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Peter Brimelow
Nov. 2, 2009, 1:19 a.m. EST · Recommend (2) · Post:
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Manufacturing recovery hard to ignore
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch) -- A bad week for stocks has investors worried. But one top-performing letter remains fully invested.
Well, in fact, the veteran Turnaround Letter is always fully invested. Its system depends on stock selection, not market timing. The idea is that beaten-down stocks with real value will prevail regardless of the overall market.
It's a dangerous game. Turnaround is naturally drawn into volatile areas. It had a bad patch recently, but now seems to have, well, turned around. Over the year to date through September, Turnaround's portfolios are up an average 66% by Hulbert Financial Digest count, versus 21.3% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.
Over the past three years, however, the letter is down an annualized 6.51% -- significantly more than the negative 4.83% annualized for the total return Wilshire 5000.
But over the past five years, the letter was up an annualized 2.55%, as compared to 1.76% annualized for the total return Wilshire 5000.
And Turnaround's strength becomes evident as you go back. Over the past 10 years, the letter was up an annualized 9.44% against just 0.85% annualized for the total return Wilshire 5000. Since the HFD began following the letter at the end of 1987, it has achieved an 11.4% annualized gain versus 9.4% for the Wilshire
In its latest issue, published in early October, Turnaround offered this possibly ominous way of looking at the stock market: "The stock market has had quite a run since it bottomed out in early March. Over the seven months from March through September, the S&P 500 Index has gained 44%. This is the best seven-month performance for the market since 1933."
Er -- since 1933? Is Turnaround hinting at something?
Maybe not, because the letter continues: "Does this recent performance represent a blowout before the market heads into the tank? We have no idea."
Turnaround isn't afraid to admit it doesn't know the market's direction because its system depends on stock selection. But the letter did go on to look closely at the worst-performing large-cap stocks, on the theory that they will eventually catch up -- which presumably means they'll have something to catch up to.
It wrote: "It is interesting to note that four of the worst performers are in the pharmaceutical/medical products sector. That sector also performed badly during the early years of the Clinton administration -- the last time major health-care reform was proposed -- and then recovered nicely shortly thereafter. Maybe history will repeat itself."
The stocks: Abbott Laboratories /quotes/comstock/13*!abt/quotes/nls/abt (ABT 50.80, +0.23, +0.45%) , Baxter International Inc. /quotes/comstock/13*!bax/quotes/nls/bax (BAX 54.39, +0.33, +0.61%) , Bristol-Myers Squibb Co. /quotes/comstock/13*!bmy/quotes/nls/bmy (BMY 21.73, -0.07, -0.32%) and Gilead Sciences Inc. /quotes/comstock/15*!gild/quotes/nls/gild (GILD 42.55, 0.00, 0.00%)
Similarly, Turnaround is attracted to cigarette manufacturer Altria Group Inc. /quotes/comstock/13*!mo/quotes/nls/mo (MO 18.24, +0.13, +0.72%) ("has thrived over the years in the face of relentless campaigns to curb smoking ... the company's impressive cash flow gives the stock substantial gain potential. It recently raised its dividend to provide a very generous 7.6% yield.")
Altria, of course, has long been one of the very few stocks held by Charles Allmon, the octogenarian value-oriented super-bear editor of Growth Stock Outlook. ( See Sept. 17 column.)
An example of the dangerous areas that Turnabout's system draws it into: The letter has just recommended The Wet Seal Inc. /quotes/comstock/15*!wtsl.a (WTSL.A 3.19, -0.04, -1.24%) because of its "very strong balance sheet."
Wet Seal is a chain of fashion stores aimed at teenage girls and young women. Turnaround writes warily: "While appealing to the ever-shifting tastes of teenage girls and young women is challenging, it can also be very profitable. ... Investing in a young women's fashion retailer is not for the faint of heart, but we believe that in this case, it should be very profitable. We recommend buying Wet Seal stock up to $6.00."
- CommonMan | 2:23 a.m. Today2:23 a.m. Nov. 2, 2009
It's getting harder for the skeptics to explain away all the good news about U.S. manufacturing.
12:13 p.m. Today12:13 p.m. Nov. 2, 2009 | Comments: 30
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