Invest By Model

Miserable Week Sinks Month

This was a week like we haven't seen in a year, punctuated by political incompetence like we haven't seen in almost three years.  Hopefully Congress and the President can end this terrible game of chicken shortly.  Here is how we look as the first month of the second half of the year ended:

 
Top 20 lost ground this month and has had a very tough three months.  It's important to remember that the model had a strong run into the end of April.  Still, the model is trailing the market marginally this year.  For July, the model lost 2.61%, while the S&P 500 gave up 2.02%. 

CG/B lost a little ground too, but it continues to steadily outperform the stock/bond index.  For July, the model fell 0.91%, while the benchmark surrendered 0.58%.  YTD, the model is up a respectable 2.2% vs. the benchmark.

The pleasant surprise of the past few weeks has been the resurgence (finally) of Sector Selector ETF, which is now 0.5% ahead of the S&P 500 since we launched three months ago.  The improvement comes as Technology has outperformed the market and Emerging Markets have recovered.  For the month, the model fell 1.34% compared to the 2.02% decline in the S&P 500.

Outlook

While many believe that the weakness in stocks was due to the uncertainties out of Washington and the potential for a downgrade even if they get a deal, this week was all about earnings.  The earnings season got off to a great start, as the biggest companies (AAPL, GOOG, IBM and others) not only didn't cut guidance but ultimately boosted their outlooks.  This week, though, there were some misses that resulted in brutal reactions.  I checked this morning - 24 of the stocks in the S&P 500 were down in excess of 10% this week. 

As painful as this week was (and a reminder that the road has lots of curves), I don't believe that anything really changed technically.  While some charts were destroyed, several others look fantastic.  It's still a half-full/half-empty debate.  7 months into the year, the market is up 4%.  While this is a little behind where I expected we would be, the 20% return I have forecast is still attainable.

Articles

• Sell ESRX:  Seeking Alpha

 

Have a great weekend!

 

Alan Brochstein

www.InvestByModel.com

 

Trades in Top 20 and Sector Selector ETF

Top 20 was helped by a stunningly huge move today in one of our underwater positions, and we are going to take advantage of a large short-interest fueled rally to reduce the position from 8% to 4.5% roughly.  We are reinvesting a portion into one of our newer names that has pulled back recently, taking it from about 5% to abut 6.5%.  With so much volatility during earnings season, it makes sense to have some cash to be able to take advantage of any potential opportunities next week (goes from 1% to 3%).

On SSETF, we are trimming two ETFs to add to a sector of the market that has been hammered lately.  We had previously had no direct exposure due to my concerns that the sector was too expensive, especially relative to Technology. 

CG/B Trade

We are selling out the remaining position in the name we have been trimming to add back a Healthcare name that we had sold in April and May at higher prices.  The buy has a 33% return to my target a year out, while the sell is 20% to my raised target.  The sell is slightly overbought, and the buy is pretty oversold now.  The stock reacted very poorly to higher expenses that led to a slight reduction in the full year EPS guidance.  I think it's a great opportunity to get back into this high quality name.

Summer Rally Lifts Models

Despite an ugly start to the week and a lackluster end, the middle of the week rocked.  For the models, it meant higher valuations, but we had mixed performance.  The model that seems to be working the best, Conservative Growth/Balanced, fared the best, while the other two were essentially in line with their benchmarks:

 
Top 20 rose 2.13%, while the S&P 500 increased 2.22%. Our YTD lead remains a very modest .52%.  For the week, we had 4 stocks increase by 5%, but we also had 5 decline.  I was glad to see one of our better performers was the name we bought Monday.  One of our larger positions, which has been one of our worst performers this year, had a good week too.  The softness in the 5 losers wasn't related to any news with the exception of one company that reported, but I would note that 4 of the 5 are down year-to-date.  While I indicated at the beginning of the year that I thought this year would be more challenging for the model than the previous years due to the lack of exteme mispricings that were so rampant after the crash, I remain disappointed with where we are.  I have made a few mistakes this year, but I am mostly satisfied with our current positioning.  Looking back to how we performed from Labor Day last year into year-end, I am quite confident that we could meaningfully outperform the market over the next five months, though my original goal of beating the S&P 500 by 12% that I shared at year-end may be out of reach without a lot of luck.  Rather than manage to that goal, I continue to focus on positioning the portfolio for superior performance over a one-year period.

Conservative Growth/Balanced, which turned three this week, had a very strong performance in light of the sharp rally in the market that might have left it behind ordinarily.  CG/B rose 1.88%, while the stock/bond index increased 1.29%.  Here, we were helped by our underweight in bonds but also some strong stock performance.  While we did have one stock drop by almost 5% (the one to which we added on Friday), also had 4 increase by 5% (including the one we trimmed on Friday).  We were helped by Technology, including the name we added on Monday. I am pleased that we are outperforming the benchmark by 3.2% so far in 2011.

The Sector Selector ETF model, which is almost 3 months old, continues to tread water since the launch.  Here, we have been burdened by an early commitment to Financials as well as some slippage in Emerging Markets, while our high exposure to Technology has helped.  Otherwise, our structure has been alright.  For the week, the model increased 2.26%, slightly more than the S&P 500, with Financials and Technology leading the way.  Despite the slight performance drag over the past three months, I am optimistic about the prospects for the model.

Outlook

This week's action was constructive, with the NASDAQ continuing to lead the market and the NASDAQ-11 (the biggest stocks) actually breaking to new highs.  I continue to expect 1500 on the S&P 500 by year-end, with a likely momentum over the balance of the summer as well.  M&A activity remains strong, suggesting that we should continue to focus some of our attention on potential acquisition candidates among smaller and medium-sized companies.  One of the most encouraging things about this week was the tone of earnings reports.  While many have feared that companies might reduce their outlooks, the results have been generally strong and the outlooks have increased as frequently as decreased.  Companies seem to have addressed rising input price pressures from earlier this year and are navigating the soft demand reasonably well.

Articles

• Medical Devices Attractive - TradeKing
• Big REITs Beating Smaller Ones - Seeking Alpha

Have a nice weekend!

 

Alan Brochstein

www.InvestByModel.com

CG/B Trade

We are making an adjustment to the portfolio, selling (again) some of our position in the egg producer to add to our drugstore.  I have been very frustrated with the egg producer's stock.  Note that the company will report its earnings next week.  After jumping up when we bought it in November, it pulled back to our initial buy price (actually a bit lower), where it sat for six months.  All of the sudden it has taken off.  On the one hand, it smells like bacon with those eggs - I was premature to trim so far, and perhaps this is a mistake too (i.e. potential egg on my face).  On the other hand, it's really close to my target, which may be too conservative.  Rather than sell it all, we are retaining a portion because it's not especially expensive nor is it particularly overbought technically.  I can go either way on this - sell into strength or add back on weakness after they report their fiscal year-end.  For now, the trade is really being driven by the buy opportunity.

On the buy, we are replacing what we sold near 45 a month ago - the stock is below 40.  There are some near-term issues that could potentially turn into longer-term challenges, but I believe that the stock has overreacted.  In fact, the news today, which raises some fear of the problem getting a bit deeper, at least on the surface, is likely not being interpreted correctly.  The big acquistion today is likely to face FTC scrutiny, and the last thing they want to do is take hostile action in my opinion, as it could strengthen the case of opponents to the deal.  My target of 57.50, if achieved, would offer 45% price-return and a 2.2% dividend, while our sale looks to offer just 12% with a slightly higher but variable dividend.

CG/B just turned 3 yesterday.  Part of the reason why we have been able to achieve annualized returns above the benchmark in excess of 11% is risk-control through optimizations such as this.  I don't always get it right, but, with respect to this style, you can bet that I weigh risk and reward very carefully.  The return on the egg stock since our initital buy in November is about 22% before dividends - not bad.

Trades in CG/B and Top 20

As I had indicated, we are adding a new name to CG/B and selling one of our winners in Top 20 to buy something more attractive.  Both of our buys have a very strange commonality:  The CEOs both own well over $100mm of stock.  Both companies are in the top decile in my opinion in terms of quality too.  The buys also reflect my positive relative sentiment to Large-Caps.

In CG/B, we are selling the rest of a retailer we held for almost a year, booking a 75% gain.  While the stock may continue to appreciate, it is equally likely to see some profit-taking unless it surprises to the upside.  The risk/reward leaves it only minimally qualified for inclusion in the model.  We are taking the proceeds along with some excess cash to add to another retailer with a 3.2% dividend (the sale was a below-market 1.3%) as well as establish a new position in a semiconductor company with a whopping 4.3% dividend.  I may be early, but the recent pre-announcement was due to transitory issues rather than any long-term structural problems.  I have followed this company for over a decade - it is extremely high quality and less prone to earnings volatility than its peers.  The stock is oversold, sitting on some support and not too far from very deep support.  I am starting small and looking to add to the position once it has settled down.

In Top 20, we are selling a retailer that has performed quite nicely since we bought it earlier this year.  The stock may stall near its all-time high (from 2007), and it offers 25% upside to my one-year target.  While I had several candidates to consider, I decided to go back to a Healthcare name that we sold at slightly higher prices earlier this year.  The stock ran up sharply to an all-time high after we sold, but it has pulled back substantially though maintaining its uptrend.  I view the upside over the next year as about 50%.

Summer Rally Takes a Breather

After a lackluster post-4th-of-July week, the market saw more profit-taking this week, with the markets giving up about half of recent gains at the low point today before rallying to close down slightly.  Our models didn't fare very well during the week:

 
Top 20 lost 2.5%, about 0.45% worse than the S&P 500.  We had several names pull back in excess of 5%, but nothing was driven by news.  Smaller stocks were generally weaker than larger ones, which accounts for our performance short-fall.  Next week, our earnings reports begin.  We avoided a big plunge today in FLIR, which we had bought earlier this year at 29.57 and exited at 35.98 a couple of months ago.  Better to be lucky than smart!  While this has been a very challenging year, that was one good move.  For those not familiar with why we sold that stock, I refer you to the blog post.  Sometimes, it pays to be disciplined.  With that in mind, I anticipate that I will sell one of our positions that has moved to within 25% of its target over the next year.  I am considering several potential replacements.

CG/B fell 1.4%, while its benchmark lost a little over 1%.  Here, we had mixed performance as well.  One of our companies, a small bank, reported a nice quarter last night and rose over 6% this week.  On the other hand, we endured some big profit-taking in our largest position, which has been a solid performer so far this year.  CG/B turns 3 this week.  It has been a steady and strong performer, and I continue to think that this style is a great one for our slow-growth economy.  I have a name I am considering adding, but I need to think through the sell.

Sector Selector ETF struggled due to its heavy exposure to Financials, which continue to languish at best.  We had overcome a lot of headwinds to get performance back in line with the S&P 500, but we lost ground again this week.  While I am not pleased with the start to this new model, I am optimistic that it is structured properly and hopeful that we get back on track soon.

Market Outlook

I believe that we are in the middle of a summer rally despite that view not being widely held.  The rally began on the Thursday before options expiration (6/16), and it took a while to look solid.  This week looked like consolidation - certainly no major damage was done.  In fact, among the very largest companies, the action was good, with XOM, AAPL, IBM and CVX (the largest 4 stocks) all rising this week despite the market declining.  Big stocks look good - I urge you to check out the charts of the four I have mentioned as well as MSFT, which is finally bouncing, and JNJ, which is breaking to a 52-week high from a tight base.  There are certainly several large overhangs that continue to sap confidence, but a solid earnings season and the resolution of the debt-limit issue are likely to draw more buying.  For a taste of what a good report can do, check out the action on GOOG today. 

Articles

• NASDAQ Momentum Signals Summer Rally - Seeking Alpha
• Dividend Growth Stocks to Consider - TradeKing

Have a nice weekend!

 

Alan Brochstein

www.InvestByModel.com

All 3 Models Start July with a Surge

Despite the weakness today, July is off to an excellent start, with all of the models rising in value rather sharply and exceeding their benchmarks:

 
Top 20 rose 2.59% in the first 8 days of the month, well ahead of the S&P 500, which has increased by 1.83%.  While we had our first negative pre-announcement today (a RIMM supplier), most of our stocks have started the month quite well, with several up over 5%.  Earnings season will kick in beginning 7/20 for our names.  Top 20 is now ahead of the market for 2011 again.  You may recall that after a huge finish to 2010, we started the year sluggishly but surged into the end of April.  May was very challenging and led to a tough Q2, but we beat the market in June and are off to a good start early this month.

Conservative Growth/Balanced extended its consistently strong performance, rising 1.72% so far this month, about 0.4% better than the blend of stocks and bonds.  The model is 3% ahead of the market so far this year.  All but one of our stocks are up so far this month.  We continue to be close to fully invested (our max is 75% stocks), with bonds near their 10% minimum.

Sector Selector ETF launched at the end of April and has struggled with heavy exposure to Financials.  Still, the model has essentially tracked the S&P 500 after rallying 1.97% so far this month, about .15% better than the S&P 500.  I like the way we are positioned, having made the portfolio a little more aggressive during Q2 by selling out the Utilities and Healthcare.  We have a somewhat barbelled portfolio, with exposure to the largest and smallest stocks as well as some exposure to Emerging Markets. 

Outlook

While the economic data today was disappointing, I am rapidly becoming more optimistic about economic recovery.  I expect to see housing and employment trends improve over the balance of the year.  With respect to the market, several components have exceeded their April highs now, notably the NASDAQ 100 (large Growth companies) and Consumer Discretionary (we have a tilt in Sector Selector there).  As I look at the charts, things look quite constructive to me, reminiscent of the ways things looked after Labor Day last year.  I think that my recent contributions (see below) reinforce my view.

Articles

• S&P 500 Still on Track to 1500 - Seeking Alpha
• 10 Healthcare Dogs - Seeking Alpha
• Housing Stocks- TradeKing

Have a nice weekend!

 

Alan Brochstein

www.InvestByModel.com

CG/B Trade

We are adding a retailer to CG/B today.  I had added this to my Watchlist last month after they hiked their dividend substantially (yield is now 3.3%), but it ran up.  Yesterday, it retreated on some profit-taking and looks like a good entry, allowing us to diversify a little.  We are reducing two other positions and using a little bit of cash to fund the buy.  The company we are buying is operating well and is now adding new stores again.  My valuation expectation may be too aggressive, but 13PE and adding in the tremendous amount of cash yields a 50% price return, while our sells are in the 20s by my calcuation.

Trades for July 5th

In CG/B, where we are 75% invested in equities (our maximum, and well above the 60% targeted exposure), we are trimming an above-average name in terms of size that has improved substantially since we added to the position in mid-May.  The projected return of 25% over the next year suggests maintaining the stock, but a smaller position.

In Top 20, we are selling one retailer and trimming another to reestablish a position in a Large-Cap big-box store.  The buy is down a little YTD, while the sells are up 16% and 29% respectively.  The sells have expected returns of 26% and 31%, while the buy is 47%.  For those who care about taxes, I must apologize, as our sell, which is up 74% from our purchase price, goes LT for capital gains purposes in late August.  I remain optimistic on the name in the short-term in the event you choose to retain the position, and we continue to hold it in the CG/B model.