WANTED: Someone I Can Trust

Forecasters have a tough job. They ponder reams of data, assign unknowable odds and then have to endure endless criticism for getting it wrong. Fortunately for them theyʼre thick-skinned, and clever too. As Author Darrell Huff mused in his seminal 1954 book How to Lie With Statistics, “If you torture the data long enough, it will confess to anything.”

Honestly, we donʼt mean to pick on forecasters. We truly appreciate their attempt to plot the road ahead. We just wish they get it right more of the time, especially considering some of the consensus gaffs this week:

  • U.S. Capital Goods Orders ex-Defense declined 1.4 percent vs +0.3 forecast
  • U.S. Durable Goods Purchases also declined 1.4 percent vs 0.2 percent
  • U.S. GDP grew 2.2 percent vs 2.4 forecast.

The team at Citigroup complies a running scorecard of economistsʻ forecasts compared to actual results. Simply put, better than expected data adds to the tally, disappointing data subtracts. Not only have economists been off the mark this year, economic trends have been particularly disappointing. As data guardian Chris Verrone of Strategas Research notes, the current “miss rate” is more than two standard deviations away from historical norms… meaning theyʼre only this wrong, and data only this bad about 2 percent of the time.

WANTED: Someone I Can Trust

In times of such uncertainty, coupled with an S&P 500 Index up less than one percent this year, we rely on the proven record compiled by value investor David Herro of Harris Associates, Morningstarʼs Fund Manager of the Decade in 2010. Davidʼs primary screen for identifying value hinges on three criteria:

  1. Price to Cash Flow less than 10 times (cheap valuation)
  2. Debt to Cash Flow less than 2 times (low leverage)
  3. Return on Equity 3-year average greater than 13.5 percent (profitable businesses)

We further narrowed Davidʼs criteria by omitting energy companies and utilities, reflecting our view on continued low oil prices and gradually higher rates. 32 stocks in the S&P 500 Index met our criteria. While we encourage investors to further narrow the list with their own fundamental research, as David too would advocate, we think this is an excellent starting point for finding value amid challenging economic trends.

Aetna Inc. (AET); Ameriprise Financial, Inc. (AMP); Avery Dennison Corporation (AVY); Bed, Bath & Beyond Inc. (BBBY); CA, Inc. (CA); CF Industries Holdings, Inc. (CF); Cigna Corp. (CI); Cummins Inc. (CMI); Delphi Automotive PLC (DLPH); Emerson Electric Co. (EMR); Flowserve Corp. (FLS); Fluor Corporation (FLR); Fossil Group, Inc. (FOSL); Franklin Resources, Inc. (BEN); The Gap, Inc. (GPS); Gilead Sciences Inc. (GILD); H&R Block, Inc. (HRB); Intel Corporation (INTC); The Interpublic Group of Companies, Inc. (IPG); LyondellBasell Industries N.V. (LYO); Micron Technology, Inc. (MU); Nordstrom Inc. (JWN); Northrup Grumman Corporation (NOC); Parker-Hannifin Corporation (PH); Ralph Lauren Corporation (RL); Raytheon Company (RTN); Segate Technology (STX); Symantec Corporation. (SYMC); Union Pacific Corporation (UNP); United Technologies Corporation (UTX); Wal-Mart Stores Inc. (WMT); Western Digital Corporation (WDC).