Invest By Model

Top 20 Trade

If you log in, you will see a new buy.  This is a company I visited last summer and have been following for quite some time.  For those of you who have been following for over a year, you may recall the quick gain we made on CyberSource.  This company is in the same space, but better in my view.  If you think e-commerce expansion is a trend that will continue to grow, then you will likely be glad that we are adding this name to the Top 20.  I said earlier this year that I need to be a bit more balanced after becoming a bit too "value" oriented - this is a very high quality growth story.

The sell is difficult.  We have a couple of stocks that I am almost ready to sell potentially, but I feel like they may have some good short-term upside.  I decided to reduce one of our Large-Cap Technology names and to eliminate our Large-Cap Health name (that finally started to work recently).  I view our buy as having 44% upside over the next year, while the trim has 38% and the sell is currently at 31%.  Both of the stocks we are selling are overbought, while the buy is slightly oversold after some selling following the earnings report last week.  I listened to the call and felt more comfortable than ever regarding the company's long-term outlook.  I think that the timing is excellent - the reported growth is going to be substantially better than it has been starting next quarter.  The monkeys will like this.  Allow me to explain...

The company was doing great in 2007 and even through 2008, but it had a 30% customer that was rumored to be going away.  In fact, the company announced in October 2009 that its mega-client would be leaving in 2010.  This loss has finally cycled through.  In the last quarter, the company's sales and earnings were essentially flat, but the underlying sales growth excluding the former client was 20%.  I think that people will start to appreciate the growth in the coming quarters.  Here's what I am talking about:

 
This quarter's reported growth rounded to -1%.  Before the customer loss, the company was growing smartly.  You can see how the maximum reduction took place two quarters ago.  The projections for the next four quarters are strongly positive, and I think that quantitative programs will like this (as stupid as this sounds, it's the way things work - don't ever believe in "efficient markets").

CG/B Trades

In Conservative Growth/Balanced, we are selling two Healthcare names and adding to a Consumer Discretionary name.  Both of the sells have done very well for us.  In fact, they are long-term gains, with each of these remaining pieces of formerly larger positions having been purchased near the beginning of 2010.  Each of them is technically challenging to me - they seem ahead of themselves.  My valuation suggests that they can return a little over 20% over the next year (excluding dividends), while our purchase should return in excess of 30%.  Our Healthcare exposure remains quite high in this model, even after the sales.  Our two names are probably both bigger than I would like them to be, but I am trying to ride the positive momentum a bit further before trimming them.  With our sale last week as well as this net reduction in exposure, we have built a little cash but remain highly exposed to stocks.  Our maximum is 75%, but we will decline to about 72% after the trades.

April: Another Great Month for Invest By Model

My title points to it being a great month, and it was for the models.  It was also a great month for the service.  We launched a new model for the first time since the summer of 2008, gained new subscribers, held on to most of our existing ones, and continued to make enhancements to our newly redesigned website.  We are as confident as ever as we approach our 3rd anniversary of the Top 20 launch later this month that we are all headed in the right direction with our service, which is designed to enable individual investors who prefer to direct their own investments to invest more confidently and enjoy superior investment performance at an affordable all-in cost.  Speaking of superior investment performance:

 
 

Top 20 had a good week, increasing 2.3% compared to the S&P 500 rallying 2%.  My marketing department suggested that just because I do this weekly doesn't mean I should just discuss changes only over the week.  In the spirit of this being a month-end, I will highlight that we had a fantastic month - 4.5% compared to 3% for the S&P 500.  The marketing department is calling - hold on.  Sorry.  Let's step back further.  The model is now up 14.5% YTD, which is almost 5.4% better than the S&P 500.  Over the past year, it's up a stunning 40.6%, 23% better than the S&P 500.  As I said before, we are about to turn three.  Most of those months have been good ones, but we started off in an abyss.  Since the launch, with dividends, the S&P 500 is up almost 6%.  Hey, that's more than most bank accounts have paid, but kind of paltry compared to the compound growth of Top 20:  + 113%.  OK, enough tooting the horn! 

Looking at this past month, I am pleased to have continued the strong performance.  The overall averages didn't favor small companies or companies classified as "value", so we overcame some headwinds since we have lots of those.  We did well mainly because of security selection and the fact that we were low in Energy exposure, which was a drag for the overall market.  It's just a month-end and not a quarter-end, so I won't spend too much time, but I will call out our biggest contributors:  JNJ and INTC, both up more than 10%.  We had many stocks up more than 5% too.  Only two stocks declined more than 5%.

Conservative Growth/Balanced had a good week too, improving 1.8% compared to the stock/bond index increasing 1.5%.  For the month of April, the model gained 3.75%, which was well ahead of the 2.3% stock/bond return.  Over the past year, the model is up 25.2%, which is almost double the 13.0% return of the benchmark, but let's not neglect to realize that it's up more than the S&P 500 by far (almost 8% better).  The model is less risky, but continues to return more.  Since inception, it has returned an annualized 12% above its benchmark.  The very strong month was mainly a function of the performance of our Healthcare stocks.

Next week, I will begin updating the SECTOR SELECTOR ETF model portfolio results.  FYI, our launch today enables us to have a complete month beginning in May.  I am sorry for the short-notice for those of you who might have wanted more than a few minutes to get on board! 

Outlook

Let me be frank:  There was no chance to change my outlook this week.  Between the two models, we had 6 of our 29 companies report, but the percentage of my watchlist was even greater (something like 30 out of 100).  I felt like an air traffic controller or a triage nurse.  Luckily not too much triage!  So, keeping it brief, I remain bullish.  We are slighly ahead of pace in my view, as the 9.1% S&P 500 return annualizes out more than the 20% or so I expect this year.  I am not too cautious in the near-term, but we still continue to have a lot of extended stocks.  I don't expect May to be as strong as April was and I see resistance at 1375 or so on the S&P 500 - not too far at all.  Not to worry - the models can perform well in quiet consolidating markets. 

Articles

• Negative on Energy (Seeking Alpha)
• EZPW Rocks (Seeking Alpha)

Live Webinar - Tuesday May 3rd at 5PM EST

    On Tuesday, I will be conducting an interactive webinar on TradeKing's website - please feel free to join us in my initial attempt at "talking" to investors.  The topic will be the exact same as the one I am presenting the following week at Money Show in Las Vegas:  Targets.  The time is 5PM EST, and here is the link if you care to listen live (register in advance).  There is also an archive that will be available a few days later - I will post that next week.

Have a nice weekend!

 

Alan Brochstein

www.InvestByModel.com

Sector Selector ETF Model Portfolio is Live

Effective 4/29, we are launching our third model portfolio, Sector Selector ETF Model Portfolio.  We are offering a free trial for 30 days, so please feel free to check it out yourself or to mention it to your friends, family and associates.

The goal of Sector Selector is to beat the S&P 500 using solely ETFs, primarily those representing various sectors of the market. The model may hold up to 25% in cash and must hold a minimum of 50% US equities. A maximum of 10% may be invested in each of the following: Commodity, High-Yield or Bond ETFs. A maximum of 20% may be invested in dollar-denominated Foreign Equity ETFs.

I expect that there will be many similarities to our other two models, but there are some substantial differences:

Similarities

• Same website - www.InvestByModel.com
• Same functionality - trade alerts, easy to figure position sizes
• Same Portfolio Manager - Alan Brochstein
• Diversification
• Performance focus
• Same thoughtful and persistent communication via the blog

Differences

• Fewer positions
• Less turnover
• Less research provided
• Lower subscription fee - just $10
• Lower overall cost (including commissions)

Before I share the initial model (which you can see on the website yourself), I want to explain why we are offering Sector Selector.  While I don't expect that anyone who subscribes to our stock-picking models will want to migrate, I do believe that this product will be something to apply to a different bucket, so to speak.  The Top 20 style or the Conservative/Growth Balanced style both have a lot of appeal - more than 10% of our subscribers choose both.  Still, I understand that there are many reasons why one might not want to put all of ones eggs in a single basket.  The ETF model offers a lot more diversification - no security risk.  It also gives me some additional flexibility not available in Top 20 with respect to using cash (25% maximum compared to 10%). 

Even if it doesn't appeal to those of you who already understand the value proposition and appreciate the performance, we are hopeful that it will open our whole portfolio model process and philosophy to a broader group of investors that might migrate over time to our stock-picking models.  We also avoid some of the crowding issues that might arise over time as we get larger - this model is much more scalable in that regard.

If the description above isn't clear, hopefully this explains what we will be doing.  My primary decision is to pick sectors of the market that have the most appeal and to adjust over time.  Since we are trying to beat the S&P 500, that opens up the possibility of choosing between various S&P 500 sectors (like the SPDR funds).  We can also choose to vary our market-cap exposure, shifting towards Mega-Caps or Small-Caps.  Finally, we have included a few other areas, with limited potential exposures, including commodities, bonds, high-yield, or international stocks (dollar-denominated though). 

I have shared some long-term goals for the other models in the past, suggesting that I aim for S&P 500 plus 12-20% for the Top 20 and a bit lower for CG/B (since we use bond ETFs and can't really add value in security selection on a large part of the portfolio).  For Sector Selector, my expectations are that we can beat the S&P 500 on a gross basis by 3-5% a year (including embedded ETF fees that typically are 0.2-0.3%).  To me, that type of performance over time would more than justify the price ($120 per year) for accounts larger than $25,000 (the math suggests possibly even lower, but it depends upon transaction costs). 

The initial model looks like this:

• PSCI - 5%
• XLG - 20%
• VWO - 15%
• XLK - 21%
• XLF 16.5%
• XLV - 7%
• XLY - 7.5%
• XLU - 5%
• Cash - 3%

So, let me tell you whatwe are trying to accomplish.  For those familiar with the structure of the other models, you will most likely detect a lot of consistency.  PSCI is Small-Cap Industrials - which are big in the Top 20.  XLG gets us the Mega-Cap exposure I have added to Top 20 and that is a great part of CG/B.  VWO gets us into a trade I like right now - Emerging Markets, which I expect can beat the S&P 500 over the balance of this year by 10-15%.  The other five ETFs represent the sectors.  We have exposure through XLG to all the sectors.  The balance is heavily weighted towards Technology (XLK) and Financials (XLF).  We have no Energy, Materials or Industrials and no Consumer Staples, and we have below-market exposure to Health (XLV) and Consumer Discretionary (XLY).  Utilities (XLU) account for the rest - a slight overweight that is designed to compensate for our lack of exposure to Telecom Services.

Let me know what you think!  We are excited about where we are headed, with ideas for an income model as well as a hedged model in the development phase.  We have received terrific feedback regarding our website redesign, which we continue to enhance.  So, please check out Sector Selector ETF Model and help us to spread the word.

Thanks,

 

Alan Brochstein

www.InvestByModel.com

Trades

We are slightly over our 75% maximum in stocks in CG/B thanks to strong stock performance, so we are trimming our largest position.  I am inclined to lighten up absent that catalyst, though.  For CG/B, we should always be careful on position size due to the mandate to preserve capital.  The position is still quite large, even after the trim.

We are also trimming that same name in Top 20 to buy another stock that is likely to be under pressure tomorrow after reporting today.  I am still bullish on this story over the longer term - it's just taking a little longer than I originally expected.  Thankfully, perfection isn't required to achieve the kind of success we have enjoyed.

Mighty Market Motors Past Monday Massacre

It was a short but sweet week, especially if you had some extra cash to spend on the open Monday (we did!).  As earnings season kicked off for us (6 of the 30 names in the models reported), I am happy to say we are off to an excellent start.  Here is how the models look today, which I thought was a pretty "Good Thursday":

 
Top 20, where we exited our first position since late February today, had an outstanding week, rising 2.6% and expanding its lead over the S&P 500 by 1.4% YTD.  We had a nice snag on IIIN Monday, as it was one of our strong reporting companies, but the strength was diverse.  INTC and JNJ were obviously big contributors (also both having reported), but there were many other companies that helped.  Of course, not everything worked, but no real disasters.

CG/B advanced a healthy 1.8% and expanded its lead over the 60/40 balanced index by almost 1%.  INTC and JNJ obviously helped a lot.  Now, if we could just get that other large Technology stock to kick in!

Market Outlook

This was an excellent test of the market early this week (on S&P watchlisting U.S. debt for a downgrade) that leaves me with conviction that we can continue this rally.  I have had some concerns about near-term congestion, but I haven't let that influence the portfolios.  The key thing to watch in my view remains interest rates.  Absent a very large increase, I still believe that we are on a path to 20% return for the S&P 500 (and a very modestly positive bond market return).  With the year almost 1/3 over, I find it interesting that the S&P 500 is exactly on track (actually slightly ahead, but the 6.95% includes dividends - the price return of 6.34% is almost exactly 20% divided by 3).  For the balanced index, I had projected about a 13% return for the year, and it is currently at 4.59%, perhaps a little ahead of where I expected due to bonds doing a bit better than expected.

Articles

• Gambling Equipment- TradeKing All-Star Blog
• Negative Short-Term on Energy - Seeking Alpha

I want to apologize for a technical problem today.  It all started with my oversleeping, but that's a whole other story and something I don't recommend during earnings season.  I wanted to sell the stock we sold in Top 20, but I was sorting through various potential replacements.  We have a 8:30 EST cut-off, and I got the trade in right about that time.  Our goal is to have the trades available well in advance of the market open, but I cut it too close.  Most subscribers did receive the alert before the open, but many didn't.  The emails were sent in time, but certain ISPs (mine included) are very slow to deliver these types of bulk messages.  In any event, there was no harm done fortunately, because the stock we were buying didn't budge all day, and the stock we sold rallied from the open for another 90 minutes or so.  While my focus is primarily on picking great stocks and managing the portfolio, delivering a great customer experience is very important to me too. 

After a tough start to the year, it appears that we will string together our third consecutive winning month.  As I said in early December, when we were sitting on top of the mountain looking down on our benchmarks, it's not in my DNA to rest on my laurels.  I don't believe we have stale positions or too many that are overdone to the upside, but I remain vigilant for opportunities to improve both portfolios.  My goal (shared on 1/1/11 here) remains to beat the S&P 500 by at least 12% this year and to beat the benchmark for CG/B by 7% or more (that would be a real feat if I am right about the direction of the market).  We are ahead of that pace for now in both models, and the only promise I make is to try my hardest.  While I don't have anything definite, I do want to share that I have added 5 or 6 new names to my watchlist recently and have several candidates that I deem worthy of consideration in the near-term. 

Happy Passover and Easter,

 

Alan Brochstein, CFA

www.InvestByModel.com

Top 20 Trade

We are exiting a position in a stock that has really befuddled me.  I honestly don't understand the huge reaction and find the upside to be limited.  On the flip side, we are adding an industrial that is in CG/B.  I spoke to the CFO yesterday and reconfirmed my understanding of the risks and opportunities.  While the stock has slightly below-average return to my target (about 35%), I feel like my target may in fact be conservative.  I was going to marginally increase the target of the stock we are selling.  At the current price, the upside is less than 20% and it has reached the point of being extremely overbought.

Trades in Both Models

We are using some available cash in both models to add to existing positions.  In Top 20, the name we are purchasing had gotten ahead of itself and we had trimmed it.  This purchase brings it back to a reasonable size position, though still below average.  The company reports on Thursday.  We will learn more about how well the integration of their recent acquisition is going and if there is any improvement in fundamentals (not likely).  The stock offers a 43% return if it hits my target a year from now.

In CG/B, we are adding to a recent new purchase in the Technology sector which also offers 43% price return if my target is achieved plus a dividend yield of 2.2%.  This trade leaves us at our maximum of 75% stocks.

Two Steps Forward...

After several strong weeks, both models paused during this options expiration week.  This is all the pre-season, as earnings reports start in earnest next week.  Here is how we are looking:

 
In the Top 20, the S&P 500 pulled back slightly, but we slipped by more. Our lead dropped from 4.59% to 3.53%.  We basically reversed out the strong performance last week.  It was a tough week for several of our Small-Cap holdings.

Conservative Growth/Balanced slipped very marginally, along with the market, with its lead contracting from 1.95% to 1.75%.  The portfolio is actually up MTD despite stocks being down and bonds being up just marginally. 

Market Update

We still have a divergence, with larger companies unable to penetrate the peaks from February.   Smaller companies were able to do so.  Same with Emerging Markets.  There has been a substantive shift in leadership lately, with Healthcare coming on strong.  Energy seems to have put in at least a short-term top.  All in all, I believe that we are still on track for 20% returns in the S&P 500 this year.  I had been concerned about some consolidation, but it seems like we are almost past it now.  I view this as a nice time to own stocks - good valuations, an improving economy and most likely continued exodus from bonds to stocks ahead.

Articles

• 10 Growth Stocks (TradeKing)
• Healthcare Momentum (Seeking Alpha)
• 12 Healthcare Stocks (Seeking Alpha)

I am considering several new names, but nothing appears imminent, as I remain satisfied with the holdings in both models and our overall portfolio structure.  We'll see if there are any changes after my review tomorrow.

Regards,

 

Alan Brochstein

www.InvestByModel.com

April's Off to a Good Start

Despite some turbulence today and yesterday, the month is off to a great start.  Before I go into the usual review of the weekly performance and my outlook, I want to take a moment to discuss today's trades.  In CG/B, we had a position that has gotten much closer to its target price and was too big in my view relative to the opportunity.  The stock is a bit overbought and close to resistance.  With that said, we kept the majority.  In Top 20, we shed a piece of one of our best stocks.  What we sold today was the second purchase (as of last night's close, it was up 26% in just four weeks).  Our original position was up 62% since 12/3.  The stock returns about 32% over the next year if it hits my target, which is well below the average.  It is also quite overbought and due for some potential backfill.  With that said, I don't expect it to give up much.  Our buy would return 46% or so to my one-year target if attained.  Hopefully that explains the trades.  Here is how we look performance-wise:

 

Top 20 is ahead of its benchmark by 4.59% YTD and is up 1.1% MTD compared to the S&P 500's gain of just 0.25%.  We have been helped by surprisingly robust performance still by our smaller companies - the Russell 2000 is actually down a little MTD now.  We also got a boost from our emerging markets ETF as well as a certain Large-Cap Technology company finally bouncing, at least a little.

CG/B is ahead of its benchmark by almost 2% and is up .48% MTD compared to the blended index being essentially flat.  Bonds, which we are significantly underweight, are down on the month and benefiting us.  After the trade today, we are about 73% in stocks, just under the maximum and well ahead of "normal" 60% exposure, while bonds are at about 21.3% and cash is now at 5.7%. 

Outlook

I feel like a broken record, but, for the benefit of those new to the service, I continue to believe that we end the year near 1500 on the S&P 500 as PE ratios expand modestly.  While the dip in March was most likely the bulk of the near-term consolidation I was expecting, I think that many stocks are still extended.  This is an environment ripe for a change in leadership.  I am expecting Energy and Industrials to make room for Financials and Technology to get back in the race.  The M&A activity remains quite robust, which suggests we keep our focus on smaller companies despite the overall Small-Cap index being a bit ahead of itself.  One of the big focuses in coming months will be the Fed Policy.  The market could get nervous about interest rates, but I expect longer-rates to be stable to only slightly higher. 

Update on My Own Analyst 

Some of you have been asking me about the new service, which is now a little over 5-weeks old and going well I believe.  We were able to keep the vast majority of our initial subscribers and continue to refine the offering.  If you trade around your positions or are interested in trading stocks off my watchlist or that are interesting due to sharp changes in the price, it might be for you.  For more info, check out the new  My Own Analyst Brochure

Articles

• Seeking Alpha:  Boost Technology and Cut Energy
• Seeking Alpha:  GNI is Outrageously Overpriced
• Seeking Alpha:  Pepsi over Coke
• Trade King:  Big Cap Technology is Attractive (27 names)

Speaking of TradeKing, I will be hosting a live webinar on Tuesday, May 3rd in the evening.  The topic is "How to create and use target prices", a similar presentation to what I will deliver in Las Vegas on May 11th at the Money Show.  I will send out details regarding accessing the event as soon as they are available.

Regards,

 

Alan Brochstein

www.InvestByModel.com