Invest By Model

1 Down, 3 to Go

It wasn't easy, and it wasn't always obvious, but when it was all said and done, we beat our benchmarks handily this quarter, extending the superior performance record in both models.  I will have a full review tomorrow, when I will share my review of performance and my outlook in my usual weekly format.

As I think about highlights (and lowlights) from this past quarter, I am reminded about what it means to have a PORTFOLIO.  If you had told me three months ago that one of our largest names in the Top 20 would lose 1/4 of its value and another name would decline by 10% or so, I might have predicted an inferior quarter.  Yet, somehow, we prevailed.  If you told me that Energy would be the big winner and that we would be underexposed (as we were), I might have predicted an inferior quarter.  Yet we prevailed.  Similarly, in Top 20 and in CG/B, we are saddled with three big stocks that are like  a ball and chain around our ankles, yet we prevailed.  This quarter was a reminder that not everything has to work as long as most things are working or some things are working fantastically.

The numbers aren't final, so I will be approximate, but we were up almost 10% in Top 20.  The S&P 500 returned a very healthy 5.9% including dividends - it looks, so far at least, like we are on track to achieve my prediction of attaining 1500 on the S&P 500 later this year.  As I described on New Year's Day, I hope over the long-haul to beat the S&P 500 by 12-20% per year, and I remain confident that we are on track, though this quarter ended up being closer to the low-end.  I will update the exact number tomorrow, but if each stock in our portfolio were to achieve its target price over the next year, the portfolio would increase approximately 45%. 

For CG/B, we did have the interest-rate call right, as bonds had their worst quarter in over a year (but not so bad - better than cash actually).  I had warned that it would be difficult potentially in a rallying market for conservative stocks to keep up.  It looks like our stock/bond portfolio will end up just shy of the S&P 500 (almost all the return with a lot less risk assumed in my view) and well ahead of the hybrid index ( about 1.5%).  I will discuss this more tomorrow, but I like our portfolio and feel like we can achieve the types of returns I described at year-end (I stated that if stocks rise 20%, I hope to be able to see CG/B equal that rise despite having the bond exposure weighing down returns). 

As always, thanks for your continued confidence!

 

Alan Brochstein

www.InvestByModel.com

My Own Analyst - Free Look

Thursday completes the first month of My Own Analyst as a subscription-based blog.  It's still a work in progress, but I encourage you to check it out over the next two days to see what it's all about.  With earnings reports on several holdings in the models due, April will prove to be a great time to subscribe to this additional service if you want:

• Timely additional information on the holdings in the model
• Access to information on the other names on my Watchlist
• Other ideas as they come up (check out the "Trash or Treasure" section, for instance)
• Answers to your questions

March has been a great month for InvestByModel.  Not only did we unveil the new website (thanks for your patience!), but we are nearing 100 subscribers.  More importantly, the performance is holding up!  Please keep your ideas coming as far as features you would like to see.  What can we do better?  One new feature that we are working on is to provide more timely information on our holdings via the website.  I hope to internalize this blog onto the website so that I can be more open regarding our holdings.

As always, thank you for your confidence and continued patronage.

Regards,

 

Alan Brochstein

www.InvestByModel.com

Trades in Top 20

We are trimming a small-cap that has had a nice run, cutting the position to slightly below average, as it is somewhat overbought and offers 36% to my target.  While I still like the stock, it's not as attractive as some of our other smaller names.  The stock is up over 55% since we started buying it in late October and certainly offers a testimonial about how we can make money investing in a very mundane company by buying it dirt-cheap and out of favor with other investors.  We are also trimming our Energy name because it is somewhat overbought and offering less than 30% upside to my recently increased target.  This stock is up over 40% since our initial buy in August and has turned out to be a good stock, even if it didn't feel like it along the way. 

On the buys, we are adding to a Mega-Cap Healthcare name that has been below average in weighting and is WAY out of favor.  I view it as having 40% upside over the next year, but that's what I said last year!  The other add is an average-sized name we are making one of our larger names.  The stock was hit most likely due to concerns over RIMM and offers over 50% to my target.  Like that first one  mentioned that we are selling, "dirt-cheap and out of favor".

After the trades, here are some descriptive features of the Top 20:

On Market-Cap, 27% of the portfolio is >$10 billion, 19% is between $1 billion and $10 billion, and 54% is below $1 billion.  As far as names, the breakdown is 25%, 25% and 50%, respectively.  Since the beginning of the year, we have increased the allocations to >$10 billion and <$1 billion by 3% and 10% and reduced the exposure to the stocks between $1 billion and $10 billion by 13%.

As far as sectors, we are now 30% Industrials, 30% Technology, 15% Consumer Discretionary, 13% Healthcare, 6% Financials, 3% Emerging Markets and 2% Energy.  This compares to 33% Industrials, 28% Technology, about 9-10% each for Financials, Healthcare and Consumer Discretionary, and 5% each for Energy and Materials at year-end. 

This will probably be the last trades of the quarter.  We will likely end up having added 5 new names.  According to my data, repositioning the portfolio throughout the quarter has provided a benefit to our return.  In fact, I believe that the portfolio at year-end would be up about in line with the market, making it appear that the trading has been justified.

 

Top 20 Surges, CG/B Keeps Pace

What a crazy month!  The market bounced nicely, and I was quite pleased with both models, especially Top 20 and especially today.  Here is what it looks like with just 4 days left in Q1:

 

Last week, we were down in Top 20 relative to the S&P 500 by 0.46%, so this was a huge swing.  The S&P 500 rose 2.72%, while Top 20 rose 5.19%.  Nice!  We aren't too far from the peak set in late February.  The reason for the strong performance was predominantly random moves in some of our beat-up smaller names.  Kind of the opposite of why the previous week was so challenging. 

CG/B, which doesn't have too many of those Small-Cap names, kept pace, preserving its spread over its index of stocks/bonds.  It's even closer to the high set in late February.

Market Outlook

No change - Bullish LT (S&P 1500 by year-end).  While I had been cautious for technical reasons, I am less so now.  With that said, the levels I discussed last week are still valid, as I see very strong support between 1220 and 1250, but that's farther down now!  Stock-picking is 90% of what I do anyway, so whether or not we get that pullback, it's not likely to influence my portfolio construction.  I intend to stay focused on my thesis of multiple expansion among Large-Caps as the primary driver of stocks.

Articles

Three on Seeking Alpha:

• Bullish on Financials
• Bull Market is Intact
• Large-Cap over Small-Cap

One from TradeKing:  Utilities

 

We did several trades in CG/B on Thursday, and I am likely not going to make any adjustments.  In Top 20, I believe that I have one trade that we will be implementing, but I will invest my four hours reviewing my entire watchlist and our holdings tomorrow to see what else might make sense.

Have a great weekend!

 

Alan Brochstein

www.InvestByModel.com

Rebalancing in CG/B

We are implementing 2 sells and 2 buys, all partial trades.  We are reducing our largest position, which has performed well and remains relatively attractive (at 33% return to my target), but it is overbought and somewhat extended.  We are also reducing one of our smaller positions that has held in well lately but offers only 20% to the target.  The adds are to a Consumers Staple company that offers 37% to the target and a Healthcare company that offers 30%.  The Healthcare company is somewhat oversold at the moment and I am making this one perhaps a little larger than the return to target alone might suggest.

Top 20 Industrial Swap

After a lot of contemplation, we have just a single trade to do Monday, though I am monitoring several other potential changes.  The trade we are doing is simply taking profits on one of our Small-Cap Industrial holdings to take advantage of one that is oversold.  I have updated my targets, and our sell is very attractive, offering 47% to my target over the next year.  The buy, though, offers over 100% potentially. The new target is a discount to tangible book value and also a function of what I expect EPS to be two years out.  The trade leaves our sell at about an average position, while our buy goes to above average.

Top 20 Struggles, Conservative Growth/Balanced Shines

The performance of the models went in opposite directions this week, as our Small-Cap deep-value plays in Top 20 were under pressure.   This was a very challenging week, forcing me to send out a rare mid-week message, with turmoil in the markets from Japan on top of a big options expiration today.  Here is how we look, with 9 trading days left this quarter:

 

Top 20 suffered a big hit on the week, with one large position's decline accounting for more than all of the underperformance.  We are now down YTD relative to the S&P 500 modestly.  Last week, our YTD return advantage was 0.91%  A decline of over 20% in an above-average position is a reason though not an excuse.  Looking at the other names, we were also under pressure this week in some other smaller names.  Fortunately, we had one name skyrocket.

As a reminder, while it would be nice if every stock in the model worked well and all the time, that's not a realistic goal.  When we have a portfolio, we are bringing different types of securities to the game.  Whether they are big or small, growth or value, cyclical or non-cyclical, each stock plays a role.  We have been fortunate over the past few years to be able to get out of mistakes when necessary - I offer ORN and ABFS as prime examples.  Just because a stock goes down, it's not a buy.  But, it's also not an automatic sell.  When the market tells us we are wrong, at least temporarily, we must reconsider all of our information.  Even then, we won't always get it right. 

Switching to a more favorable topic, CG/B fell very slightly this week and was able to pick up ground compared to the index of stocks and bonds.   Last week, our lead was 0.2%, but we were able to increase it to 0.65% despite being underweight bonds (which rose) and overweight stocks (which fell).  Our smallest company had a nice report and  rallied on the week.  Our biggest holding and our biggest company was also up on the week.  We continue to get punished by our allocation to Large-Cap Technology.

I don't expect to make any changes to CG/B on Monday, but I have several trades in mind for Top 20.  Most likely, we will be trading among the existing holdings, but I am also considering a new name as well.  I am inclined to add to a couple of our deep-value names despite the struggles we have been enduring.  I will post any changes tomorrow and share my thinking.

Market Outlook

This week was a big test, but I am not sure it's over.  I had hoped that the S&P 500 would stay green for the year.  While it ended up that way, it briefly violated the 1257.64 level.  Small-Caps had a similar dynamic.  As I look at the market from a technical perspective, it can certainly go lower without calling into question the big rally from Labor Day.  I see support near 1240, but it wouldn't surprise me to see a test of 1220-1230 develop.  1220 was the peak last April.  If the market were to pull back to 1220, it would amount to less than a "correction", which is typically defined as 10-20%.  From our February peak, this would be a little over 9%.  It would also be very close to the 38% Fibonacci Retracement from the 1010 low over the summer to that 1344 peak (1217). 

I remain bullish, with no change in my outlook for about 20% returns this year.  A few weeks ago, we were well ahead of the pace, and I warned that we might get some consolidation.  I didn't really do much about it, and, quite frankly, the pullback has been a little greater than I expected (they always are!).  At this point, I believe that the pullback is likely slightly more or considerably more than 1/2 over (1344 to 1279, with a shot at 1220 but hopefully 1240 or last week's 1249).  Encouragingly, I believe that this move has purged the market of some risks of high sentiment and extended chart patterns.

Articles

• Retail Buyout Targets

New Website

As you are probably aware, we launched the new website last weekend.  I know that a few of you had some glitches, but I believe we were able to rectify any issues that arose.  There will more features added in the coming days, and I will alert you as they become functional.  One that I believe is live is an "Export to Excel" button that many of you had sought.  We have received some favorable feedback.  If you have anything to share, please let me know.

Have a great weekend!

 

Alan Brochstein

www.InvestByModel.com

Invest By Model Update

With the markets under pressure and concerns heightened, I wanted to share my thoughts about the two models.  After a rough start to the quarter for both models, with each lagging the rallying market, we had finally had very strong performance into early March and even as four trading days ago.  I am disappointed to see that we are essentially in line with our respective benchmarks after a tough few days.

The first thing I would like to discuss is my market outlook.  I remain bullish.  For those who fear that  I am always bullish, allow me to remind you of my views in 2007 and early 2008.  I did get bullish a bit early, no doubt, and looked quite foolish in late 2008 and early 2009, but I don't have a natural bias.  I try to call them like I see them.

I have been concerned that we could see some consolidation - I have been discussing this for the past few weeks.  With that said, I didn't forecast a meltdown (pun intended) in Japan as being a catalyst and don't look to reduce my burden for properly positioning in the Conservative Growth/Balanced (where we are invested at our maximum amount in equities).  As a reminder, I try to share my insight (for those who care) and to certainly adjust our holdings in Top 20 to take into account my expectations for the market, but we are always fully invested there by design. 

I remain bullish, with a forecast of 1500 on the S&P 500 later this year - that's just 15X projected 2011 earnings and even lower on 2010.  I had initially projected that level last October, expecting earnings of about $93 and, conservatively, $100 for 2012.  As it stands now, the forecast is $96 now for 2011 - so we have "room".  The impact of Japan, presumably, may be to raise our interest rates slightly while at the same time lower our export growth marginally.  It's very premature, but these shouldn't be significant in my view, especially on the interest rate side.  The though there is that Japan will need to sell bonds to rebuild.  These slight negatives also don't incorporate the positive of risk number 1 in the popular press lately - rising commodities.  The CRB index has declined sharply since peaking at almost 363 8 days ago (now 338).  All in all, this is a horrible situation for Japan, but it most likely isn't something that will impede the economic recovery globally.  In the short-run, I am watching the performance of smaller companies relative to larger ones for signs of liquidity issues as well as corporate bond spreads (no problem so far).

I trust, though, that you subscribe to the models not for my market call, since you know I don't have a crystal ball, but rather for my stock-picking.  Folks, it's usually better than this!  We have our ups and downs - nothing ever is a straight-line.  In Top 20, I had a stock really disappoint, and I apologize.  We had a nice run with it after we bought it a year ago but didn't sell when it was very profitable (like I tended to do on too many others that kept  going up!).  Until recently, it was just not a good stock, but, since the sudden CEO departure last week, it has become a bad stock.  It's just one out of twenty and, while larger than average, was certainly not devastating to our overall portfolio, but I am, as I said, disappointed.  I am taking no action yet - it's a very thin stock.  Quite frankly, I am perplexed as to why someone would sell it today.  I don't have the confidence to add and am reconsidering my target (which has been 25).  I think we could have a more graceful exit.  It might even prove to conform to my original expectations, just a bit later than I expected.  Bottom-line, I am not neglecting it.

On CG/B, one issue that stands out is our heavy weighting to Big-Cap Technology.  We had been doing well with names like TXN and then XLNX, but the ones we own now (and in Top 20) are really not working for now.  I am evaluating my thinking on these names and will probably need to reconsider them if they don't bounce shortly, as they are large positions.  Let's just say that I have put them both in the penalty box (but it's not that hard to get out).

I worked for years for a firm that managed money, and we would get a few calls on days like today.  It's not efficient for me to call each and every one of you, obviously, but I wanted to take a few moments to let you know that while things are scary in the world at the moment, I am double-checking my thinking and making sure that I am properly incorporating these shocking developments over the past few days.  As I mentioned to subscribers on My Own Analyst early this morning, I would like to see the market hold above its year-end close of 1257.  If not, things might become a little more challenging.

Thank you for your continued confidence.

 

Sincerely,

 

Alan Brochstein

www.InvestByModel.com

CG/B Trades

We have a few small trades for Conservative Growth/Balanced:

• Trim Consumer Discretionary name that is up since we added recently and not sits against resistance wtih 26% upside to my target
• Add to Consumer Staples name that reports later this month.  It's our smallest name, offers 29% to the target and has corrected its technical overbought condition.  We had trimmed recently at a higher price
• Add to Technology name to make it our largest.  It's near support and offers 51% return to my target

These are really just tweaks as we optimize the portfolio.  We are using a little cash and now will be again "fully" invested at 75% stocks, 22% bonds and 3% cash.  As a reminder, our bonds are skewed towards mortgages, reducing our interest rate exposure relative to the benchmark (at least for a moderate rise in rates).

New Website is Live

My friends at Rainbox Holdings, who are responsible for the website, unveiled the long-awaited new version last night.  I think that subscribers will immediately appreciate the new look and functionality that has been added.  There are still some features to come, but I want to share the major changes thus far:

• Enhanced Performance Information
• Improved Highlighting of Pending Trades
• Upgraded Payment Processing through Authorize.Net

One of the first things you will notice is the performance chart, which allows you to see how the models have performed over time.  Not only can you see the absolute growth of the portfolio, but you can also see how it has done relative to its benchmark (S&P 500 for the Top 20 and a blend of S&P 500 and Barclays Aggregate Bond Index for Conservative Growth/Balanced).  Additionally, you can customize periods in the bottom panel to see how the models performed over shorter periods of time.  Also, we have added annual performance data and will soon be adding quarterly in tabular form.

The color coding for buys and sells is much clearer now.  Additionally, we have added arrows in case anyone might be color-blind! 

On payments, we now take Discover in addition to Visa, Mastercard and debit cards.  Additionally, our international subscribers can now subscribe directly to the website (yes, we have several that we have had to manually process).  We continue to use Authorize.Net, a leading provider of credit card processing services to smaller organizations, but all of the data for recurring billing will reside on their server rather than ours.  Some of you might remember Authorize.Net, as they were owned by CyberSource, a stock we bought in Top 20 just weeks before they were acquired by Visa last year.  You can be even more confident in Invest By Model as an e-commerce merchant knowing that we are an Authorize.Net Verified Merchant.

There are some other great features - I encourage you to spend some time on the website.  We will follow up with some details about these other benefits later when Rainbox finishes adding them.  One that I know many of you will appreciate is the addition of a print button and an export to excel button.  Those are two of the many little tweaks that I hope will make everyone even happier with the service.

Please let me know what you think, and stay tuned for more updates soon.

 

Alan Brochstein

www.InvestByModel.com