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June 30, 2009

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.

June 28, 2009

Crazy Day in Small-Caps

While the Russell rebalancing may have had something to do with it, I am not entirely sure why we had such an awesome day with our smaller stocks in both models.  ACET, MPR, and SCVL all popped rather hard to the upside.  You will see some adjustments to both models.


Top 20 is up 34.6% in 2009 - 31.5% better than the S&P 500.  CG/B is up 12.2% - 9.2% ahead of its benchmark.  We are 3 weeks away from the 1st anniversary of the launch.  The model is up 5.7% since last July and 18% ahead of the stock/bond index.

June 20, 2009

IBD comments on DORM

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=480084

June 19, 2009

Week Ahead, Week Behind

On Monday, WAG will report.  The stock has been basing after a spectacular run from depressed levels.  Fundamentally, I don't expect much on the earnings front.  Technically, it could go either way.  We trimmed the stock in both models at about the current price in early May while the rest of the market has been advancing.  I hope to be able to add on weakness, but might even do so at the current price.  I can make the case for a 38 target a year out - an ok return, especially in CG/B.

Today was quad witch (lots of options expirations, etc.), capping a negative market for the week.  Top 20 ended up losing about 1.5% this week, better than the market.  YTD, it is now up 32.8% or 29.5% ahead of the S&P 500.  Big picture, we have structured the portfolio with generally "high quality" and a big overweight in Healthcare.  CG/B is up 10.8%, which is 8.1% ahead of the blend of the S&P 500 and bonds.  It was down less than 1% this week, also a bit better than the market.  Big picture, it is at minimum equity exposure and slightly overweight bonds.

Top 20 Trade

I went ahead and added the stock that I had mentioned, but I neglected to share my rationale for the sale.  We ended up selling the rest of CRMT, which was a fantastic stock for us.  I like it fundamentally, but the stock is at technical resistance and fairly valued.  We have a lot of exposure to Consumer names, and this one was the easiest to cut loose.  CRMT will stay on my watchlist - 14 is a good buy spot.

June 17, 2009

Quiet

I have been laying low with both the models.  The market has fallen back and is now down on the month.  Lower quality stocks are leading the way back down.  My views on the economy are very negative, and my concerns for stocks are elevated.  I have been trying to get more quality into both models and we have raised cash to the highest levels in CG/B.

Top 20 took a big hit with EZPW, but it continues to perform reasonably well.  YTD, it is up over 31% and over 29% ahead of the S&P 500.  Since inception, it has lost 4.58% of its value, while an equal investment in the S&P 500 would be over 32% lower.  I have a new buy candidate in mind - I will probably wait to execute on Monday.

CG/B  is up 10.8% YTD, which is 8.6% ahead of the index.  Since its inception last July, it is up 4.4% - 17.5% ahead of the 60/40 stock/bond index.

June 11, 2009

EZPW Pre-announces Negatively

EZPW reported that it is lowering its guidance for each of the next two quarters due to lower loan demand and lower retail demand at its pawn stores.  This is quite surprising - the stock is off about 10% in AH.  It hasn't exactly been a strong performer, but the weakness YTD (-15% through today) has been due to concerns about the payday lending becoming uneconomical due to potential regulation.  It will be interesting to see if this slowdown is specific to EZPW or industry-wide.  Unfortunately, it is quite a large position in Top 20.

June 09, 2009

Top 20 Add

I really don't have much to say, but I wanted to share the rationale behind an add to a recent purchase.  The stock has rallied since we bought it, but it remains inordinately cheap at a slight premium to tangible book value and <9X the forward earnings estimate for the coming year.  This purchase gets the stock to "average" size.  Cash is now 2%. 

June 06, 2009

Top 20 - 1 Trade

Subscribers should have received notification regarding an add to an existing position.  This retailer is very inexpensive on a P/B basis and not too bad on a PE basis if one considers that the margins are depressed.  It has lagged the very strong Consumer Discretionary sector this year, and it looks to have bottomed after a tough quarter.  Our target is about 33% above the current price.

June 05, 2009

Strong Week for Both Models

Despite the premature work I have done to make the models more defensive, we continue to hold up well.  CG/B is now up over 11% YTD and almost 5% since inception last July, 7.5% ahead of the S&P 500/Bond combination in 2009 and 16.6% since the launch.  We are at 45% stocks, the minimum, and just slightly overweight bonds.  Speaking of bonds, what a day!  While the longer-dated bonds have been weakening progressively over the last few months, today the hammer came down hard on short-dated Treasuries.  Rarely in my life have I seen as sharp a move in the 2yr Treasury as today - 30 bps.  The dollar was strong too, which was somewhat odd.  I believe that what happened is that the market is beginning to anticipate higher interest rates out of the Federal Reserve later this year.  Our slight overweight in bonds has been ok, though it was better a couple of weeks ago.  Basically, while the Treasuries are getting hurt, the corporates and mortgages are helping.  All in all, we continue to be better off in bonds than cash, but we don't need to be heroes (hence just slightly overweight).

Top 20 slipped slightly today but is up a whopping 36.5% YTD, 31% better than the S&P 500.  Since the launch in late May of 2008, it is down less than 1%, which is 29.5% better than the market.  I have really toned down the "beta", and we have some residual cash, yet we continue to do well relative to the market.  Our exposure to small-cap is helping.  The R2000 was up 6% roughly this week.  We were helped by some tremendous double-digit moves this week in several of our names (SCVL in particular).  In fact, we were up about 5% this week, well ahead of the S&P 500 despite being heavily weighted in the lagging Healthcare sector. 

I will be reviewing both models more in depth tomorrow, but I don't expect any signficant changes.  Neither model has any companies reporting earnings next week either.