Q2 Review and Top 20 Trade
This will be the last post beyond performance updates. The truth of the matter is that the performance of both models is just too exceptional relative to the number of paying subscribers. Our intention has always been to use this forum to supplement the research that we provide as part of the service, and we intend to share that information going forward with only paying subscribers and not the general public. We are very disappointed with the conversion of free trials to subscriptions and certainly encourage any of you who have investigated Invest By Model but have found the $20 a month to exceed its value to give us some feedback. Going forward, we encourage subscribers to contact us directly should you have any questions. Further, we intend to email directly to you any additional commentary that we might have previously shared here.
Q2 was a very strong one for both models, especially in light of the fact that we got way too defensive too early in the quarter. Top 20 increased over 31% during Q2 and is now up 33.2% YTD compared to the S&P 500 increase of 3.2%, an advantage of 30%. Since its inception in May of 2008, it has declined just 3.2%, which is about 28.5% better than the market. The model has 5.7% cash currently, with approximately 17.5% in Energy, 8.7% in Industrials, 13.6% in Consumer Discretionary, 13.8% in Staples, 34.6% in Healthcare and 6% in Financials. Relative to the S&P 500, the portfolio is somewhat overweight Energy, underweight Materials, somewhat underweight Industrials, somewhat overweight Consumer Discretionary, relatively neutral Staples, extremely overweight Healthcare, pretty underweight Financials, very underweight Tech and underweight Telecomm Services and Utilities. The model has a PE just below 15, a median market cap of about $800mm (so a lot smaller than the S&P 500) and a median net cash to capital of 11% (significantly better than the S&P 500). The portfolio has a dividend yield of about 1.4%.
Conservative Growth/Balanced rose about 11% during the quarter, which was just behind the blended index. This shortfall is the result of both conservative stock selection as well as high levels of cash throughout most of the rally. YTD, the model is up 11.5%, which is about 8.5% ahead of the stock/bond index. Since inception last July, the model is actually up 5.1%, while the stock/bond index is down 12.4%. The performance has been relatively steady since inception despite the pause this quarter. Quite frankly, keeping up with the best market in a decade despite being "conservative" pleases us greatly. We believe that we are well positioned for any erosion in equity prices in coming months. The model is currently 12% cash, 42% bonds (2% above the neutral weight) and 46% stocks. Our equity weighting is very close to the minimum 45% exposure. The equity portion has a 2.6% dividend yield, which is higher than the 2.3% yield of the S&P 500. The PE of 13.5 is slightly lower. The portfolio stands out with its balance sheet. The median net debt to capital is -22%, while the S&P 500 has a net debt to cap ratio of about 25%. Further, every single holding has positive tangible equity, with a median price to tangible book value of 2.7X. Just looking relative to overall equity exposure, the portfolio is 22.5% Energy, 20.3% Industrials, 9% Consumer Discretionary, 22.7% Staples and 25.5% Health.
Finally, we are selling an Energy name to add another Healthcare name in Top 20. The buy is a company I have actually watched for quite some time, though I have always found it to be unattractive up until recently. The company has no exposure to the likely changes ahead for Healthcare. While it has taken a hit from the economy, it is likely to produce flat sales but higher EPS this year. The company has a pristine balance sheet, a reasonable valuation, solid free cashflow generation and likely strong prospects for 2010. The Energy name is one that we trimmed higher. My view on Energy is less bullish now than a couple of months ago given the recent run-up in prices.
