Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Greeks (finance) wikipedia , lookup
Financial economics wikipedia , lookup
Present value wikipedia , lookup
Financialization wikipedia , lookup
Land banking wikipedia , lookup
Investment fund wikipedia , lookup
Modified Dietz method wikipedia , lookup
Business valuation wikipedia , lookup
October 2006 Newsletter for Investors Large blue chip growth stocks soon the asset of choice? As of this writing the Dow Jones Industrial Average (DJIA) is climbing to new all-time highs. Having gone full circle from technology stocks to bonds to real estate to commodities, investors are asking if it is finally time for large cap growth stocks to shine. We think the answer is yes and the reasons are plentiful and based on common sense. First, the economy is clearly slowing. We have written about the unsustainable boom in housing Kornitzer’s Corner The famous investor Benard Baruch once said, “never follow the crowd, it is so simple, but so difficult to do”. My advice to clients is to make a copy of this quote and always refer to it when you are about to make an important investment decision. Far too often individual investors get emotional about their investments at exactly the wrong time. We have seen and written about phenomenon such as the internet bubble of 1999-2000 and more recently the residential real estate bubble. In each case, they turned into bubbles because too many late-to-the-game investors simply followed the crowd. When any investment idea becomes the main topic of discussion at cocktail parties, the barbershop or with your plumber – it is not likely the time to be following the crowd! This is simple advice, but will serve you well in the future. John C. Kornitzer President in past newsletters. The Federal Reserve was clearly intent on slowing activity and inflation in housing and recent data suggests they have been successful. New orders and prices for homes have weakened materially across the country (plunging in the hottest markets). Construction activity and employment related to housing will likely show a considerable decline in coming months. The slowdown in housing (combined with high energy prices) has had a negative effect on overall consumer confidence, particularly for big ticket items such as automobiles, boats etc.. In turn, this has cooled investor’s love affair with commodities and other deeply cyclical stocks. This may be only a temporary correction for some commodities that have been fueled by global demand (such as oil), as the outlook for global GDP growth still looks very healthy. However, it appears reasonable that in the medium term investors may begin to pay higher valuations for companies with a bit more certainty of growth. By more certainty, we mean those companies that should still be able to grow earnings in the face of a slowing economy and whose fortunes are not tied to price inflation for their underlying products. In general, this should favor certain large cap growth companies. Next, the recent decline in interest rates has very positive implications for the relative attractiveness of large cap growth stocks. They appear attractive on a traditional valuation basis such as price-to-earnings ratio (P/E) relative to interest rates. Also, they look attractive from an after-tax yield standpoint relative to CDs, treasury bills and bonds. Below is a sample list of traditional growth or growth at a reasonable price (GARP) names that are part of the DJIA 30 stock index. They are incorporated into a table Continued on page 2 that provides valuation (P/E), dividend yield and expected earnings growth for each company and for the group as a whole. Relative Performance by Style Table 1 Company 3M American Express Altria AIG Citigroup Coca Cola Disney General Electric Hewlett Packard Home Depot Honeywell Intel IBM Johnson & Johnson J.P. Morgan McDonalds Merck Microsoft Pfizer Procter & Gamble United Technologies Walmart Average *NTM P/E 15.9 18.0 14.0 11.3 11.6 18.3 18.9 16.0 15.6 12.1 15.8 20.1 13.6 17.1 12.7 16.8 20.0 19.4 14.2 21.1 16.8 16.1 16.2 * NTM- Next Twelve Months We should note that we are not recommending the purchase of these individual stocks or the group as a whole, but that this group of names is simply being used as an example. To support our case on valuation we would point to former Fed Chairman Alan Greenspan’s rule-of thumb for P/E ratios. His formula was to calculate the inverse of the 10-year treasury yield as a reasonable guide for the P/E of the S&P 500 stock index. The basis for this formula was that it equated the earnings yield on stocks with the earnings yield on longer-term bonds. Today, this formula (1/10yr treasury yield) would equate to a suggested fair value P/E ratio of 21.9x. As seen 2 Dividend Yield 2.5% 1.1 4.5 1.0 3.9 2.8 0.9 2.8 0.9 1.6 2.2 1.5 1.5 2.3 2.8 2.5 3.6 1.5 3.4 2.0 1.6 1.4 2.2% NTM Earnings Growth 8.3% 13.4 4.8 8.8 6.8 8.0 11.5 14.0 18.0 5.8 15.1 9.0 6.1 9.1 12.3 6.8 0 13.4 6.5 12.4 14.5 11.2 9.8% Source:FACTSET above in table 1, this sample of large cap growth names are trading at a next 12 months (NTM) P/E of 16.2x. Based on his model, this valuation looks very reasonable relative to interest rates. Due to the threat of terrorism and given the uncertainty factor for earnings, the market P/E probably should probably trade at a discount to Greenspan’s model. However, the current discount appears unduly large, particularly for a group of companies that should be able to grow earnings faster than the S&P 500 in a slowing economy. Continued on page 3 From an after-tax income standpoint these stocks appear to be a good long-term value as well. As seen in Table 1, the average dividend yield on this sample of stocks is 2.2%. Given the current tax rate on dividends of 15%, this represents an after-tax yield of 1.87%. Assuming dividend growth of 7% annually (slightly lower than earnings growth), the effective after-tax yield would grow to 2.62% in 5 years. This would compare to an after-tax yield on 5-year treasuries or CDs of 2.7% (4.5% taxed at federal and state combined average rate of 40%). Thus, in 5 years you would have roughly the same income yield from growth stocks as for bonds or CDs. The advantage of owning the growth stocks would be continued dividend and yield (and stock price or principal) growth versus the uncertainty of Table 2 Index Style Cum. Performance 12/00-9/06 Russell Top 200 Growth Large Cap Growth -16.32% Russell Top 200 Value Large Cap Value +27.52 Russell Mid Cap Growth Mid Cap Growth +9.69 Russell Mid Cap Growth Mid Cap Value +93.82 Russell 2000 Growth Small Cap Growth +11.16 Russell 2000 Value Small Cap Value +112.82 Source: Russell & Co Congratulations! We are pleased to announce that Jeff Deardorff, Paul Dlugosch, Nicole Kornitzer, and Frank Wei have each passed all three levels of the Chartered Financial Analyst (CFA) program. Final awards of their CFA charters are pending CFA Institute approval. Our entire staff of research analysts, traders, and portfolio managers now have CFA charters. To earn the CFA charter, candidates must sequentially pass three six-hour exams that are widely considered to be the most rigorous in the investment profession. Since the first exam was given in 1963, the average global pass rates are 47 percent for Level 1, 52 percent for Level II, and 68 percent for Level III. the level of interest rates for reinvestment in treasury bonds or CDs in 5 years. Finally, large cap growth stocks have been out of favor for a lengthy period, with value stocks well out-pacing growth. Additionally, small and medium sized companies have materially outpaced large companies as well. Table 2 provides a picture of the relative performance among the various groups. Historically, out-performance and underperformance between growth and value, and large and small have run in cycles. What we are pointing out is the recent period of under-performance by large cap growth has been long and deep. Over time this will change and we think it will happen sooner rather than later. Kicking the Tires... We have been traveling and meeting with the management of many of the companies we’re invested in this quarter. During times of shortterm uncertainty it always helps “to kick the tires” one more time, to help separate Wall Street chatter from reality. This level of due diligence and in-depth research on our companies gives us the level of conviction needed to buy when others are panicking. We were asked recently why company management teams are so willing to meet with us. We believe company managements are willing to spend time with us because of our long term orientation. They view us more as partners, not speculators or traders, and they know that once we invest we keep our holdings for a long time. Kornitzer Capital Management and Buffalo Funds Recognition We have been very fortunate to receive a number of press mentions lately. In the third quarter alone, The Buffalo Funds were written up in the Wall Street Journal, Forbes, Kiplingers and USA Today, and shortly after quarter end we were the topic of a nice article in Investor’s Business Daily. 3 Kornitzer Private Client Services The Kornitzer Private Client Services (KPCS) group is dedicated to providing personalized investment solutions for its clients. The group adheres to a strict discipline of prudently investing each client’s assets in a customized, diversified portfolio of securities offering attractive risk/reward profiles. *Professionals working together on your distinct portfolio. •Determining your goals and objectives •Designing your strategy •Working as a team with trust companies, custodians, administrators, estate planners and banks to ensure a smooth process *Strategy implementation •Dedicated Value and Growth teams •Proprietary in-house research •Team based investment management •Continuously monitor investments *Results •Solid long-term performance track record •Tax efficient •Competitive fees Contact Information Kornitzer Capital Management P.O. Box 877 Shawnee Mission, KS 66201-0877 (913) 677-7778 John C. Kornitzer, President, Portfolio Mgr. Kent W. Gasaway, Portfolio Mgr. Robert J. Male, Portfolio Mgr. Grant Sarris, Portfolio Mgr. Bill Kornitzer, Portfolio Mgr. Clay Brethour, Portfolio Mgr., Research Analyst Dave Carlsen, Portfolio Mgr., Research Analyst Jeff Sitzmann, Research Analyst Elizabeth Jones, Portfolio Mgr., Research Analyst Jeff John, Research Analyst Patrick D. Cubbage, Equity Trader Jeff Deardorff, Fixed Income Trader Dwight Twillman, Relationship Manager Jeff Ream, Relationship Manager Chris Nelson, Relationship Manager Nicole Kornitzer, Research Analyst Alex Hancock, Research Analyst Paul Dlugosch, Research Analyst John Bichelmeyer, Portfolio Mgr. 913/384-4339 913/384-1513 913/384-5733 913/754-1512 913/754-1537 913/754-1510 913/754-1509 913/754-1532 913/754-1508 913/754-1507 913/754-1527 913/754-1526 913/754-1506 913/754-1505 913/754-1543 913/754-1528 913/754-1531 913/754-1529 913/754-1544 Brad Miller, Portfolio Mgr. John Shepley, Portfolio Mgr. Vern Cushenbery, Research Analyst Scott Moore, Research Analyst David Levenhagen, Research Analyst Feng (Frank) Wei, Research Analyst 913/754-1535 913/754-1540 913/647-2307 913/647-2303 913/754-1542 913/647-2314 Susan E. McElwain, Director of Operations Denise Minet, Staff Accountant Stephanie Snyder, Staff Accountant Kristi Misejka, Staff Accountant Lisa Adair, Staff Accountant Monica May, Staff Accountant Kathi Brink, Staff Accountant Jackie Albertson, Administrative Asst. Sarah Hodges, Administrative Asst. Kelli Manson, Administrative Asst. Shauna Rice, Administrative Asst. James T. Dore, Systems Administrator Barry Koster, Chief Financial/Compliance Officer Sharon Weaver, Marketing Coordinator Heidi Welch, Advisor Liaison 913/384-6254 913/384-6956 913/384-4315 913/754-1519 913/754-1523 913/754-1521 913/754-1522 913/677-7778 913/754-1524 913/754-1534 913/677-7778 913/754-1511 913/754-1533 913/754-1501 913/754-1525 4