Neither is unusually high or low at current levels.

This week’s AAII Sentiment Survey results:

  • Bullish: 39.8%, up 8.9 percentage points
  • Neutral: 33.2%, up 2.3 percentage points
  • Bearish: 27.0%, down 11.3 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at:

AAII Members on Corporate Inversions: Change the Tax Code

Posted on August 14, 2014 | AAII Survey

This week’s AAII Sentiment Survey special question asked AAII members for their opinion about whether U.S. corporations should pursue tax inversions. Approximately 49% of respondents said companies should pursue inversions, while 36% said companies should not. Nearly one in four those who are in favor of inversions thought such transactions could pressure Congress to reform the tax code. A nearly equal proportion of those not favoring inversions said the tax law needs to be changed. Several members, both for and against inversions, described the U.S. corporate tax rate as being both high and a reason why inversions are being pursued.

Here is a sampling of the responses:

  • “U.S. corporations should do what’s best for shareholders. The U.S. needs to fix/simplify its tax code.”
  • “If a corporation primarily receives its income in the U.S., it should pay its taxes in the U.S.”
  • “Corporations should pursue inversions until the U.S. modifies and reduces its uncompetitive tax rate.”
  • “I believe this tax loophole should be removed. It perverts our economic system.”
  • “While patriotic concerns are debatable, any corporation may adhere to the law of the land.”
  • “Yes, corporations have a fiduciary duty to do so. It’s not their problem that Congress is so dysfunctional.”

Investing Cash Flow: The Purchase or Sale of Long-Term Assets

Posted on August 13, 2014 | Dividend Investing

In the previous article of this series, we examined operating cash flows, which measures day-to-day profitability. This month we move on to the next primary section of the cash flow statement: cash flows from investing activities. Investing activities pertain to the acquisition or disposal of non-current assets (investments) and are usually classified as either capital expenditures—money spent on items such as new property, plant or equipment—or monetary investments such as the purchase or sale of government bonds or stocks of other firms. It is important to remember that, as with all cash flows, an investing activity only appears on the cash flow statement if there is an exchange of cash during the specified period.

Cash flows from investing activities are separately reported because they tell whether the company is investing in assets that are expected to result in future profits or whether it is disposing of long-term assets already owned. It is important to note that investing activity does not take into account the issuance or redemption of company’s own stock or debt.

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