About March 2005 Performance
"Don't fight the Fed" - Unknown
"Rule number one of investing is never lose money. Rule number two is never forget rule number 1" - Warren Buffet.
These two quotes come to mind as we wrap up March and the first quarter. First, it has long been sage advice that trying to make money in stocks as the Fed is in a tightening cycle is difficult, and recent results bear this out. While the Fed only controls short-term rates, normally we expect long-term rates to follow. That they have not up until recently, has been quite an anomaly. Since hitting a near term low of around 4% in early February, the 10 Year treasury is now up 50 bps.
As yields on bonds become more attractive, we would expect funds to shift out of stocks and into bonds. Indeed, the first quarter ends with the S&P declining 2.6%. Moreover, higher interest rates tend to hit the more speculative stocks, whose prospective cash flows are farther in the future, even harder. For example, the NASDAQ is down 8.1% for the first quarter.
For this reason, we think our picks are exceptionally well positioned for relative outperformance in the 2nd quarter. We tend to recommend stocks with positive and growing free cash flow and low valuations. This is where the second quote comes to mind. In an environment where stocks are likely to decline, we want companies that have a margin of error built into their valuations. Our rigorous focus on fundamental intrinsic value has helped us avoid losing money even as the indices have declined. Indeed, our list of stocks put in yet another month of outperformance in March beating the S&P 500 by 1.9%. For the first quarter, our recommended list is up 5.2% versus the S&P500's 1.9% decline, for a 7.24% alpha.
For a change this month, rather than talk about which stocks helped our hurt our performance, I'd like to highlight a few of those stocks with the most room to our analyst's price targets. Acme United (ACU:BUY) remains one of our favorite picks. After a spectacular run for most of lat year through early March, the stock has given back some of its recent gains, on no news, down 20% in March. It currently sits 80% below our $25 price target. This is a great opportunity to build a position.
United Guardian (UG:BUY) is another stock we'd highlight, sitting 60% below our $12 price target. While the company did report disappointing earnings, it has been aggressively returning cash to shareholders, first in a special dividend of $0.25/share last September, and more recently, hiking its regular dividend 20%.UG trades at just 12.3x our forward estimates.
Finally, Travelzoo (TZOO:SELL) remains one of our top short ideas. Despite having declined 42% from our initial short call at $94, we still believe the stock remains hugely overvalued. Our $23 price target implies an additional 58% decline from current prices and the recent jump in the shares, most likely on other's short covering, provides a great entry point. TZOO is a classic case of the kind of stock which should be hurt the most in a rising interest rate environment.
Subscribers will find much more inside. Why not sign up for a free one month trial? If you believe as we do, that most asset classes are overvalued, and we're in for mid single digit type returns on the major US indices, then successful stock picking will become even more crucial for market beating returns. Let us help you to a prosperous 2005. Happy trading.