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  • Volume I, Issue 17

LGR Newsletter

Volume I, Issue 17 (released on August 18, 2014)

Hello all!  I hope you all are enjoying your last few weeks of summer.

This Issue will contain a Website Update, which I will use to describe some of its new and upcoming features.

As always, this Issue will contain a Write-up on Life Time Fitness (LTM), a Summary of the Market’s Performance (8/04/14 – 8/15/14), a Portfolio Update (7/28/14 – 8/15/14), and a Market Update (8/04/14 – 8/15/14).

If you have any questions about anything that was written in this Issue or in my article on Life Time Fitness, please feel free to email me. Thank you!

 

Write-up on Life Time Fitness (LTM):

As previously mentioned in a brief note sent out to my email Listserv on August 12th, I recently published a new article on Life Time Fitness Inc. (NYSE: LTM). The article was chosen to be a Seeking Alpha PRO article, meaning Seeking Alpha editors decided it was one of the best articles written on the stock and held it exclusively for Seeking Alpha PRO subscribers for 24 hours (an “embargo” period). After the 24 hour period ended, the article was published in normal Seeking Alpha format, and it has been made available to all Seeking Alpha subscribers free for 30 days (26 days as of Sunday, August 17th). My agreement with Seeking Alpha PRO prohibits me from publishing the full article on my website. Therefore, I include a short summary below plus a link to the article on Seeking Alpha.

Note: The article contains charts and other information that could not be included in this summary.

The summary below presents the four points of my Investment Thesis for LTM, and then focuses on LTM’s valuation multiples. These multiples demonstrate that LTM is a value stock that is currently undervalued. I updated the upside/downside potential figures in this summary, to reflect LTM’s closing price of $40.09 on August 14, 2014. The valuation multiples presented are only current as of August 11, 2014.

(The article was made available to non-Seeking Alpha PRO member on August 13, 2014, at 8:08 ET after being exclusively available to Seeking Alpha PRO members for 24 hours)

Summary:

  • Life Time Fitness is an excellent value stock poised for upside of 30-40% over the next twelve months.
  • LTM strongly differentiates itself from its competitors by creating high barriers to entry in an industry that typically has few such barriers.
  • As one of two publicly traded gym companies, LTM has experienced solid growth over the last five years and presents the best investment opportunity in the industry.
  • The leisure industry benefits significantly in an improving economy, and LTM is well-positioned to leverage these positive economic tailwinds, with long-term growth potential.

Life Time Fitness (NYSE:LTM) is a strong value buy for a 12-month period, with 30-40% upside potential and limited downside risk. My 12-month target price of $53 presents an upside potential of 32.20%, over LTM's closing price on August 14th, and I see downside risk of approximately 8%. LTM currently has an EV/EBITDA (ttm) multiple of 7.59x, which is 10% lowest than LTM’s average multiple over the past 18 quarters (8.35x). The last time LTM traded at near this multiple it surged 33.90% in 16 trading weeks, and significantly outperformed the S&P 500.

LTM’s P/E, P/S, P/B, and P/CF multiples are all near historical lows (the last time LTM traded near these multiples was in late 2009). If LTM’s P/E, P/S, P/B, and P/CF multiples were to expand to reach their 5-year averages (3-year average for P/CF) the stock would need to rise 32.60%, 30.78%, 28.56%, and 33.43% respectively. These multiples support a conclusion that LTM is approximately 30% undervalued.

The full article can be found here: http://seekingalpha.com/article/2421045-life-time-fitness-a-value-stock-in-shape-for-large-upside

Feel free to follow me on Seeking Alpha!

 

Website Update:

As mentioned in a previous Issue of my Newsletter, my website has four main sections:

  • A Financial Blog: to foster conversation about financial markets (I often release a News Blast post describing important news from the trading day);
  • A Portfolio section containing snapshots of my portfolio’s holdings and a chart of my portfolio’s performance vs. the S&P 500;
  • A Newsletter section containing Issues of this Newsletter; and
  • A Predictions section documenting the predictions I’ve made.

Financial Blog:

After taking about a month long hiatus from writing “News Blasts” on my Financial Blog, I am back at it. Each “News Blast” is focused on providing information (news) related to stocks in my portfolio and general market news that I find interesting. Each News Blast it date stamped, the information provided separated into specific “categories”, and when specific stocks are mentioned, their ticker symbols will be “tagged.” By clicking on a “tagged” ticker symbol, one is able to look through all the News Blasts in which the ticker symbol (company) is mentioned. I will attempt to produce three News Blasts each week (time permitting).

Portfolio:

As you all know by now, I am very dedicated to being open with my portfolio management strategies and performance (simulated portfolio). The portfolio section of my website outlines my simulated portfolio’s management guidelines, and provides multiple charts that depict my simulated portfolio’s performance.

New Features: I recently included a chart that does a full breakdown of my portfolio by sectors. Not only does this chart allow people to see what stocks I hold in my simulated portfolio from each sector, it also allows them to track the performance of stocks in my portfolio in real time! When one clicks on the name of one of the stocks in the chart, a graph will appear depicting the stock’s performance over the last year. The chart’s data is provided by “tradingview.com,” and the chart updates itself in real time. In short, this section of my website tells you pretty much everything that you would want to know about my simulated portfolio, which I try to manage as though it is real money.

Predictions:

This section catalogs the predictions I’ve made, in either the Newsletter or in an article I wrote.

New Features: You are now able to track the performance of my predictions in real time! This is done by looking at the entry price listed in each prediction, and then comparing it to the price of the security in the chart (updated in real time) below each prediction.

The “Predictions” section of my website also has a “Company Spotlight” sub-page. The “Company Spotlight” page gives in-depth details about the most recent article that I wrote about a specific stock. Currently, the “Company Spotlight” section is highlighting Las Vegas Sands Corp. (NYSE: LVS), because I had already highlighted information about Life Time Fitness (LTM) before. People are also able to track the performance of the stock mentioned in the “Company Spotlight” page, by looking at the price chart that updates itself in real time.

Upcoming Website Features:

I plan to add a “Resource Guide” page. The Resource Guide will allow people to see what sources I use to collect information, and it will also define some investing-specific terms that I frequently use while writing. If you can think of any features that you would like to see included on my website, please let me know and I will try to include them!

 

Summary of the Market’s Performance:

(August 04 – August 15, 2014)

Over the past two trading weeks, from the market’s close on August 1st to its close on August 15th, the stock market has been in rally mode and it has regained much of the ground it lost in late July. The Nasdaq Composite outperformed both the Dow Jones Industrial Average and the S&P 500 with a gain of 2.58%, compared to gains of 1.03% and 1.55% for the DJIA and the S&P 500 respectively. The Russell 2000 Small Cap Index also did extremely well, over the past two weeks, with a gain of 2.40%. Biotech stocks in the Nasdaq Composite, represented by the iShares Nasdaq Biotechnology ETF (IBB), saw huge gains over the last two week, and their collective performance was the main reason why the Nasdaq Composite outperformed the other major stock indexes.

Over the two week period, IBB gained 5.25%, with most of that gain being attributed to the performance of a few large companies with huge weightings inside the ETF. I am happy to say (right now at least) that I own two of IBB’s top four holdings, Amgen Inc. (Nasdaq: AMGN) and Gilead Sciences Inc. (NASDAQ: GILD), in my simulated portfolio and both stocks outperformed IBB over the last two weeks (AMGN was +5.77% and GILD was +8.73% over the last two weeks).

The price of long-term bonds increased sharply over the last two weeks, with the iShares 20+ Year Treasury Bond ETF (TLT) moving 2.75% higher while the LT Composite Rate (>10 yrs) dropped from 3.03% to 2.87%.

  • Note: The US Treasury defines “The Long-Term Composite Rate” as the “…unweighted average of bid yields on all outstanding fixed-coupon bonds neither due nor callable in less than 10 years.”

I find it rather surprising that both low risk (long-term US Treasury Bonds) and high risk (Biotech and small cap stocks) would catch a bid over the same period of time. Usually, one would expect to see investors flock to either low risk or high risk securities, but not both. My only guess for why both caught a bid over the last two weeks is that investors (both foreign and domestic) turned to US Treasury bonds, in a “flight to safety” when news from Iraq or Ukraine made headlines, and many investors still believe that the market can reach new highs so they have been buying riskier stocks as they “reach” for higher returns.

The surprises didn’t end there. Gold and silver experienced a major divergence in performance, which is rare seeing as the two precious metals historically move in the same direction. A small divergence in performance wouldn’t be anything to talk about, but the divergence between gold and silver these past two weeks was quite large. The spot price of gold closed at $1,305.50/oz on Friday, August 15th, moving 0.80% higher over the past two weeks, while the spot price of silver closed at $19.55/oz, dropping 3.88% over the same period of time. This led to a quite mixed performance from precious metal miners, with many silver miners selling off while gold miners rallied, but the senior and junior gold miner ETFs (GDX and GDXJ) closed 2.37% and 0.36% higher respectively.

Currently, it appears gold’s rally is being capped by the US Dollar, which has been catching a bid recently due to global unrest. The price of gold is currently negatively correlated to the US Dollar, and it appears as though the strength in the dollar has stopped gold from rallying as much as I believe it should be right now. This can be seen in the two charts below:

LGR Newsletter Volume I, Issue 17 Picture #1

Source: Data provided by Stockcharts.com

LGr Newsletter Volume I, Issue 17 Picture #2

Source: Data provided by Stockcharts.com

Clearly gold and the US Dollar are both at inflection points right now, and watching their performance over the next two weeks will be very important. Gold will need to break above $1,350/oz for a new bull market to truly take hold, and for that to happen the US Dollar will probably need to depreciate in value.

The US Dollar Index has a lot of resistance in the $81.00 - $81.50 region, and it is still unclear whether the US Dollar has broken the resistance and is just consolidating now before moving higher (forming a “bull flag” chart pattern) or its rally is beginning to stall out and the dollar is headed lower. For my prediction regarding gold (made in Volume I, Issue 15) to come true, gold will need to break out of its consolidation channel to the upside and break above $1,350/oz. You all know that I believe that gold is headed higher in the long-term, and that it marked a bottom in June 2013, but it appears to me as though gold is struggling from a technical perspective. It appears as though the US Dollar and gold are currently nearing a major turning point, and I believe that how those two perform in the coming weeks will have a huge impact on their intermediate-term (1 year+) performance.

 

Portfolio Update:

(July 28 – August 15, 2014)

This Portfolio Update is for the last three weeks, not for the last two weeks, because the last Issue of my Newsletter was released during the week and the Portfolio Update section of that Issue was delayed by a week.

As I’m sure you all know, earnings season has been underway for almost the past six weeks (since earnings season unofficially began when Alcoa, Inc. released its Q2 2014 earnings on July 8th). So far, since July 8th, 28 out of the 30 stocks in my simulated portfolio (obviously this excludes ETFs) have reported earnings. I decided to compile a spreadsheet to help depict how the stocks in my portfolio performed during this earnings season. Here’s a picture of the spreadsheet:

LGR Newsletter Volume I, Issue 17 Picture #3

  • Note #1: I looked at data from Seekingalpha.com to figure out whether or not a stock beat its EPS and Revenue estimates. However, for all of the boxes with red tabs in the upper right-hand corners, I needed to look at a different source (Zacks Equity Research) to figure out whether or not the stock beat the estimate number.
  • Note #2: All of the performance figures use the stock’s closing price before the earnings report came out.
  • Note #3: Please understand that the data above is very limited, and there were many other factors (not listed) that contributed to each stock’s performance after it released its earnings report.

A quick analysis of the data above will show you that 16 out of the 30 stocks in the table above have reported revenue that beat analysts’ consensus estimates, and 14 out of the 30 stocks reported EPS that beat analysts’ consensus estimates. The average 1-day, 1 week, and 2 week performance for all 30 stocks (compared to the S&P 500) was -0.51%, -0.31%, and -1.90% respectively (did not include data points labeled “N/A”). I will refer back to the table above later.

Portfolio Performance Overview:

Over the past three weeks, my portfolio under-performed the S&P 500 with a return of -1.45% versus the S&P 500’s return of -1.18%. My portfolio outperformed the S&P 500 while the market was going down, but when the market turned higher my portfolio began to underperform. As I currently have a bearish perspective on the market, that is what I would expect to see.  Right now my focus is on outperforming the market when it declines.

This past week, my portfolio experienced a “glitch,” which resulted in my portfolio’s total balance (value) being lower than it should be. I will explain this in greater detail later.

Below is some information about my simulated portfolio, and a list of my five best performers, and five worst performers, for the past three weeks:

  • Starting balance (on 1/1/2014): $1,000,000.00
  • Current balance (on 8/15/2014): $1,060,074.18
  • Return to date: 6.01%
  • The S&P 500’s return to date: 5.77%
  • Number Of Currently Profitable Positions: 19
  • Number Of Currently Unprofitable Positions: 13
  • Percentage Of Positions That Are Profitable: 59.38%

My Five Best Performers For Past Three Weeks:

  1. Gilead Sciences, Inc. (GILD): +10.74%
  2. Amgen Inc (AMGN): +8.11%
  3. First Solar, Inc. (FSLR): +7.92%
  4. IAMGOLD Corp. (IAG): +7.18%
  5. Whole Foods Market, Inc. (WFM): +4.47%

My Five Worst Performers For Past Three Weeks:

  1. Sturm Ruger & Co., Inc. (RGR): -13.44%
  2. BP Amoco PLC (BP): -6.93%
  3. T-Mobile US, Inc. (TMUS): -6.83%
  4. Las Vegas Sands Corp. (LVS): -6.45%
  5. First Majestic Silver Corp. (AG): -6.18%

In addition, please see below for the latest “snapshot” of my simulated portfolio:

LGR Newsletter Volume I, Issue 17 Picture #4

  • Note: Numbers as of August 15, 2014

Referring Back To Earnings Season:

The five stocks with the largest “weight” in my portfolio (AL, WR, BUD, CVS, and MO) had mostly positive results this earnings season. Those five stocks had an average 1-day and 1-week return (compared to the S&P 500) of +1.19% and +0.50% respectively.

  • Note: Only two of the five stocks have performance numbers for the “2 Weeks” data point, so it did not make sense to include the average performance number for that time period.

In addition, the five stocks with the smallest “weight” in my portfolio (AG, AMGN, ZNGA, FSLR, and NVO) had mixed negative results this earnings season. Those five stocks had an average 1-day and 1-week return (compared to the S&P 500) of -0.33% and +1.38% respectively.

  • Note: Only one of the five stocks had performance numbers for the “2 Weeks” data point, so it did not make sense to include the average performance number for that time period.

Changes To My Portfolio During Earnings Season:

I didn’t make any major weighting changes in my portfolio as a direct result of this earnings season. However, I can say that I bought more shares of AMGN, ZNGA, FNV, LTM, AL, and IAG directly after those companies reported earnings, and sold shares of AG, SLW, and ATVI directly after they reported earnings. I tell you all this just to keep you up-to-date with the changes my portfolio has gone through as a direct result of this earnings season.

 

Market Update:

(August 04 – August 15, 2014)

All of the news talked about in the Market Update section of this Issue is strictly related to stocks in my portfolio, because these stocks have had a lot of very interesting news come out recently.

Portfolio News:

QCOR: I mentioned earlier that my simulated portfolio experienced a “glitch” this past week, which hurt my portfolio’s performance, and I will talk about that now because it relates to a very important news report that affected a stock in my portfolio. On August 14, 2014, it was reported that Mallinckrodt PLC (NYSE: MNK) completed its acquisition of Questcor Pharmaceuticals, Inc. (NASDAQ: QCOR) and, because my portfolio is only a “simulated” portfolio and not a “real” portfolio, my portfolio did not register the transaction (I own shares of QCOR in my simulated portfolio). The deal, “…valued at approximately $5.8 billion,” entitled shareholders to receive “…$30.00 in cash and 0.897 of a Mallinckrodt ordinary share for each Questcor share.”

As of August 14th, I owned 441 shares of QCOR and, if it was a “real” position, this would have entitled me to receive approximately $13,230 in cash and 395 shares of MNK. This would have left me with a $27,997.60 (market value) position in MNK. Therefore, when MNK rose 1.10% on August 15th, my position would have had a market value of $28,305.70, based on MNK’s closing price on Friday. This wouldn’t have made a huge difference to my portfolio’s total value (only adding $308.10), but it is something to note nonetheless. Obviously, if MNK continues to rise in value I will be missing out on more money, so I’m hoping that my Tradestation account will resolve this issue.

To be honest, I am not sure yet whether or not I want to keep my position in MNK. QCOR was a rather risky stock, one that I obviously profited significantly from owning, and I am rather glad to be rid of it. QCOR’s entire company is built on one drug, “H.P. Acthar Gel,” which the company is able to charge huge amounts of money for. Acthar “…generates some 95 percent of Questcor’s revenues,” and it is extremely risky to be invested in a company that only sells one product. Some have even gone so far as to call QCOR “… probably the most controversial company inhabiting the biotech sector,” and I would have to agree that QCOR is an extremely controversial company. I’m glad to have gotten out with the return that I did, but I will have to consider whether or not I want to hold MNK going forward.

TMUS: More M&A news for my portfolio but this news wasn’t positive. On August 06, 2014, Sprint Corp. (NYSE: S) decided to drop its bid for T-Mobile US, Inc. (NYSE: TMUS). This was very bad news for both Sprint and T-Mobile because, for a long time now, managers from both companies have “…seen the acquisition as key to taking on U.S. market leaders AT&T Inc (T) and Verizon Communications Inc (VZ).” Sprint reportedly decided to drop the deal after coming to terms with the fact that US regulators  “…want to keep the number of major wireless carriers at four.” The news resulted in a flurry of activity from investors, and Sprint and T-Mobile both saw their share prices fall significantly lower.

That isn’t the only major news report that affected TMUS these last few weeks. On July 31, 2014, the French telecom company, Iliad SA, “…offered $15 billion for a majority stake in [T-Mobile].” Although Iliad is much smaller than Sprint, the company also wanted a much smaller percentage (approximately 57%) of T-Mobile and it thought that a $33/share offer was sufficient. T-Mobile’s management team completely disagreed and completely rejected Iliad’s offer saying that the offer was “inadequate.”  This came directly from T-Mobile’s CFO, Braxton Carter, but he did “…[hint] that his company may be open to a higher offer.”

Lots of other news about stocks in my portfolio can be found in the “News Blasts” I posted on my Financial Newsroom! Go check it out and let me know what you think! 

If you have any questions about this Issue of my Financial Newsletter please fill out the form below. I also appreciate receiving any comments you might have about what you just read, and I encourage you to send me ideas for topics that you would like to see me write about in the future. Thank you for reading! 

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