2012 Value Picks Forbes
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2012: Time for Value
Plenty of headwinds to navigate and the sailing will be far from smooth, but better-
than-expected economic numbers, healthy corporate prot growth, inexpensive
valuations, historically low interest rates, rising dividends and distaste for the asset
class from both Main Street and Wall Street, despite improving consumer and
business condence, have us enthusiastic about stocks in 2012. And whether our S&P
500 year-end target of 1400 is on the money, we are especially fond of the prospects
for our 2012 picks—a diversied baker’s dozen—as we look for a renaissance of
Value investing in the seasonally favorable fourth year of the Presidency.
January 2012
Stock investing involves risk and possible loss of principal.
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Market Outlook
W hile the journey continues to be marked by violent swings in both direc-
tions, it is perhaps a bit surprising that the U.S. equity market indexes
managed to rebound from a frightening mid-year selloff to end 2011 not too far
from breakeven. Of course, just in the last third of the year, we endured an awful
September, a remarkably strong October, the worst Thanksgiving week since 1932
and a spectacular rebound as the calendar turned from November to December, so
stomachs have needed to be strong in order to stay focused on long-term invest -
ment objectives.
Clearly, as Figure 1 will attest, there are plenty of issues about which to be con -
cerned, but it would seem that the primary catalysts for the latest roller-coaster
ride have been the twists and turns in the European sovereign debt mess as wor-
ries about the drama in Greece quickly spread to Italy, Spain and even France.
There has been plenty of political intrigue on the Continent as well, with stocks
lately hanging on every utterance from German Chancellor Angela Merkel, French
President Nicolas Sarkozy or European Central Bank (ECB) head Mario Draghi.
No doubt, the situation across the pond continues to be uid, even as leaders
of 17 euro countries and nine of the 10 European Union countries that don’t use
the euro recently hammered out a comprehensive ‘scal compact’ and the ECB
has done its part by lending freely to nancial institutions all in an to attempt to
calm the debt crisis. Alas, the credit rating agencies have not yet expressed much
enthusiasm and bond yields in Italy and Spain have again been climbing, while
the euro currency just hit a 15 month low against the U.S. dollar.
Certainly, we can’t simply dismiss the turmoil and threat of contagion in Eu -
rope, especially as ‘risk-on’ and ‘risk-off ’ trading has been the order of the day, but
Sovereign Debt Contagion
Credit Rating Agency Downgrades
Health o the World’s Banks
Emerging Market Growth
U.S. Budget Decit
U.S. Tax Policy
Presidential ElectionHousing
Deleveraging
Dollar Volatility
Terrorism
High-Frequency Trading
MF Global
Stock markets have oten climbed a wallo worry, but the current one is unusuallysteep. O course, when it comes toinvesting, what is comortable is rarelyvery protable!
Figure 1:
Challenges Ahead
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thus far we have yet to see much impact on the U.S. economy. In fact, against the
projections of recession made by several well-respected economists, Q4 numbers
have actually surprised to the upside. Whether it has been auto sales, consumer
condence or jobless claims (see Figure 2), the economic data generally have been
coming in better than expected. Looking ahead, despite a downward revision in the
Q3 GDP growth gure to 1.8%, the latest Leading Economic Indicators tally (see
M o n t h - o v e r - M o n
t h P e r c e n t a g e C h a n g e
-4%
-3%
-2%
-1%
0%
1%
2%
3%
100090807060
grey areas denote recessions
And the latest read on uture economicactivity ound that “November’s increasein the LEI or the U.S. was widespreadamong the leading indicators andcontinues to suggest that the risk o aneconomic downturn in the near term hasreceded.”
Figure 3:
Leading Economic Indicators
0
100
200
300
400
500
600
700
800
10/114/1110/104/1010/094/0910/084/08
grey area denotes a recession
Initial requests or unemploymentbenets have recently broken belowthe important 400,000 level, while thewidely watched monthly unemploymentrate dipped to 8.6% (thanks in part to anumber o olks leaving the workorce) inNovember.
Figure 2:
First-time Jobless Claims
From 01.31.60 to 12.29.11. SOURCE: Al Frank using data rom Capital IQ and the Conerence Board
From 01.04.08 to 12.29.11. Numbers in thousands. SOURCE: Al Frank using data rom the U.S. Department o Labor via Capital IQ
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Figure 3) rose 0.5% in November, prompting the Conference Board, the measure’s
purveyor, to state, “The LEI is pointing to continued growth this winter, possibly
even gaining a little momentum by spring.” And pundits have been busy boosting
their forecasts for Q4, with the latest consensus projection calling for GDP growth
of 3.3% in the nal quarter of 2011. To be sure, growth will most likely slow in 2012,
but those predicting a U.S. recession next year are steadily shrinking in number.
Despite a subpar economic recovery romthe Great Recession, U.S. corporationshave continued to see solid trends in netincome growth with current record protlevels likely to be improved upon againin 2012.
Figure 4:
Corporate Prots
From 01.31.82 to 10.31.11. SOURCE: Al Frank using data rom the U.S. Bureau o Economic Analysis via Capital IQ
S e a s o n a l l y - a d j u
s t e d
b i l l i o n s o f U . S .
D o l l a r s
$0
$500
$1,000
$1,500
$2,000
100500959085
Corporate Profits Corporate Profits after Tax
grey areas denote recessions
Annualized Standard
Series Return Deviation
Actual
Large Company Stocks 9.9% 20.4%
Small Company Stocks 12.1% 32.6%
Long Term Corporate Bonds 5.9% 8.3%
Long-Term Government Bonds 5.5% 9.5%
Intermediate Government Bonds 5.4% 5.7%
Treasury Bills 3.6% 3.1%
Infation 3.0% 4.2%
Ination-Adjusted (Real)
Large Company Stocks 6.7% 20.4%
Small Company Stocks 8.8% 32.0%
Long Term Corporate Bonds 2.9% 9.5%
Long-Term Government Bonds 2.4% 10.6%
Intermediate Government Bonds 2.3% 6.8%
Treasury Bills 0.6% 3.9%
SUMMARY STATISTICS—SBBI DATA SERIES
As the market results or Stocks, Bonds,Bills and Infation (SBBI) illustrate,equities have won the long-termperormance derby, though return isoten commensurate with risk.
Figure 5:
SBBI Summary Statistics
From 11.01.25 through 12.31.10. SOURCE: Al Frank using data rom Morningstar
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The news from Corporate America has also been positive on the whole. Sales
and earnings for U.S. corporations in Q3 again topped expectations. In fact, as
shown in Figure 4, the Bureau of Economic Analysis said that corporate prots
on both a pre- and post-tax basis now stand at all-time high levels and Standard
& Poor’s (as of December 22) is estimating that bottom-up operating earnings per
share for its broad-based S&P 500 index will climb from $83.77 in 2010 to $97.05
this year to $106.81 in 2012. To be fair, there have been some recent high-prole
company-specic disappointments (DuPont, Intel, Best Buy, Oracle, Walgreen) on
the earnings front, so we like that our all-cap strategy is favoring historically-less-
volatile, dividend-paying stocks, while maintaining modestly higher-than-usual
cash balances in our portfolios.
Little doubt, market volatility will remain high, but we continue to fancy the
long-term prospects of our broadly-diversied portfolios of undervalued stocks.
Supporting our optimistic stance, we like that stock valuations are attractive (the
trailing P/E ratio on the S&P 500 is 13), interest rates are extremely low (the yield
on the 10-year U.S. Treasury has again dipped below 2%), dividend payouts have
been on the rise (342 members of the S&P 500 either increased or initiated a divi -
dend in 2011) and investor sentiment is hardly enthusiastic (despite a Santa Claus
rally, the most recent AAII Bull/Bear survey is in line with historical averages and
equity mutual fund outows have continued to be hefty).
We aren’t in the business of making short-term market calls, as our investment
time horizon is at least three-to-ve years, but it would not be surprising for the
statistically favorable fourth year of the Presidency (the third year is actually the
best, with the rst and second years the weakest performers) to see equity returns
equal to or modestly above the 9.9% to 12.1% that has been the average for stocks
over the last eight-plus decades (see Figure 5). For those who must have a ‘num-
ber’, we’d go with 1400 on the S&P 500 for our year-end 2012 market target!
Why Value
Everyone loves a sale, right? No doubt, the economic downturn has made bar-
gain hunters out of many more folks, but very few of us would prefer to pay more
than we have to for a gallon of gas, a carton of milk or a new washing machine, no
matter our net worth. Indeed, ‘deal-of-the-day’ Web site operator Groupon launched
a very successful business three years ago that simply provides discounted cou-
pons for goods and services at local and national businesses.
Happily, for those who embrace value investing, the common sense that so
many utilize in their everyday lives often seems to be absent when it comes to the
stock market. Consider Groupon itself, which has just gone public in an offering
that valued the entire enterprise at $12.7 billion, this despite the company losing
$414 million in 2010 on revenue of $313 million. Believe it or not, Groupon’s initial
valuation was more than twice that of the social networking company LinkedIn,
which was actually protable at the time of its $45 per share IPO earlier in 2011.
While Groupon is still (temporarily in our view) defying gravity, not surpris-
ingly, LinkedIn shares have come back down to earth, after opening for trading
at $85 and quickly soaring well into the triple-digits. After all, while LinkedIn is a
nice little company, the current valuation of more than 14 times revenue and more
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than 200 times earnings, even with the big pullback, suggests that most of those
holding the shares are simply hoping to ride the momentum associated with a hot
stock and sell to what we would call a greater fool.
To be sure, we like what Warren Buffett says of value investing, “You either get
it or you don’t.” While we think it should jibe with the way most people live their
lives, those who need a little more convincing about the merits of a value-based ap-
proach need only look at the historical evidence. There have been more than a few
shorter-term periods where it hasn’t held true, but the long-term numbers show a
tremendous performance advantage in favor of value-priced stocks. Data provider
Morningstar cites a couple of reasons for this phenomenon: The market eventually
comes to realize the full value of a company’s securities that were once underval -
ued (the Graham and Dodd view) and the market generally overreacts to bad news
and underreacts to good news, providing more room for value stocks (which are
more likely to have reported bad news) to improve and outperform growth stocks
that already have high expectations built in.
Though Morningstar’s SBBI 2011 Classic Yearbook presents the Fama/French
Value vs. Growth performance comparisons on a capitalization-weighted basis
(which we show in Figure 6), we think it even more interesting to study equal-
weighted returns. Both methodologies tell the same story, but equal weight better
mirrors the way that we (and most investors) construct their portfolios. Yes, many
invest in index funds and ETFs, but we doubt that most think to buy two times as
much ExxonMobil ($400 billion market cap) as they do Wal-Mart Stores ($200 bil -
lion) in order to ‘properly’ cap-weight their portfolio.
It should come as no surprise that the screens that we construct to search for
new investment ideas as well as the analytics that we run each day to evaluate
our existing holdings center on ve classic metrics (Sales to Price, EBITDA to EV,
A ew percentage points a year in betterperormance or Value stocks may notseem like much, but those with a long-term time horizon should understand themiracle o compounding.
Figure 6:
Value Trumps Growth
I n d e x
10
100
1k
10k
100k
1m
10m
100090807060504030
Large Growth: 9.3%
Large Value: 11.5%
Small Growth: 8.6%
Small Value: 14.7%
Logarithmic Scale. Value-weighted Returns. Indexed to 100 on 07.31.27. Data through 11.30.11. SOURCE: Al Frank using data rom
Eugene F. Fama and Kenneth R. French
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Book Value to Price, Earnings Per Share to Price and Dividend Yield) that histori-
cally have proved strong indicators of future investment performance (see Figures
7 and 8). Note that the rst four ratios are inverted (i.e. Price to Sales instead of
Sales to Price) from how they are conventionally displayed as well as how they ap-
pear in The Prudent Speculator , with the result being that we can compare a high
ranking stock on Sales to Price to a high scorer on Dividend Yield. Doesn’t matter
I n d e x
Hi 20%: 19.2%
Quintile 2: 16.5%
Quintile 3: 14.6%
Quintile 4: 12.9%
Lo 20%: 10.4%
100
1k
10k
100k
1m
10m
100090807060
...and as the ratio o earnings to priceincreases provides even more evidencethat value investing is the way to go.
Figure 8:
Fama/French—Earnings/Price
I n d e x
Hi 20%: 19.4%
Quintile 2: 16.5%
Quintile 3: 14.9%
Quintile 4: 13.2%
Lo 20%: 7.7%
100
1k
10k
100k
1m
10m
100090807060
The uniormity o the improving trendin the Fama/French return series asthe multiple o stockholders’ equity tomarket cap rises...
Figure 7:
Fama/French—Book-to-Market
Logarithmic Scale. Equal-weighted Returns. Indexed to 100 on 06.30.51. Data through 07.31.11. SOURCE: Al Frank using data rom
Eugene F. Fama and Kenneth R. French
Logarithmic Scale. Equal-weighted Returns. Indexed to 100 on 06.30.51. Data through 07.30.11. SOURCE: Al Frank using data rom
Eugene F. Fama and Kenneth R. French
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either way, but we chose to be consistent with how Fama/French present their ve
divisions (quintiles) as the higher the metric the more undervalued the stock.
Now, we do add a little of our own valuation avoring to the mixture as we
think that companies also should be compared to their industry peers in addition
to the entire investment universe. The bottom line is that there is very clear and
signicant outperformance (the ‘active return’) over the past two decades for the
...and since the turn o the Millennium,stock pickers (either in the small-capRussell 2000 or the large-cap Russell1000 subsets o the Russell 3000index) are likely to have done better than‘passive’ index und investors.
Figure 10:
Russell Index Equal-Weighted vs.
Capitalization-Weighted Returns
50
100
150
200
250
300
350
100806040200
I n d e x
R1K Cap-Weight: 1.3%
R1K Equal-Weight: 9.0%
R2K Cap-Weight: 4.8%
R2K Equal-Weight: 6.0%
Indexed to 100 on 1.31.00. Data through 12.31.11. SOURCE: Al Frank using data rom Russell Investments via Bloomberg
Our own analysis covers only 20 years,but we’ve also ound that the lessexpensive the stock the higher the returnpotential...
Figure 9:
Factor-Based Investing
A n n u a l T
o t a l A c t i v e
R e t u r n
Sales/P
BV/P
EBITDA/EV
Div yield
EPS/P
Valuation quintiles (1=most inexpensive)
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
54321
From 11.30.91 through 11.30.11. Active total return (Quintile return less the return o the Russell 3000 Index). Quintiles are based on Al Frank’s
proprietary coverage universe.Quintiles are calculated or each month and a portolio o each quintile is held or one month. The return gures are the
chained perormance data over all time periods or each quintile. Sales, EBITDA and EPS gures combine trailing data and near-term estimates into a
blended current trailing gure. SOURCE: Al Frank using data rom Capital IQ via ClariFI
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most undervalued stocks. It is also very interesting to see in Figure 9 that quintiles
1, 2, 3 and 4 all have better equal-weighted returns than the cap-weighted Russell
3000 benchmark (there is not an equal-weighted R3K total return series) no matter
how expensive the metric. Helps, along with the performance numbers shown in
Figure 10, to refute claims that traditional ‘passive’ index strategies are best!
Why Value Now?Unfortunately (or fortunately for 2012 and beyond), Value stocks had a tough
time of it in 2011, while also suffering dismal relative performance in 2007 and
2008. Interestingly, those lousy returns have coincided with difcult time spans for
the entire market. In fact, history shows that Value stocks have fared worse than
Growth stocks in down markets. We nd in Figure 11 that the Downside Capture
ratio—the amount of the S&P 500’s negative move experienced by the portfolio in
question—is historically greater for Value than for Growth. It doesn’t always hold
true, of course, but the ugly ve months from the market peak in 2011 on April
29 to September 30 saw a total return of -17.7% for the Russell 3000 index. As the
Downside Capture chart illustrates, Large Value stocks have historically ‘captured’
105% of the decline compared to 97% for Large Growth stocks when the market
losses have been worse than 15%. Same comparison holds true with the Capture
numbers for Small Value (113%) and Small Growth (110%).
Those gures would suggest, then, that Large Value stocks might have been
expected to have dropped by 18.6% (105% times 17.7%) and Small Value stocks by
20.0% (113% times 17.7%) over those ve months. Shifting to Russell performance
data, the Russell 3000 Value index indeed suffered a worse fate during that span,
tumbling 19.3% versus a 16.2% loss for the Russell 3000 Growth index, in line with
-150
-125
-100
-75
0% to
-2.5%
-2.5% to
-5%
-5% to
-7.5%
-7.5% to
-10%
-10% to
-15%
<-15%
Large GrowthSmall Growth
Small Value Large Value
D o w n s i d e C a p t u r e b y R a n g e o f S & P 5 0 0 P e r f o r m n c e
Value investors have oten endured boutso sub-par perormance when marketsare headed south...
Figure 11:
Downside Capture
From 08.31.27 through 11.30.11. Downside capture relative to the S&P 500 using monthly total returns. Ranges are o the monthly change in the S&P
500. SOURCE: Al Frank using data rom Eugene F. Fama and Kenneth R. French
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the Downside Capture stat. The purveyor of those indexes, Russell Investments
breaks down its Russell 3000 benchmark utilizing “valuation style variables: book-
to-price ratio to represent value and I/B/E/S forecast medium-term growth and his-
torical sales per share growth to represent growth.” Those variables are then com-
bined to yield a Composite Value Score with 70% or so of the stocks classied as
all Value or all Growth and 30% weighted proportionately to both Value & Growth.
Whether the data come romMorningstar, Fama/French or Russell,value stocks have over the long-termdelivered the best returns.
Figure 13:
Russell Value vs. Growth
Russell 3000 Value
(11.7% per annum)
Russell 3000 Growth
(10.0% per annum)
T o t
a l R e t u r n
0
1,000
2,000
3,000
4,000
5,000
6,000
10050095908580
Indexed to 100 on 12.29.78. Data through 12.31.11. SOURCE: Al Frank using data rom Russell Investments via Bloomberg
...and we are now in a time span (nothanks to a disastrous 2008) whereValue has lagged Growth or multipleperiods, though the tide has started toturn in the last three months.
Figure 12:
Annualized Russell Returns
-5%
0%
5%
10%
15%
20%
10-yr5-yr3-yr1-YrQTDMTD
Russell 3000 Growth
Russell 3000
Russell 3000 Value
A n n u a l i z e d
R e t u r n
Annualized total returns or periods one year and greater. Cumulative returns or periods less than one year. Data through 12.30.11. SOURCE: Al Frank
using data rom Russell Investments via Bloomberg
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Alas, in addition to its recent subpar performance, the Russell 3000 Value also
has lagged behind the Russell 3000 Growth index for the past one-, three- and ve-
year periods as depicted in Figure 12. Obviously, this is an unusual occurrence
given that Value has outperformed Growth over the last 10 years and since the
inception of the Russell indexes in 1978 (see gure 13) and going all the way back
to 1927, according to the Fama/French data. In fact, while there can never be any
50
100
150
200
>15%10% to
15%
7.5% to
10%
5% to
7.5%
2.5% to
5%
0% to
2.5%
Large Growth
Small Growth
Small Value
Large Value
U p s i d e C a p t u r e b y R a
n g e o f S & P 5 0 0 P e r f o r m n c e
...that Value must outperorm Growthby a wide margin when the markets aremoving higher.
Figure 15:
Upside Capture
From 08.31.27 through 11.30.11. Upside capture relative to the S&P 500 using monthly total returns. Ranges are o the monthly change in the S&P 500.
SOURCE: Al Frank using data rom Eugene F. Fama and Kenneth R. French
-15%
-10%
-5%
0%
5%
10%
15%
20%
10050095908580
A n n u a l i z e d R e t u r n o f t h e R u s s e l l 3 0 0 0
V a l u e I n d e x
M i n u s t h a t o f t h e R u s s e l l 3 0 0 0
G r o w t h I n d e x
5-year underperformance of value versus growth
5-year outperformance of value versus growth
Subsequent 5-year return, value minus growth
The boxes highlight periods when
value started to underperform growth
on a trailing 5-year basis. Note that
in each case, value had out-
performed growth over the next
five years.
It doesn’t happen very oten that Valuelags over a trailing 5-year period. Ocourse, simple math suggests...
As o 11.30.11. SOURCE: Al Frank using data rom FactSet Research Systems
Figure 14:
Time or Value
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As o 11.30.11. All data are total returns, except or that o all recommended stocks, which excludes dividends. Data or periods greater than
one year are annualized. The Dow Jones Industrial Average (DJIA or Dow) is a price-weighted average o 30 actively traded “blue chip” stocks,
primarily industrials, but includes nancials and other service-oriented companies. The Russell 3000 Index measure the perormance o the
largest 3,000 U.S. companies. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged index o 500 stocks that is generally rep-
resentative o the perormance o larger companies in the U.S. 1The Russell 3000 Index lacks sucient history to match that o Al Frank’s TPS
Portolio. We thereore have shown the S&P 500 Index or comparison purposes. SOURCE: Al Frank using data rom FactSet Research Systems
TPS Portolio is Al Frank’s actual investment portolio. Though not presently leveraged, it has been so in the past. Buckingham Portolio is John
Buckingham’s actual investment portolio. Though not presently leveraged, it has been so in the past. Millennium Portolio is unleveraged and
hypothetical. PruFolio is unleveraged and hypothetical.
All portolio returns are calculated on a total return basis and refect the reinvestment o dividends, i any, margin leverage and margin interest
charges, trading costs and subscription costs. There are inherent limitations with in hypothetical or model portolio results as the securities are
not actually purchased or sold. They may not refect the impact, i any, o material market conditions which could have has an impact on AFAMs
decision making i the hypothetical portolios were real. Hypothetical perormance is shown or illustrative purposes only and should not be in-
terpreted as an indication o perormance o any AFAM portolio. The use o leverage magnies gains and losses and increases risk to a portolio.
guarantees, history would suggest (see Figure 14) that now is an especially favor-
able time to be steering money to Value-oriented strategies. While returns in 2011
were hardly disastrous, a great time to embrace the stocks recommended in The
Prudent Speculator is after we’ve underperformed. This was denitely the case
following our dismal performance in 1990 and 1998, and even after 2008, as we
enjoyed a very nice rebound in 2009 and 2010.
While Value has now underperformed Growth on a trailing basis since May
2008, the simple laws of mathematics require that Value stocks generally must
have outperformed Growth stocks in rising markets. This is conrmed by the Up-
side Capture statistics illustrated in Figure 15: in nearly every instance Small and
Large Value stocks have had greater participation in the market’s gain. For ex -
ample, when the S&P 500 has risen by more than 15%, Large Value stocks have
on average captured 156% of the advance versus an 87% Upside Capture ratio for
Large Growth stocks. The Small stock Value/Growth Upside Capture comparison
is also wide at 184% to 143%.
Unfortunately, we don’t receive advance notice when stocks will climb, even
though the odds denitely favor rising markets. History shows that there is a
strongly positive long-term bias as the Russell 3000 Value index has turned in a
11.7% annualized rate of return since 1978 while the Russell 3000 Growth has re-
turned 10.0% and Small-Capitalization and Large Capitalization stocks have seen
annualized returns of 12.1% and 9.9%, respectively, going all the way back to 1927.
We are always striving to improve (reduce) our Downside Capture while not losing
our Upside, but we know that it is tough to stay the course with Value-oriented
strategies when the markets are struggling, but we believe our top-of-table long-
term performance record relative to our Hulbert Financial Digest newsletter com-
petition and the benchmark-besting long-term numbers for our four newsletter
portfolios (see below) are testament to the merits of our approach.
Since The Prudent Speculator’s launch in March 1977, its 1,753 stock recommendations have returned, on average, an annualized 16.87%,
not including dividends.
Inception Since Index
Date Inception Return Index
Buckingham 01.21.03 11.11% 6.68% Russell 3000
Millennium 12.31.99 7.62% 1.19% Russell 3000
PruFolio 12.29.00 12.78% 2.02% Russell 3000
TPS 03.10.77 18.37% 10.81% S&P 5001
NEWSLETTER PORTFOLIO PERFORMANCE
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W e’ve put together a baker’s dozen of our most fa-
vored undervalued stocks for 2012 and beyond. All
trade for signicant discounts to our determination of
long-term fair value and/or offer favorable risk/reward pro-
les. Note that, while we always seek substantial capital
Sotware & Services ATVI Activision Blizzard $12.32 $19.38 14.8 2.9 5.2 9.7 0 1.3% 14,079 -1.0
Utilities EXC Exelon Corp. $43.37 $56.47 10.1 1.5 2.5 6.8 87 4.8% 28,754 4.2
Materials FCX Freeport-McMoRan $36.79 $67.28 6.3 1.6 2.5 2.5 23 5.4% 34,877 -38.7
Capital Goods GD General Dynamics $66.41 $97.67 9.3 0.7 nm 5.1 29 2.8% 23,649 -6.4
Semis & Cap Equip. INTC Intel Corp. $24.25 $35.23 10.4 2.4 4.2 4.8 15 3.5% 124,112 15.3
Diversied Fins JPM JPMorgan Chase $33.25 $54.18 7.1 1.1 1.0 16.4 166 3.0% 126,313 -21.6
Commercial Services MAN ManpowerGroup $35.75 $68.62 12.2 0.1 2.5 18.7 11 2.2% 2,907 -43.0
Transportation NM Navios Maritime Hldg $3.57 $6.66 3.5 0.5 0.6 6.0 136 6.7% 363 -32.4
Energy NXY Nexen $15.91 $31.31 9.9 1.5 1.1 3.5 53 1.3% 8,391 -30.5
Retailing RSH RadioShack Corp. $9.71 $18.12 7.4 0.2 1.5 3.8 83 5.1% 969 -47.5
Energy SFL Ship Finance Int’l $9.34 $14.21 5.2 2.5 0.9 10.6 220 10.7% 739 -56.6
Pharma/Biotech/Sci TMO Thermo Fisher Sci $44.97 $95.23 11.3 1.5 nm 12.4 40 0.0% 17,011 -18.8
Capital Goods TPC Tutor Perini Corp. $12.34 $34.40 7.3 0.2 2.6 5.6 55 0.0% 584 -42.4
Price Target Price Multiples EV/ Debt/ Div Mkt 2011
Industry Group Ticker Company 12/30/11 Price EPS S TBV1 EBITDA2 TE3 Yld Cap Per
Prudent Speculator 2012 Favorites
gains, we require lower appreciation potential for stocks
that we deem to have more stable earnings streams, more
diversied businesses and stronger balance sheets. The
natural corollary is that riskier companies must offer far
greater upside to warrant a recommendation.
Activision Blizzard (ATVI)
Activision Blizzard is one of the largest developers,
publishers and distributors of video games for consoles,
PCs and handheld devices. The company sells its games
globally and owns popular franchises such as Call of Duty,
with its newest edition selling more than 8.4 million cop-
ies in November alone, and the discontinued Guitar Hero
series, as well as some of the most popular PC games, in-
cluding World of Warcraft and Starcraft. Many of the com-
pany’s games generate such a strong following that mul-
tiple expansion packs and sequels are released. We also
like that Activision has a very strong balance sheet that
sports over $2.50 per share of cash and no long-term debt.
In addition, the company generates strong free cash ow
which allows management to both invest in the growth of
its businesses and to also partake in shareholder friendly
activities such as stock buybacks and dividend payouts.
Shares currently yield 1.3% and offer long-term oriented
investors an appealing investment opportunity at a rela-
tively attractive valuation.
Exelon Corp. (EXC)
Chicago-based Exelon is the largest U.S. utility by
market capitalization. The company is the largest nuclear
generator with 17,000 megawatts of nuclear power pri
marily located in the Midwest and Mid-Atlantic regions
Exelon’s diversied power generation also includes coal
hydro and gas. Additionally, the company has two large
energy delivery subsidiaries, ComEd in Illinois and PECO
in Pennsylvania, which together serve over 5 million cus
tomers. With the EPA recently announcing tougher air
quality rules that will be in place in the next few years, we
would expect that more than a few coal red plants wil
choose to shut down versus installing expensive emis
sions controls, which should benet large nuclear power
generators like Exelon. The rm’s ability to produce low-
cost electricity with minimal emissions should help pro
duce attractive, sustainable and expanding shareholder
value for years to come, even if power prices take some
time to rebound. We like that EXC boasts strong free cash
ow and stands on sound nancial footing. Shares are
As o 12.30.11. N/A=Not applicable. nm=Not meaningul. 1Tangible book value. 2Enterprise value-to-earnings beore interest taxes depreciation and amortization. 3Tangible equity. SOURCE: Al Frank using data rom Capital IQ and FactSet
Research Systems
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trading at relatively attractive forward earnings and EV/
EBITDA multiples versus its peer group. Furthermore,
the stock currently offers a 4.8% dividend yield.
Freeport-McMoRan Copper & Gold (FCX)
Freeport-McMoran is a major international mining
company with assets in North and South America, Indo-
nesia and the Democratic Republic of the Congo (DRC).
The company’s main products are copper (77% of sales),
gold (13%) and molybdenum (6%). The relationship be-
tween FCX’s earnings power and copper prices was
strengthened considerably following the 2007 acquisition
of Phelps Dodge. Despite the plunge in the price of cop -
per since the summer, we remain positive on the long-
term fundamentals since inventories remain tight and
long-term demand should be driven by strong emerging
market growth. Since December 2010, FCX management
has paid four quarterly dividends and two special divi-
dends. We think this trend could continue as cumulative
free cash ow projections over the next 2 years stand at
more than $7 billion. With a focus on organic opportuni -
ties as opposed to acquisitions, and with a reputation for
solid execution, we consider FCX a core holding in the
metals and mining industry. Just considering quarterly
dividends, FCX shares yield 2.7%, however including spe-
cial dividends brings the payout to more than 5%.
General Dynamics (GD)
General Dynamics is a self-described market leader in
business aviation; land and expeditionary combat vehi-
cles and systems, armaments, and munitions; shipbuild-
ing and marine systems; and mission-critical information
systems and technology. Some of its major defense con-
tracts include Virginia-class nuclear-powered submarines
and Ohio class replacements, Arleigh Burke-class Aegis
ships, the Abrams M1A2 tank and the Stryker 8-wheeled
assault vehicle. However, General Dynamics is more than
just a defense contractor, thanks to solid returns from its
business aviation unit, Gulfstream, which produces jets.
The unit has solid prospects as the space rebounds and
is seeing strong interest from emerging market regions.
The bright prospects for the aviation unit provide appeal-
ing diversication to GD’s defense business, especially
in the wake of expected domestic defense budget cuts.
Nevertheless, the company’s backlog of business of more
than $58 billion, good nancial position and strong cash
ow generation should allow management to continue to
look for value-added acquisitions, as well as to offer share
buybacks and dividend increases. On that last score, GD
currently yields 2.8%.
Intel (INTC)
Intel is clearly the leader in the worldwide micropro-
cessor market. Despite recent weakness in PC sales (due
in part to the ooding in Thailand that caused a shortage
of hard disk drives), long-term demand for microproces-
sors is solid thanks to aging computers and bandwidth-
consuming applications for PCs and servers. Improved
processing speed is core to many of technology’s top
trends and Intel is providing it in PCs, smartphones, tab -
lets and TVs. In addition, the trend toward cloud comput-
ing will require substantial server build-outs to create the
infrastructure necessary to handle the rapidly growing
amount of data movement. Further, we are still intrigued
by the company’s purchase of security software maker
McAfee, and believe that its plans to materially enhance
security features for its chips and hardware will further
differentiate its products and support margins. We favor
the company’s competitive position, strong balance sheet,
rapidly growing free cash ow, current share buyback
plan (with $14.2 billion remaining) and 3.5% yield.
JPMorgan Chase (JPM)
JPMorgan Chase is one of the largest nancial insti-
tutions in the U.S., with more than $2 trillion in assets
and operations in more than 60 countries. The company
is also the top corporate syndicated lender. The bank
specializes in debt markets and it operates large units fo -
cused on securities custody, trust banking, credit cards,
venture capital and asset management. Although JPM is
held in high regard for its navigation through the credit
crunch, recent share price weakness shows it is not im -
mune to investor concerns about the mortgage market,
regulatory changes and the revenue outlook for banks
in general. Despite these challenges, we are positive on
the rm’s strong balance sheet, high quality and stable
leadership team, enhanced risk-management controls
and broad business model. In addition, we like that JPM
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has been taking share in overall trading revenue and that
it continues to boost exposure to faster growing non-U.S.
markets. JPM shares are currently trading at meaning-
ful discounts to ve year average forward earnings and
book value multiples. Continued economic progress and
a clearer regulatory picture could mean additional buy-
backs and/or dividend increases (the current yield is 3%).
ManpowerGroup (MAN)
Manpower is the 3rd largest stafng rm in the world
with 4,100 ofces in 82 countries providing services to
more than 400,000 clients. The rm maintains a diversi-
ed model by offering services such as temporary staff -
ing, permanent placement, workforce training and out-
placement. Its largest segments in stafng are industrial
and clerical stafng. Its two largest markets are France
(29% of total revenue) and the United States (10%). While
current macro uncertainty has led to slowness in expan-
sion of full-time payrolls, Manpower is seeing tempo -
rary stafng growth in nearly all of its regions, a trend
one would expect to continue as businesses seek greater
exibility in their labor costs. Concerns over a prolonged
European recession have weighed on shares, as the stock
is off nearly 50% from April highs. Shares are currently
trading at relatively inexpensive multiples (sub-10 for-
ward P/E and 13% of sales) while yielding 2.3% and we
believe the company offers long-term oriented investors
solid top- and bottom-line growth prospects.
Navios Maritime (NM)
Navios Maritime is a sea-borne shipping and logistics
company focused on the transport of dry bulk commodi-
ties, including iron ore, coal and grain. Though Navios
recently completed a massive four-year $2.5 billion eet
expansion program, it has still managed to maintain a
respectable net debt-to-total capital ratio of 51%. Despite
a cautious sector outlook and prolonged periods of char-
ter rate declines, Navios should continue to benet from
high contract coverage for its core eet (68.4% in 2012 and
42% in 2013) and from ample dividend support from its
afliated companies. We are also partial to the company’s
63% ownership of a lucrative South American logistics
provider, an entity poised to capitalize on expanding
economies worldwide and the resulting increase in im-
port/export activity. We believe Navios is one of the best
positioned companies in the dry bulk space, yet multiples
such as P/E and price-to-sales are inexpensive relative to
ve-year historic averages. The board of directors has also
approved a $25 million repurchase authorization for 2012
and the current dividend yield of 6.7% is quite attractive.
Nexen Inc. (NXY)
Canada-based Nexen engages in the exploration and
production of conventional offshore oil in the North Sea
Nigeria and the Gulf of Mexico as well as unconventional
natural gas in British Columbia. In addition, the company
is mining oil sands in the Alberta. With Nexen reporting
that it has proven reserves of more than 1 billion barrels
of oil equivalent, material increases in long-term globa
oil demand and projected supply constraints should bode
well for the stock price over the coming years. We like
that the company is maintaining its status as a low-cost
producer and has had recent exploration success with off
shore discoveries in the Gulf of Mexico at Appomattox
Vicksburg and Knotty Head, as well as in Nigeria at Usan
and Owowo. Furthermore, management continues to ag
gressively pay down debt to strengthen the balance sheet
Shares are currently trading at less than 10 times forward
earnings estimates, right near tangible book value and an
EV/EBITDA multiple of 3.5, all relatively attractive met
rics. NXY shares offer a current dividend yield of 1.3%.
RadioShack (RSH)
RadioShack is one of the leading U.S. retailers of wire
less products and services as well as consumer electronics
and parts. The company operates 4,500 company-owned
stores in the U.S., with many of the locations in major or
strip malls to maximize convenience. Its retail network
also includes some 1,300 wireless kiosks, 1,200 dealer out
lets and 200 company-owned stores in Mexico. We like tha
management has cut costs and increased store efciency
The company focuses its sales associate training on cus
tomer service and in-depth product knowledge in an at
tempt to improve its customer’s experience so as to drive
repeat business and referrals. While the market is com
petitive, we think the addition of Verizon plans and Apple
products (including the iPhone 4S and iPad 2) should
provide ample opportunity for growth. From a valuation
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standpoint (P/E ratio is less than 9), RSH shares are com -
pelling, especially after dropping almost 50% in price over
the last year. The dividend was recently doubled, putting
the current yield at 5.1%, while the company said in its
latest earnings announcement that it intends to buy back
$200 million of its stock over the next 12 months.
Ship Finance (SFL)
Shares of the oil tanker owner and operator have been
brutalized over the past month after worries arose about
its exposure to former parent Frontline, which has major
liquidity concerns and which is on the other side of char-
ter contracts for 28 of Ship’s 69 vessels. Happily, those
concerns have been calmed somewhat after Frontline put
forth a restructuring proposal that will actually see $106
million of ‘restructuring compensation’ make its way back
to Ship Finance. Yes, SFL has agreed to amend the terms
of the long-term Frontline contracts in the process and a
near-term hit to $0.25 per share from the lucrative $0.39
quarterly dividend is likely, but we think the outcome is
far better than what the recent 40% share-price hit would
suggest. In addition, while last quarter’s results came in
light relative to investor expectations, the company still
earned $0.35 per share, and the consensus forecast calls
for EPS well north of $1.00 in 2012. The double-digit per-
centage yield (even if we simply annualize the likely new
$0.25 quarterly payout rate) along with the fact that we
believe that shipping rates are more likely to move higher
than lower from currently depressed levels over the long
term add to SFL’s appeal.
Thermo Fisher Scientifc (TMO)
Thermo Fisher Scientic is the product of the 2006
merger of Thermo Electron (primarily an instrument
maker) and Fisher Scientic (a provider of laboratory con-
sumables). The combined company has the largest sales
force in the industry and supplies universities, laborato-
ries and hospitals with high-end analytical instruments
and lab equipment. With many customers looking to sim-
plify procurement functions, TMO’s ‘one stop shop’ strat-
egy is appealing. The company’s comprehensive product
offering is also ripe for various cross-selling opportuni-
ties. TMO also has accelerated investment in emerging
markets, particularly India and China, to better serve
local life-sciences customers. Importantly, these outlays
have not detracted from management’s commitment to
adding shareholder value as evidenced by its proactive
share buyback program, including a recently approved
additional $750 million that can be used before Novem-
ber 2012. With leading positions throughout an $80 billion
market, consistent and heavy investments in research
and development, global growth opportunities, solid free
cash ow generation and a strong balance sheet, we think
that TMO remains a ne addition to portfolios looking for
a large-cap medical specialties name.
Tutor Perini (TPC)
Tutor Perini is one of the largest construction services
rms in the United States. The company has a market
leading position in heavy civil and large complex build -
ing projects, and also provides a variety of services to
the U.S. military, government agencies and corporations.
We are encouraged by management’s success in replac-
ing major Las Vegas-based gaming projects with higher
margin civil and government contracts. In addition, an
increasing percentage of the company’s backlog is made
up of non-xed-price contracts, often referred to as cost-
plus. Such contracts are a benet to margins especially
in a rising commodity price environment. Shares dra-
matically underperformed in 2011 due to weak demand
for civil engineering services and a downward revision to
full-year earnings guidance in the second quarter. How -
ever, we believe that demand will eventually rebound and
that both the numerator and the denominator of the cur-
rent single-digit P/E ratio will expand. Further, it is worth
noting that the solid balance sheet provides management
with operational exibility.
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Important Information
Opinions expressed are those of Al Frank Asset Management (AFAM) and are
subject to change without notice and are not intended to be a forecast of future
events, a guarantee of future results or investment advice.
Past performance may not be indicative of future results. Therefore, you should
not assume that the future performance of any specic investment or investment
strategy will be protable or equal to corresponding past performance levels.
Al Frank Asset Management (AFAM) is registered with the Securities & Exchange
Commission, is editor of The Prudent Speculator (TPS) newsletter and is the
Investment Advisor to four no-load proprietary mutual funds and individually
managed client accounts.
While the funds are no-load, management and other expenses still apply. Please
refer to the prospectus for further details.
Mutual Fund investing involves risk and principal loss is possible. The Fund’s
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AFAM adheres to the same investment principles and philosophies in managing
individual client accounts, its Value Division proprietary mutual funds and in the
information that appears in its investment advisory newsletter, which is long-term
growth of capital by owning a diversied portfolio of securities that are undervalued
and holding them for their long-term potential appreciation.
As adviser to its own proprietary mutual funds and manager of individual client
accounts, AFAM may purchase, sell or hold positions in the securities that appear
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stocks that appear in this presentation subject to AFAM’s Code of Ethics, Insider
Trading, and Personal Trading policies.
The Russell 3000 Index measures the performance of the largest 3000 U.S.
companies. It is constructed to provide a comprehensive, unbiased, and stable
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growing equities are reected.
One cannot invest directly in an index.
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Nothing presented herein is, or is intended to constitute, specic investment ad-
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Past specic recommendations: Investment recommendations provided herein
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