Invest By Model

Portfolios Feel the Weight of Small Stocks

It wasn't a great week for either model, as the S&P 500 continued its advance while the smaller stocks held firm.  Tax-loss selling and end-of-year window dressing are weighing on many smaller stocks, some of which we own.  It's always a tough call on the "January Effect".  I try to be opportunistic but not get too hung up on the precise timing.  You will see an add-to in Top 20 that will be an attempt to play that angle.

Here is what Top 20 looks like:

Performance as of 11/13/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	54.19 %	0.67 %	7.39 %	25.76 %	81.01 %	12.08 %
S&P 500	23.68 %	2.08 %	8.54 %	25.08 %	23.10 %	-18.09 %
Difference	30.51 %	-1.41 %	-1.15 %	0.67 %	57.91 %	30.17 %

The model increased in value, but it really lagged terribly.  Still, we are up 30.5% YTD and well positioned for potential weakness in the market. 

Here is what CG/B looks like:

Performance as of 11/13/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	20.47 %	0.69 %	3.73 %	11.89 %	31.92 %	13.52 %
S&P/Bond 60-40	17.15 %	1.45 %	6.30 %	16.90 %	19.53 %	-0.37 %
Difference	3.32 %	-0.76 %	-2.57 %	-5.01 %	12.40 %	13.89 %

We got hit with a double-whammy here, as the focus on smaller stocks as well as the heavy cash position inhibited the returns.  The model actually increased slightly, but we lost about 1.7% relative to the benchmark.  We have given up a lot of our relative advantage as the market has rallied, which isn't surprising given the nature of this model (conservative).  Still, with an almost 14% advantage since July 2008, it has managed to do relatively better over a very volatile time.  The model is positioned for a pullback - not sure if it is ever coming! 

Strong Week for Both Models

Just when it looked like the market was vulnerable, it once again showed its resilience.  The market followed through early in the week with new lows for the correction but spent the rest of the week recovering on light volume. 

Top 20 had a strong recovery, fueled by a snap-back in small-cap as well as a few specific moves (ALGT on strong October traffic numbers and EZPW on great earnings and outlook, with VOLC on a good report).  Here is what it looks like:

Performance as of 11/6/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	53.42 %	0.54 %	9.83 %	24.63 %	63.54 %	11.52 %
S&P 500	20.86 %	1.56 %	7.81 %	17.59 %	21.27 %	-19.96 %
Difference	32.56 %	-1.01 %	2.02 %	7.04 %	42.27 %	31.48 %

Despite our relatively conservative posturing compared to the market, we expanded the lead over the index YTD by 0.5%.

CG/B managed to keep up roughly despite its very large cash position and conservative positioning.  We sold SYY this week due to concerns about food deflation and continued weak restaurant demand.  Here is how CG/B looks:

Performance as of 11/6/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	20.36 %	0.72 %	4.97 %	11.82 %	24.00 %	13.42 %
S&P/Bond 60-40	15.33 %	0.97 %	5.99 %	12.74 %	18.28 %	-1.92 %
Difference	5.03 %	-0.25 %	-1.02 %	-0.91 %	5.72 %	15.34 %

Bring it on!

Last week, I headlined that the market was looking toppy.  FINALLY, we had a sharp sell-off, with the market now down about 6% from the peak  and 10% for Small-Caps (where we are more exposed relative to the benchmarks).

Top 20 looks like this:

Performance as of 10/30/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	49.11 %	-2.41 %	5.17 %	26.15 %	65.55 %	8.39 %
S&P 500	17.06 %	-1.84 %	5.57 %	20.06 %	11.51 %	-22.47 %
Difference	32.04 %	-0.57 %	-0.40 %	6.09 %	54.04 %	30.86 %

While we pulled back some, our YTD gap widened from 30.4% to 32.0%.  Unfortunately, that wasn't enough to offset the slippage earlier in the month, as we lost some of that 33.6% margin.  The explanation is partially our exposure to smaller companies, the weakness in Healthcare (where we have gigantic exposure) and the way the math works when you are way ahead but the market goes down.  We had some fantastic reports this week (AKAM, DORM today and TBL yesterday).  I believe that we are set up pretty well for a weak market should it play out that way due to our sector exposures, our focus on strong balance sheets and our tilt towards companies that haven't rallied like crazy (related to the previous point).

Here is what CG/B looks like:

Performance as of 10/30/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	18.74 %	-0.57 %	3.07 %	12.35 %	24.61 %	11.90 %
S&P/Bond 60-40	13.51 %	-0.63 %	5.03 %	14.66 %	13.67 %	-3.46 %
Difference	5.24 %	0.06 %	-1.96 %	-2.31 %	10.94 %	15.36 %

The story here is somewhat similar due to the Healthcare exposure and tilt towards smaller companies, but a maximum cash position resulted in a cushion.  The YTD lead expanded from 4.1% to 5.2% from last week.  For the month, the relative advantage held.  Since inception last July, this model had performed consistently well until the summer.  As you can see above, we have lagged for the past six months now (due to the past three months), and I attribute this to being too defensive with cash and to our conservative holdings compared to the market.  Clearly this model is extremely well positioned for a continued downturn.

As I consider the potential for the rest of the year, I remain defensive.  While I don't expect as sharp a move as we had this week, I wouldn't rule out a quick drop.  More likely, though, we drift lower.  I expect that the S&P 500 should find support 10-15% below here (880-930).

Bad News, Good News, Better News

Sorry Top 20 followers that I got nervous about AKAM and trimmed going into the number (the bad news).  But, we retained some (the good news).  Even better, I think, is that we reestablished a position in TBL earlier this month and added to it yesterday, and they really cranked this quarter. 

Looking Toppy

Who would have expected MSFT to be up over 5% and AMZN up over 25% but the market down?  Something smells...

The week wasn't especially kind to the model portfolios.  One problem is a certain stock common to both models, ACET.  We learned mid-week that the CEO/Chairman is leaving.  While it sounds potentially troubling, I am not so sure that it is.  He is in his 70s, while his successor, who has been with the firm for 30 years, is in his 50s.  We will learn more when they report.

Top 20 is up over 52% YTD:

Performance as of 10/23/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	52.35 %	-0.67 %	10.86 %	30.76 %	67.95 %	10.74 %
S&P 500	21.94 %	1.92 %	11.17 %	28.15 %	22.07 %	-19.25 %
Difference	30.41 %	-2.59 %	-0.31 %	2.61 %	45.88 %	29.99 %

We were down a bit on the week and lost some of our YTD lead over the S&P 500.  Until Healthcare does relatively better, we are going to struggle.  You might find an article I contributed this week helpful to understanding my table-pounding enthusiasm:

http://community.tradeking.com/members/tk-all-star/blogs/45274-stock-spotlight-medical-device-co%E2%80%99s

CG/B was helped a bit by its very conservative cash positioning this week:

Performance as of 10/23/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception	Annualized
Conservative Growth/Balanced	19.86 %	0.45 %	5.04 %	14.94 %	28.46 %	12.95 %	--
S&P/Bond 60-40	15.82 %	1.47 %	8.08 %	18.76 %	18.81 %	-1.50 %	--
Difference	4.05 %	-1.02 %	-3.04 %	-3.82 %	9.65 %	14.46 %	--

We picked up a little relative to the benchmark, as the 4% advantage YTD increased from 3.9%. 

Potential Market Turn???

The market stalled at what I view as natural resistance levels today, though, as with every other pause, one has to wonder what type of pullback, if any, we will get.  I note also that the dollar hit kind of a magic level of 1.50 on the euro.

I have been buying today, but every stock that I have bought is down year-to-date.  I have added to ALGT post-earnings (I think that it is possibly finally maybe perhaps going to work!), as well as STJ, SYNO and SMTS.  STJ is now 6% of the alloted equity component of the account I manage, while SMTS, SYNO and ALGT are more than double that (yes, I like to concentrate).

I am not adding to MATK here and am a bit worried with the action...

Models Lagging

I promise I am not resting on any laurels - I have been too conservative.  Top 20, which is loaded with Healthcare stocks that I think are very attractive, and underexposed to Financials and cyclical companies, actually declined slightly this week.  It is now lagging slightly in October.

Performance as of 10/16/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	54.14 %	0.36 %	13.20 %	33.38 %	68.13 %	12.05 %
S&P 500	22.82 %	1.92 %	16.23 %	27.11 %	18.01 %	-18.66 %
Difference	31.32 %	-1.56 %	-3.03 %	6.27 %	50.12 %	30.71 %

Conservative Growth/Balanced is getting whacked both for being conservative (that's the mandate!) but also heavy in cash. 

Performance as of 10/16/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	20.18 %	0.33 %	6.11 %	14.83 %	30.08 %	13.26 %
S&P/Bond 60-40	16.28 %	1.49 %	10.95 %	18.11 %	17.16 %	-1.11 %
Difference	3.90 %	-1.15 %	-4.84 %	-3.28 %	12.92 %	14.36 %

While I don't like to lag, this portfolio did better than the market by far from its launch in July 2008 through the end of the year (not surprisingly) and it is also up in 2009.  I have confidence that the strategy should perform well in most environments, but clearly this 63% rally has been problematic.

Top 20 will see a few earnings reports next week, while CG/B will see one.

MTD Update

1/3 of the way into October, the market has continued to grind higher.  Top 20 Performance:

Performance as of 10/9/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	54.74 %	5.05 %	19.25 %	36.59 %	55.15 %	12.48 %
S&P 500	20.98 %	3.86 %	22.04 %	26.50 %	20.93 %	-19.88 %
Difference	33.76 %	1.20 %	-2.79 %	10.08 %	34.22 %	32.36 %

We expanded our lead slightly over the market this week, picking up about 0.2% on a YTD basis as the return gained from 52.8% to 54.8%.

CG/B, on the other hand, burdened with what seems like way too much cash, gave up a bit vs. its benchmark:

Performance as of 10/9/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	20.06 %	1.03 %	8.38 %	15.71 %	24.09 %	13.14 %
S&P/Bond 60-40	15.25 %	2.79 %	14.24 %	18.20 %	18.79 %	-1.98 %
Difference	4.81 %	-1.76 %	-5.86 %	-2.49 %	5.30 %	15.12 %

We are structured defensively and are paying the price over the past few months.  Still, in the past 15 months or so, we have picked up 15% vs the combination of stocks and bonds.

Conservative Growth/Balanced: New Position

We went back to the well, adding a name that we sold 12% higher back in May.  This is one that I really messed up on last year, so caveat emptor.  The company is very leveraged to agriculture, with GPS-based equipment that eliminates seed/pesticide waste.  The stock trades near 26.  22 is a better and maybe likely entry - let's start it here small and see if we can add there.  If you buy it, I bet it is the only South Dakota company that you own.  I didn't include a very interesting update in the research - they have a distribution agreement with Deere that should kick in next year. 

Q3 Review: Conservative Growth/Balanced

This quarter proved to be quite challenging to the CG/B model.  First, we were just too defensive, running the equity portion (60%) at pretty much the maximum cash position the entire quarter.  This cost the model close to 4% return.  Additionally, the kinds of stocks that are appropriate for this type of model generally lagged the market.  Here is what it looks like as of the close:

Performance as of 9/30/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	19.43 %	1.21 %	7.09 %	19.27 %	10.41 %	12.54 %
S&P/Bond 60-40	14.23 %	2.32 %	10.87 %	22.81 %	1.28 %	-2.85 %
Difference	5.19 %	-1.11 %	-3.78 %	-3.54 %	9.13 %	15.39 %

While we are still ahead over 5% YTD, which isn't bad considering we are supposed to be (and are) "conservative", our lead did drop from 8.5%.  The since-inception record of a 15.4% advantage fell from 17.5%. 

	CG/B	S&P 500	Difference	Q2 CG/B	Change
Energy	4.7%	11.7%	-7.0%	17.3%	-12.6%
Materials	0.0%	3.5%	-3.5%	0.0%	0.0%
Industrials	15.0%	10.3%	4.7%	15.6%	-0.6%
Consumer Discretionary	10.4%	9.2%	1.2%	6.9%	3.5%
Consumer Staples	22.1%	11.5%	10.6%	17.4%	4.7%
Health Care	21.4%	13.1%	8.3%	19.6%	1.8%
Financials	0.0%	15.3%	-15.3%	0.0%	0.0%
Information Technology	0.0%	18.6%	-18.6%	0.0%	0.0%
Telecommunications Services	0.0%	3.2%	-3.2%	0.0%	0.0%
Utilities	0.0%	3.7%	-3.7%	0.0%	0.0%
Cash	26.4%	0.0%	26.4%	23.3%	3.1%

In the table above (looking at just the stocks), you can see the large cash position, the huge underweights in Financials and Tech (very costly this quarter, especially Financials) and our overweights in the traditionally defensive Health and Consumer Staples sectors.  You can also see that we purged our Energy position dramatically over the past few months.

The overall portfolio is underweight stocks (we are just under our 45% minimum compared to 60% target) and somewhat underweight bonds as of earlier this month (27.5% compared to 40% target). 

While I am disappointed to have given up so much of our relative advantage, I am quite excited to see that we are accomplishing our goal of principal conservation.  The market has dropped a lot over the past 14 months since we launched, yet the model portfolio has increased in value.  I remain quite defensive for now.