The best thing I can say about this past month is that it ended. Actually, I can say that thankfully it wasn't as bad as last May. Will someone remind me to be careful next May?
Here is how the models look:
Top 20 retook the lead over the S&P 500 due to some very strong action on a few names on the last day of the month. After an exceptionally strong April, May was quite disappointing. Some of this poor performance was just a function of what was going on in the market (very weak performance by the smallest stocks), but clearly I have picked a few bad stocks this year. Of the 20 stocks we currently own, one was acquired during the month and trades 2% above our purchase price. The one we sold was up at the time (FLIR). Of the other 19:
- 2 fell more than 20%, including our biotech - this is just bad stock-picking
- 2 of our stocks that had been winners and are still up year-to-date fell 14-15% - ouch
- 5 stocks fell between 5 and 10% - these were smaller companies and, with the exception of one, seem to be doing just fine
- 2 Large-Cap Tech names fell 3-4% (slightly worse than the market)
- Our Emerging Market ETF fell 3%, slightly worse than the market
- 2 Small-Caps closed down slightly, faring a bit better than Small-Caps generally after very large increases on the last day of the month
- A Small Tech stock was unch - this was nice
- Our Large-cap Financial was up slightly - good stock picking there (thanks for the upgrade, Merrill!).
- Two of our beaten-down Small-Caps actually rallied on the month (mean reversion)
- Finally, we have a retailer that was up 3%, bucking the trend.
When we have 9 stocks down more than 5%, we aren't likely to do well, and that was the case. Our overall portfolio on a share-weighted basis offers about 55% to my target prices, so I am optimistic. This isn't the first time we have had a really weak relative performance, and it likely won't be the last. I manage the model for a one-year time-frame, and sometimes the returns can be wildly different from what the market does in a given month. Fortunately, that usually means a lot better.
CG/B lagged the market only slightly during the month. Here, the issue was a little bit of Small-Cap penalty, but also the fact that we are underweight bonds, which performed well. We had weak performance from 3 names, including a semiconductor equipment maker, a small bank and a large retailer. On the other hand, 6 of our 13 stocks actually increased on the month.
Finally, Sector Selector ETF didn't have such a great first month. While I got some things right, like avoiding Energy and Materials, three of the largest exposures (Mega-Caps, Financials and Emerging Markets) didn't help. We kept it somewhat close with some smaller but correct bets on Healthcare and Utilities, while the large Technology bet was neutral.
As always, thank you for entrusting me. I always work hard and give it my best, but things don't always play out the way I expect. While I saw some rotation potential in May (especially in Energy) and was cognizant that the market hadn't closed down since last August on a monthly basis, I was a bit surprised with how poorly smaller stocks fared. It wouldn't have been practical to jettison all of our names, even if I had known, as I view the recent action as short-term in nature. I believe that we remain on a solid path and hope to see our relative performance pick up again in the very near future.
Regards,
Alan Brochstein, CFA
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