09/28/2014 When "Bear" is a redundant call

Style Model	Large Value
Sector Model	XLF	0.82%
Large Portfolio	Date	Return	Days
SHOO	4/28/2014	-5.55%	152
SR	6/2/2014	1.39%	117
CFI	6/9/2014	1.51%	110
RRD	7/21/2014	3.07%	68
ESI	8/4/2014	-69.67%	54
BSET	8/11/2014	-6.99%	47
STRA	8/18/2014	0.59%	40
PBI	8/25/2014	-5.62%	33
CLF	9/2/2014	-27.41%	25
AFL	9/15/2014	-2.16%	12
(Since 5/31/2011)
S&P	Annualized	12.37%
Sector Model	Annualized	25.13%
Large Portfolio	Annualized	19.72%

 

Rotation: selling SHOO; buying KFY.

KFY is positioned well for an improving job picture.  We have to keep in mind the fact that the “unemployment rate” and the “employment rate” have BOTH dropped during this so-called recovery.  The most important metric is the latter.

The KFY stock price is therefore artificially low under the illusion that a low unemployment rate bodes poorly for the company going forward.  But the unemployment rate actually reflects people giving up and dropping out of the workforce under a hopeless future.

That future cannot continue forever, and the low employment participation rate will have to mean revert – giving KFY a good boost when it does.

Value investing isn’t about knowing WHEN something will happen so much as knowing that it is overdue.  Employment could remain hopeless for years, of course – but it is overdue to recover now, and it’s time to put our toe in the water to test the tide.

 The Sector Model continues to outperform the Full Model:

All theories aside, stock selection is an unnerving business, especially with catastrophic declines like ESI.  From a simple quant formula like Greenblatt, ESI stands top of the list.  The worse it gets the better it looks.

But that’s not much consolation for the person who holds it while it keeps getting “better.”

From a financial health perspective, of course, ESI looks rather poor.  The company is having troubles.

The key question is how long until it recovers.

As for the market, XLF and Large Value are a good combination.  Talk of a bear market is premature (and in the case of ESI a tad redundant anyway…).

Tim