Discussing central banks and what they do is not necessarily the currency of a stock research company but we ignore them at our peril. Their decisions affect us in the way income is distributed, access to finance, the way the financial system operates, and even the solvency of government.
To many, the expansion of the Federal Reserve’s balance sheet is the harbinger of hyperinflation. Those on fixed income are incensed with low interest rates, and almost everybody is angry about the bank bailouts. Yet, the fact that central banks saved the world from the second great depression is disregarded. Martin Wolf said it best in today’s Financial Times. “Nobody gains credit for eliminating a hypothetical event.”
What then happens when central banks reverse course and begin selling assets into the market and reducing bank credit as lending recovers? We really don’t know but hope they do it carefully and over time. The greatest danger is a premature exit. It will only be in the mid 2020’s before we likely know how this all turns out. During this period, central banks will be faced with balancing their traditional role of maintaining financial stability with managing monetary policy to control the rates of inflation. How this all works with financial regulators having a seat at the post – crisis table remains to be seen. At least we can be sure of one thing – markets will ruthlessly measure their success or failure in doing so.

There is no shortage of triggers to detonate a precipitous fall in stock market values: any preemptive strike in Iran, rejection of austerity measures by electorates in the Euro zone, uncertain political outcomes and possible meltdown of the Euro, economic slow – down in China and even, perhaps, a Chinese miscalculation of American resolve in the South China Sea to keep sea lanes open, Congressional impasse in budget negotiations, a fundamentalist takeover of Egypt, terrorist attacks…the list goes on and on.
Yet, there is something emerging in the American economy that can fuel growth for the next ten years and beyond that is acting as a massive counterbalance and game changer: Shale Gas. Over the next ten years, the U.S. will experience a renaissance in manufacturing driven by low energy costs and investment that can lead to an export driven America in energy and manufacturing and the creation of jobs – millions of them. And lest, we forget, the same dynamics are at play in Canada. For many an investor, this is alien turf.
Investment time horizons for each of us are deeply personal. Yet, it might behoove those whose only point of reference has been the internet and an America that imports almost everything it consumes from China to take another look at the basics – new manufacturing capacity and its impact on U.S. economic growth both here at home and our near abroad – Canada and Mexico. Fortunately, MarketGrader’s coverage of stocks extends to Canada and eventually will encompass Mexico too.
For the moment, this ‘market’ seesaw can go either way. However, sooner or later, the impact of cheap gas will have its say and be reflected in the financials and market pricing of all the companies MarketGrader covers. With this in mind, it might not hurt to start looking at the basics that made America what it used to be – an export driven economy with hope for the future.

Many a tourist has returned from Russia with a Matryoshka doll as a souvenir. The numerous dolls waiting to be discovered inside can be as beautiful and more intricate than the first. For an investor, once inside MarketGrader.com, the discovery of ETF Grader can be a similar experience.
ETF Grader, a separate analytic component inside of MarketGrader.com, employs a process similar to the rigorous analysis used in MarketGrader to understand the underlying quality of the stocks that make up these popular investment vehicles.
By tracking, analyzing and grading the stocks that make up each ETF that MarketGrader covers, ETF Grader gives investors a unique insight into the quality of each portfolio based on a thorough bottom-up approach (fundamental) combined with a dynamic top-down analysis (sentiment). Too often, investors have no way of knowing just how good (or bad) the stocks are that make up an ETF. ETF Grader analyzes 376 ETFs and demystifies the holdings. Want to know how many stocks are in your ETF? Looking for growth or value ETFs, small cap or large cap, sector or specialty ETFs such as socially conscious or exposure to emerging markets? Or ETFs that are dividend driven? Then, click on All, Broad, Size, Style, Sector/Industry, Dividend, Specialty to get the answers. Each ETF is analyzed stock by stock to give an investor a detailed portrait of what they are buying. ETFs are also compared to their peers in terms of quality of assets, performance, and style.
And best of all, ETFGrader is free. It won’t always be but, for the moment, it’s our way of showing the value of what we offer.

It’s common for research services to write about their successes in analyzing a stock but not so for MarketGrader. So, it should be interesting to note that on September 23, 2011, MarketGrader wrote about the best three major banks in the United States. http://www.marketgrader.com/mg_blog/2011/09/23/the-best-three-major-banks-in-the-united-states/

These banks were WFC, PNC and USB. Nearly six months later, fast forward to today’s close. Prices for each bank have increased markedly. WFC is up 40%, PNC is up 35% , and USB is up 35%.

Pretty impressive when you consider that analyzing a bank stock is not the same as analyzing an energy stock. Such performance should give comfort to MarketGrader subscribers that their money is well spent.

Some thirty-seven years ago, John Bogle launched the first passive index based on the S&P 500 as a mutual fund.  In the process, he democratized the investment process by offering access to a universe of stocks used by many of the largest institutional money managers in the world as their performance benchmark without the cost of active management. Fast forward to today and the managed fund terrain is awash in new index products, some even derivative based, traded as ETFs. The old adage that investors used for years: buy and hold seems to have disappeared especially when looking at daily ETF trading volumes. Yet, some still do invest in ETF indices for the long haul.

One thing is certain, however.  Investors now look at investment expenses with a different eye.  What if a stock index fund could be bought as a buy and hold but also factored in re-balancing as part of the equation.  Is there room in the equity index world for an Index that combines low expense ratios with passive / active  management that is equally weighted and outperforms a widely accepted benchmark?

MarketGrader thinks so and to prove its point developed the Barron’s 400 Index for Dow Jones along with 14 proprietary indices of its own.  In the case of the Barron’s 400, the Index was designed to outperform the S&P 500 doing so handily over the last ten years.  http://www.marketgrader.com/MGMainWeb/mgfree/mgindex/barrons.jsp

Key to the Barron’s 400 outperformance of the S&P 500 has been the use of MarketGrader’s  research www.marketgrader.com to optimize portfolio holdings. Twice a year, the Barron’s 400 Index is rebalanced in accordance with strict portfolio construction rules that use ratings derived from MarketGrader’s fundamental research. As a result the portfolio is optimized with approximately 45-50% annual turnover and meets the time proven test that successful investing is about taking intelligent risk, diversification, and keeping costs to a minimum.   A similar discipline is applied to the construction of proprietary portfolios that are core, market cap, and sector based.

Index providers owe a debt of gratitude to John Bogle.  The investment landscape we have today has been shaped by his vision.  The buy - hold  market cap weighted investment strategy  he espoused Vs the  buy -  hold & rebalance equal weighted investment strategy both have merit.  In short, as markets evolve in time,  investors will see that there are viable and prudent alternatives to straight passive index investing as long as expense ratios are controlled & methodologies are transparent. Performance will speak for itself.

Last week, we attended Focus on Canada, an investment forum sponsored by the Financial Times and the Government of Canada in Miami. Since we cover approximately 1400 listed stocks in Canada and some 200 dual listed ones in the United States, we had a special interest in understanding the investment climate enabled by the Canadian Government. In summary, Canada is well positioned to benefit from international capital flows and MarketGrader intends to develop a Canadian Stock Index that leverages our experience in developing the Barron’s 400 Index and our other 14 proprietary indices. We are in discussion with potential Canadian partners to launch this Index in 2013 for institutional and retail investors. Stay tuned.

With the stock market up 20% since October (MarketGrader Sentiment Index Flashes ‘BUY,’) we thought this would be an appropriate time to highlight some of our best values stocks, available this week to MarketGrader.com guests in our featured Value Honor Roll.

One company in particular that caught our attention this week is Power-One, Inc. (NASD: PWER), a California-based manufacturer of power supplies and equipment used in the communications, semiconductor, health care and industrial sectors. In our view the company’s business segments put it in a strong position to benefit from two ongoing growth trends: the development of alternative sources of energy and the ongoing ‘cloud’ build out. The company manufactures solar and wind inverters, equipment that transforms energy from those two alternative sources into usable electricity. Exposure to this market segment, while promising, brings with it volatility given the nascent state of this industry, its dependence on venture capital and government incentives and the resurgence of the oil and gas industries in the U.S. On the other hand, its lineup of power supplies puts the company in the very real and very profitable position of providing critical equipment to the build up of data centers and the ‘cloud’ as companies from Amazon to Google race furiously to expand their networks.

The stock, currently at $5.15 a share, trades 43% below its 52-week high, mostly as a result of lowered guidance by management in the last quarter of 2011. However, since then, the company had a strong earnings report on February 2nd, beating analyst estimates by 50%. Its fiscal year 2012 consensus estimate is up now to $0.90 per share from $0.76 three months ago, an increase of 18%. And while the company’s revenue fell 27% last quarter from the year earlier period, its overall financial position is very strong. Trailing 12-month revenue is up 89% in three years, when the company was posting full year losses. In the last 12 months it earned $127 million. It is clear that the company is not only growing, but doing so profitably while systematically fortifying its finances. It has been trimming its debt load, which peaked at $110 million in 2008 and is down now to a mere $36 million, accounting for only 8% of total capital. All of it has long term maturities. Power-One generated $178 million of free cash flow in the last 12 months and now has $204 million in cash on hand. Also on a trailing 12-month basis its return on equity was 31% and its return on capital was 40%. The company generates almost $300,000 in revenue and $37,000 in net income per employee, both above the industry average.

The stock trades at a meager 5.5 times trailing earnings and 7.6 times next year’s estimates. It also trades at 0.5 times trailing 12-month sales, a fraction of the 3.5 price-to-sales ratio industry average for its peers in the Electrical Products industry. A few investors seem to be catching on; the stock’s Sentiment score has been climbing rapidly in recent weeks from a December low of 3.8 to its current 6.6 (out of 10.) But long term investors need not hurry as this is still, by our account, a value play. While Power-One has an overall MarketGrader grade of 77.8, when graded from the value perspective (where our system emphasizes value indicators over growth indicators) the overall grade jumps to an impressive 91.8. It is worth mentioning also that 12% of the company’s float is sold short, which, in combination with a small market cap of $630 million could represent unwanted volatility for the more conservative types. Long term, however, the stock looks solid from our vantage point. Please click here for our complete analysis.

Barron’s popular Electronic Investor column published last month a brief article on MarketGrader.com’s sentiment indicator and how we aggregate all companies’ scores of the same into our MarketGrader Sentiment Index. For those who missed it, we first introduced our Sentiment Index, which we’ve dubbed MGSI, in early October when the stock market hit its 2011 lows as measured by the S&P 500, the Dow Industrials and, of course, the Barron’s 400 Index. The S&P 500 closed the prior day at 1,099.23 while the Dow closed at 10,655.30. The Barron’s 400 closed at 268.51 on October 3rd. Our article, which was also published on Seeking Alpha, garnered a good deal of attention and prompted many of our readers and subscribers to ask us for a place in MarketGrader.com where they could follow the new MGSI. We complied and launched our new MGSI page also last month, which you may view here.

For those who didn’t catch the Barron’s article, published in the December 24th issue, you may read it here.

As for the MarketGrader Sentiment Index itself, we’d like to note that last night the index crossed the 1.5 mark for the first time since May 2011, which put its Market Call (based on the MGSI overall value) in ‘HOLD’ territory. For a better understanding of how MGSI works and what it means, please refer to our original October article, which you may read here. Since our October call, through last night’s close, the S&P 500 is up 16.2%, the Dow is up 16.5% and the Barron’s 400 is up 21.2%. Investors concerned about the market’s ongoing volatility, particularly given Europe’s lingering debt woes and looming recession, would be well served to check the MGSI periodically as a gauge of overall investor optimism or pessimism as we continue to toggle between risk-on and risk-off.

Our popular ‘Stock Ideas’ section, one of our web site’s most popular features with our subscribers, is, we suspect, about to become even more popular. After hearing back from many of our subscribers who have requested an expansion of this section to include more pre-filtered lists of stocks based on myriad search criteria, we have embarked on a complete revamp of our Stock Ideas section, the first part of which was released on Friday along with our new ‘Company Profile’ page. The two new Stock Ideas sub-sections rolled out last week are only the first step in our roll-out of an entirely new set of lists devoted to helping you find the best stocks in MarketGrader.com based on your own preferences or investment style. Since last Friday subscribers clicking on the ‘Stock Ideas’ link in the StockGrader section of our site will notice two new sections: ‘New Income Ideas’ and ‘New Sentiment Ideas.’ In addition to providing you with brand new lists of stocks with these two sections we’re also introducing our new user interface design, which will be used going forward in this section of our web site.

New Stock Ideas Interface

This week we’re introducing a new way for our subscribers to scroll through any of our ‘Stock Ideas’ called ‘Mosaic View,’ which will be available for all lists in this section of our web site in addition to our traditional ‘List View.’ Starting with the two new sections we launched on Friday, subscribers that go to any of our new stock ideas sections will now land on a snapshot page highlighting the first stock in the list, which appears underneath a new horizontal scroll bar that will display all stocks in the list from left to right. Our goal with this new ‘mosaic view’ is to allow you to see, without leaving the stock ideas section of the site, the actual criteria and data points used in selecting every company to any particular list. The navigation bar above the company’s snapshot allows you to scroll across the list without leaving the page or hiding the stock currently selected. By simply clicking on any of the ‘mosaic tiles’ on the scroll bar you may change the snapshot below it. On the page’s left hand side you may see all the idea lists in each sub-category (such as Sentiment Ideas or Income Ideas) with a brief description of each one. Clicking on any of the lists on the left margin will populate the rest of the page. And when you want to see the entire list of stocks from top to bottom all you have to do is click on the ‘List View’ tab in the upper right hand corner of the page for a traditional view of the entire list.

New Sentiment Ideas

The first new group of lists we would like to introduce to our subscribers in our expanded ‘Stock Ideas’ section is based on our Sentiment indicator. The purpose of these three new lists is to help you identify stocks with improving or declining investor sentiment in anticipation of possible short-term price movements.

1. Improving Sentiment

This is a list of the 100 stocks in MarketGrader.com with the biggest jump in positive momentum based on changes to our Sentiment indicator in the last four weeks. Our Sentiment indicator, designed to complement our traditional Fundamental Analysis, measures overall investor and market sentiment for a company’s shares irrespective of the company’s financial performance. It is comprised of four individual indicators: Price Trend, based on a MACD analysis; Price Momentum, based on a relative price strength analysis; Earnings Guidance, which tracks the rate at which companies and the analysts that follow them change their annual EPS forecast over time; and Short Interest, which tracks the monthly changes in the number of shares sold short relative to the company’s public float. The combination of these four indicators, which result in our 0-10 Sentiment score, helps MarketGrader.com subscribers identify opportunities among stocks that seem to be in favor with investors and that may be climbing as a result of a quantitative story (acquisition, product launch, etc.) not tracked or quantifiable by our traditional fundamental analysis. However, all companies in this list must have an overall ‘Buy’ or ‘Hold’ rating. The list is ranked, from top to bottom, based on the magnitude of the increase in each stock’s Sentiment score in the last four weeks.

2. Declining Sentiment

This list with the 100 stocks in MarketGrader.com with the biggest drop in Sentiment is, essentially, the opposite of our ‘Improving Sentiment’ list. It measures drops in our 0-10 Sentiment score in the last four weeks irrespective of company fundamentals. These are usually stocks that investors want to be careful with as they are either out of favor at the moment or in the process of falling out of favor with investors. The list is particularly helpful in helping investors avoid companies with high fundamental grades whose stocks are in decline, particularly if they’re concerned about their short-term performance.

3. Speculative Plays

Like our ‘Improving Sentiment’ list, this one is based on stocks with significant increases in investor sentiment over the last four weeks; however, unlike the aforementioned list, stocks in this selection are all rated ‘Sell’ based on MarketGrader.com’s fundamental analysis. This leads us to believe that the reasons why these stocks’ Sentiment is improving have little to do with the companies’ financial performance and more to do with investor expectations of upward movement in their shares as a result of a qualitative story that might not have played our entirely in the market. This would help explain why, for example, the current list contains plenty of homebuilders, banks, financials, publishers and generally companies in industries with poor overall fundamentals. This is an interesting list for investors willing to do some qualitative research looking to uncover the story behind some of these jumps in Sentiment and get ahead of a potentially lucrative rise in the stock. However, caution is required as these are, after all, speculative plays.

Those of you who subscribe to our web research service may have noticed this morning a few new and expanded sections of the web site. For those who have not seen them we encourage you to have a look and send us your feedback.

The first new page, or, actually, enhanced page, is the ‘Company Profile.’ We redesigned the existing ‘Profile’ page, reorganized some of its existing content and incorporated quite a few new elements. The ‘Company Profile’ page, available for every company covered by MarketGrader.com, can be reached by selecting the first option from the drop-down menu off the ‘Company’ link in the ‘Stock Analysis’ section of ‘StockGrader.’ At the top of the page you will find a complete description of the company’s business describing what it does, its products and, in some cases, some of the market segments in which it competes, among other general facts and company background information. Below it we have added a new information grid with items such as the stock’s 52-week range, the 50 and 200-day moving average values and the number of rating changes since we initiated coverage. To the right of the grid you’ll see the company’s address, web site and key executives.

On the page’s third tier we have added two brand new charts (long overdue, we know) that show the company’s revenue and net income per employee alongside the top five companies in the industry and the group’s average. This will provide you with additional context about each company’s operating efficiency and profitability in addition to our wealth of indicators, metrics and analyses available throughout our site. To the right of these two charts you may see the largest and smallest company in the industry as well as the group’s overall rating breakdown.

Finally, at the bottom of the page you will find an enhanced and expanded ‘Industry Ranking’ table that shows the top ten graded companies in the group along with a few other indicators and fundamental metrics such as revenue, net income, free cash flow and price to earnings ratio.

We hope our new ‘Company Profile’ page becomes a good starting point in your research process when evaluating new investment candidates. We’ll discuss our new ‘Stock Ideas’ pages, also launched this morning, in upcoming posts.