In January 2014 we at the Investor Advisory Service received the good news that we had been named to Hulbert Financial Digest’s “Honor Roll” for the fifth consecutive year. This is no small feat. Of the hundreds of newsletters Mark Hulbert tracks, only 12 displayed the consistent market-beating results required to make his 2014 Honor Roll.
A big reason why our newsletter scores highly is its very long track record of success. We have been applying the same basic strategy at IAS for forty years—we buy solid, growing companies when they are trading at fair valuations. We don’t try to time the market, we don’t chase fads, and we try not to overpay. Because we follow a middle-of-the-road strategy we’re never likely to be the top-performing newsletter in any given year. Over time, however, our steady approach has certainly proved its worth.
Looking back at where the market stood one year ago, 2013 turned out to be a spectacular year for investors. The S&P 500 gained 32.4% including dividends in 2013, scoring its best calendar-year advance since it went up 33.4% in 1997. Because of 2013’s big run-up we tried to manage readers’ forward expectations somewhat in our January 2014 “Investment Comments,” pointing out that when the market has risen more than 20% in a year historically, the following year has typically generated below-average returns. We didn’t want to turn anybody away from the market, pointing out that valuations still seemed fair to us, roughly in line with their historical averages and safely below the peak multiples achieved during past market tops.
In retrospect, we may have been too cautious. With 2014 now almost in the books, it’s looking like this will be another above-average year for investors. Through November, the year-to-date return for the S&P 500 was 14%.
Considering last year’s big advance, especially in the context of modest world growth, we’re a little surprised at how strong the market has been this year. We could try to explain the market’s action by telling stories about lower interest rates, energy prices, or a thousand other things. Maybe what makes the most sense, however, is simply to attribute this year’s gains to the stock market’s long-term upward bias. These inexplicable moves are the ones that market timers always miss because they are literally unforeseeable. All the historical data we have says a big move upward move was unlikely in 2014, but it happened anyway. These are the times when it really pays to have a consistent bullish bias, as we do.
Each month we feature three companies we believe are especially interesting and potentially timely as well. Let’s take a look back at one of the feature stocks from the January 2014 issue, Gentex Corp. (NASDAQ: GNTX). Gentex is a Michigan company that supplies automatic dimming rearview mirrors to car manufacturers. Within this niche, Gentex enjoys worldwide market share of 85%. The rearview mirror market is already highly-penetrated, but Gentex is always looking for new ways to add more value to this little bit of “real estate” it controls within the car. For example, the company integrates such things as backup cameras, garage door openers, and temperature indicators into its interior mirrors. It has also expanded into exterior mirrors and headlights and moved into the aerospace market. Its auto-dimming technology is an optional feature for the windows on Boeing’s 787 Dreamliner. We saw continued prospects for future growth and started following GNTX shares in March of 2012.
The first time around, this pick got off to a bad start, falling from $25 to $15 within a few months. It recovered from that level but continued to lag the overall market. We were almost ready to give up on it, but we were encouraged to stick with Gentex because the company took aggressive steps to cut costs and restore earnings growth. It also acquired a business called HomeLink from Johnson Controls. We thought the acquisition would help Gentex boost its top-line growth while also expanding its profit margins. In the January 2014 issue we highlighted the stock again at a price of $29.41.
This time the pick got off to a fast start, as shares quickly rallied to $34. The move turned out to be somewhat of a head-fake, however. By April, shares were back below the level at which we showed it to readers. We thought business was improving and continued to recommend the stock. GNTX shares stayed stuck in the mud as the S&P 500 continued to drift upward, and as summer turned into fall it looked like we had missed the mark once again by recommending GNTX.
In late October something very strange happened. Many of the small and midcap growth companies in the IAS suddenly shot upward for mysterious reasons. GNTX was one of the biggest beneficiaries of investors’ sudden lurch toward our kind of growth names. From October 1 to December 1, GNTX shares went from lagging the S&P 500 by 25% year-to-date to leading the market by 5%. Outperforming the market by 30% in a two-month span normally comes with some big news, but this move happened largely in a vacuum. Sometimes you just have to be there tapping your toe when the market comes around asking to dance. At a recent price of $36.81 and adding $0.60 in dividends, GNTX shares have now risen 27% on a twelve-month basis. That compares favorably to the S&P 500’s 17% impressive advance. We can’t explain what suddenly changed in October and November. If you follow a good strategy consistently, the market will eventually swing in your favor. The only investors who can’t reliably expect their fair share of good luck in the market are the ones who jump from one strategy to another. Consistency is the real key to our track record.