We are closing a position in CG/B today. I had mentioned last week when we trimmed it to add to two other positions that I might do so on further strength. At last night's close, the stock offered just 21% to my one-year target, which is the lowest by far of any stock in the model. It is also somewhat overbought. Perhaps more importantly, I am concerned that it has gotten a bit too aggressive on its balance sheet, increasing its borrowings to fund even more share repurchases. With the sale, the equity position falls to about 70% of the model, still well above the 60% benchmark.
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November 2011
November 30, 2011
November 26, 2011
From Rally to Rolling Over
In what was the worst Thanksgiving week since 1932, the models all performed quite poorly:
Top 20 had an exceptionally weak showing, declining in value by 8.5% compared to a a 4.66% decline in the S&P 500. For the quarter, it has now underperformed by 5.1%, declining 2.3% compared to the S&P 500 improving by 2.8%. 7 stocks declined by more than 10% during the week, with only one related to news (a weak earnings report and outlook). Small-Caps were particularly weak this week, declining by almost 3% more than the S&P 500, our weakness this week, month and quarter can't be attributed solely to our exposure to smaller companies. Sticking with a few beaten up names has proven very costly. Another theme is that any company with exposure to military spending has been hurtful - we have three names that fall into that category. While I realize that performance ebbs and flows and can appreciate that there is a certain amount of randomness, I have to admit to being more perplexed than ever in my career regarding the issues currently impacting the recent performance of the stocks in the model.
I want to update some characteristics of the overall portfolio. Currently, just 6 of the 20 stocks have more debt than cash. The typical stock trades at just 1.7X its tangible book value, which is a discount to the overall market. On a PE basis, 14 names trade below 14PE on a forward basis, and the median is below 11.
Conservative Growth/Balanced lost 4.38% compared to the 60/40 stock/bond decline of 2.7%. For the quarter, it has lagged its index by 0.7% but is still up in value. Our exposure to stocks has been somewhat hurtful this month, but it continues to be a positive for the quarter as stocks are up while bonds are close to unchanged. For the week, one stock declined by more than 10% (the same stock that reported weak earnings and outlook for Top 20).
Sector Selector ETF declined 6.11%, which was 1.44% worse than the S&P 500. For the quarter, it remains slightly ahead of the market. Small-Cap exposure was the primary cause of the poor showing during the week, but it is also the reason the model is beating the S&P 500 so far this quarter. Our large exposure to Financials, which had helped october, is proving to be hurtful in November. Emerging Markets too had a rough week but are ahead of the market so far in Q4.
Outlook
The rally that began in early October is now clearly at risk. The market closed near a level that I consider the last likely support level before we risk moving back to the lows or even beyond. The dynamic of a binary event continues to play out, as the market is focused almost exclusively on what's going on with Europe. This week, we saw continued high rates for Italy and Spain but also pressure on France and Germany. The European Monetary Union is increasingly looking like it will be unsustainable, and no one knows how the unwinding will play out. The banking system there remains quite fragile, and the risks of contagion to other parts of the global economy are unknown but potentially deep.
While I have focused on stabilization and even improvement in our economy in conjunction with extremely low valuations in my view, it's quite possible that the European financial crisis could lead to economic weakness as well as chaos in the financial markets. With this in mind, while I am not ready to pull the trigger quite yet, I intend to reduce exposure in CG/B and SSETF in the coming days if we take out support. Through the challenges this year as well as during the summer of 2010, I have remained focused on a more bullish longer-term view, and it has served the models well (at least through the end of October), but I think that a technical breakdown here could signal more of a 2008-style type of action.
Predicting Armageddon isn't an easy game, and I am not quite there yet, but I have to admit concern that even the "safety" trades are no longer working. For instance, gold, which typically has rallied when stocks have been weak with volatility rising, has rolled over and is acting more like a correlated asset. U.S. Treasury bonds too have typically rallied during a week like we just experienced, but the 10-yr note increased only marginally last week. It's no wonder - we are in a debt crisis where now government debt is viewed suspiciously, like a house of cards. AAA-rated Germany is seeing rates rise now. In my view, U.S. Treasuries are a horrible investment at current levels. Looking at safer sectors in the U.S., like Utilities (down 3.5% last week) or Telecom (down 4.4% last week), it is clear that there is nowhere to hide. In fact, these two sectors are down in Q4 despite stocks in general being up.
I don't mean to inspire fear (as if everyone isn't already fearful), and, to repeat, I am not quite ready to adopt a strongly bearish view dominated by deteriorating technicals. 6 of the 10 economic sectors in the S&P 500 are still up in Q4, with Health and Finanicials down just marginally along with Utilities (and Telecomm more substantively). In my own technical work, 99 of 100 stocks on my watchlist closed below their 10-day moving average on Friday, which is a rather extreme characterization typically associated with at least a bounce. I also believe that tax-loss selling, which typically takes place well into December, has played a role (and may explain some of the insane price action in a few Top 20 names). In the past few years, institutions have moved up the repositioning of their portfolios into November. The five down months that preceded October's big gain saw strong closes to the month, so it will be interesting to see how the next few days play out.
Articles
Regards,
Alan Brochstein
November 20, 2011
November 19, 2011
Everyone is Fiddling While Rome is Burning
The market continued to struggle this week, caught up in ongoing European politics and awaiting the Super Committee report next week. Here is how the models look as of 11/18:
Top 20 had a rough week, declining 5.38% compared to a 3.75% decline for the S&P 500. Weakness was widespread but rather random. One of the stocks we increased early in the week actually rallied during the week, while the other was one of the worst performers. After a modest recovery in relative performance in October, the model is lagging 1.03% in the 4th quarter.
Conservative Growth/Balanced gave up a little ground, declining about 3% compared to the 2.24% decline in the stock/bond index. Again, there were wide divergences in performance, with two stocks rallying but some intense weakness in several others. In two cases, news drove the declines, with the worst performing stock reporting a disappointing near-term outlook when they released earnings. Additionally, our heavy exposure to stocks compared to the benchmark contributed to some of the underperformance. So far in Q4, the model has outperformed its benchmark by 1.12%.
Sector Selector ETF slightly underperformed, declining 3.98% vs. 3.75% for the S&P 500. Our two largest holdings were the weakest performers (Financials and Emerging Markets). Shedding Energy at the beginning of the week proved to be a good move in the short-term, as it was the worst performing sector of the week.
Outlook
Risk levels remain quite high for the market due to uncertainty about how the European debt crisis plays out. This week, Italian and Spanish bonds struggled , with rates stubbornly at decade-high levels near 7%. Stocks fell moderately, again having a really bad day (Thursday), though it wasn't as bad as the prior Wednesday. Somewhat disturbingly, it is becoming clear that there is nowhere to hide, with commodities (including gold) declining and bonds retreating somewhat after strong gains early in the week.
This coming week could see a change to the very tight, consolidating action since late October. We have retraced less than half of the move from the lows to the highs of that month, which seems normal. Pessimism abounds, not surprisingly, regarding the political will of Germany and France to take more aggessive action and the ability of Congress to put forth a "bold" plan (or even a not-so-bold one). Maybe we get lucky and have something to celebrate on either of these fronts at Thanksgiving.
I have to admit concern, primarily because the high interest rates in Italy and Spain signal a potential financial crisis ahead. The Euro has remained relatively calm, for now, but this is likely a technical condition due to repatriation. The equivalent of our Federal Reserve, the European Central Bank (ECB), meets next week, and, absent some aggressive action (following a recent reduction in rates), we could see the crisis overseas accelerate.
I am looking forward to getting past these near-term challenges, which are more about uncertainty rather than some certain negative outcome. I shared my optismism recently about stocks for the next year, but I certainly don't expect the market to rally every day or even week. Still, I view the market as a coiled spring. A removal of the near-term risks to the global financial system shoud lead to a very strong rally. While I continue to expect a strong close to this year as well, the uncertainty of near-term geopolitical events tempers my confidence.
Articles
- Warren Buffett Like Tech - Should You?: Tradeking
- Can Buybacks Make Sense? - Seeking Alpha
- Business Development Companies - Mangagement Alignment - Seeking Alpha
Have a happy, healthy Thanksgiving!
Alan Brochstein
November 12, 2011
November 11, 2011
It's a Dip-Buying Market
Despite the sharpest single-day down move in 15 months on Wednesday, stocks advanced this week and are now extending on their October gains eleven days into November. We had mixed performance in our models:
Top 20 benefited from two stocks performing well after earnings, an outcome that we seemed to lack over the past month. I am pleased, because one of the stocks has been one that was very challenging, and I believe that we made the right decision to stay with it. The other is a more recent add, so I am happy to see it work over such a relatively short time-frame. I ended up raising my one-year targets on both of these stocks by about 5%. On the other hand, a third company reported a good quarter in my view yet fell sharply. For the week, we slipped compared to the market, with the S&P 500 rallying .94% while Top 20 gained only .08%. The culprit? Weakness among smaller stocks in general, especially on Wednesday's plunge. Month-to-date, the model has lost about 1.2% compared to the S&P 500, while we are now 0.2% behind the index in Q4. I continue to have several underperforming stocks under close review for replacement but note that tax-loss selling in general is making this a bit challenging, but I expect that it will be mostly complete by the end of this month. My goal in this model is to position the portfolio best for the coming year, though I do hope to recover some (or, hopefully, all) of the underperformance in the coming weeks.
Conservative Growth/Balanced also benefited from the Large-Cap Tech stock that reported and rallied as well as the retailer we recently repurchased. For the week, it gained 1.61%, which is substantially better than the 60% stock and 40% bond index. The model recovered all of the prior week's underperformance and is now up .36% for the month and .86% so far in the 4th quarter relative to its benchmark.
Sector Selector ETF was burdened by weakness in emerging markets and Small-cap, losing 0.03% this week. The almost 1% underperformance vs. the S&P 500 leaves it 0.84% behind the index in November but 1.05% ahead for Q4.
Market Outlook
I shared a forecast for the balance of the year as well as for year-end recently and continue to expect a good finish to 2011 and the potential to rally to 1600 on the S&P 500 in 2012. This week's action encouraged me, as bad as it felt on Wednesday. Why? We are rapidly adapting to an environment of European headline risk. Make no mistake, the risk level in the market is high, but the problems are well known and increasingly better understood. The best rallies historically have been built on a "wall of worry", and this appears to be what has been going on for the past six weeks.
Articles
- 6 Growth Stocks- TradeKing
- Income Idea: BDCs - SeekingAlpha
- BDC Review: ARCC - Seeking Alpha
- BDC Review: AINV - Seeking Alpha
- BDC Review: PSEC - Seeking Alpha
- BDC Review: SLRC - Seeking Alpha
Final Thoughts
First, I know that we have active military members subscribing to Invest By Model, and I presume that several subscribers have served our country. On this Veteran's Day, I want to thank you.
I have shared bullish thoughts recently after a very challenging year for our markets on many fronts. I am not always bullish, and I have no real incentive to say anything but what I honestly believe. With respect to Invest By Model, subscribers pay a fixed amount for access to our ideas. While it's pretty clear to me that the interest in subscribing correlates well with how the market has been doing, subscribers pay the same $20 per month (or $10 for the SSETF) whether they choose a single idea, replicate the portfolio on $25,000 or apply it to a $500,000 account.
A lot of times when talking heads on investment news shows discuss the market or when investment advisors speak about the prospects for investment, they have a vested interest in convincing you to commit more resources. Why? Because for every dollar you give them to manage, they get a penny or so. If you choose to invest more while using our service, you don't pay even a penny extra.
Additionally, many investment advisors offer only long-only products, so they are forced (sub-consciously) to tend to be more optimistic in order to justify their existence. While I admit to not having a "short product", I have committed to getting one in place before the next bear market. I do have the very easy ability to have significant cash in 2 of the 3 models, and when I move that direction I will have the new hedged or model that will allow me to offer a product that can potentially benefit from declining markets.
I say this because I am VERY BULLISH. I could be dead wrong. This year I have been certainly off on my timing with respect to being optimistic. If I am wrong to advise subscribers to be optimistic, it won't be because I compromised my intellectual honesty.
Let me conclude by saying that we are in the inverse of the bubble from 1999. Many thought it was solely a Tech bubble, but that isn't the case. Investors absolutely loved Large-Caps in general. Companies as boring as Coca-Cola (KO) or Walgreen's (WAG) commanded PE ratios in excess of 40X forward expected earnings. And everyone wanted to own them, driven by greed and by extrapolating past success into future gains. Today, despite dramatically lower interest rates (as measured not by the outrageously overvalued Treasuries but rather the bonds of the same corporations with low equity valuations), typical multiples are stupidly low in my view. I understand how a "lost decade" can make it seem like stocks aren't a good vehicle for wealth creation, but I think those potential investors locked out of the market by their fear are doing themselves an equal if not greater disservice to those who invested blindly 12 years ago.
Best Regards,
Alan Brochstein
November 04, 2011
November Starts Flat
After a rough end to October on Monday, the market flat-lined the rest of the week. Our models varied in their performance:
Before I briefly describe how we performed in the models over the past four days, please refer to the more extensive performance discussion for the month of October that I shared on November 1st. Each of the models remains ahead of their respective benchmarks so far in Q4.
Top 20 started the month with a very modest decline of .27%, while the S&P 500 increased 0.04%. CG/B had a more challenging few days, falling .73% compared to a .03% increase in the stock/bond index. We had one stock decline significantly after disappointing with its outlook for its fiscal 2012 and accounting for most of the underperformance. Finally, Sector Selector ETF continues to recover, rising 0.17% in November so far compared to the 0.04% increase in the S&P 500.
Market Outlook
I have increased my optimism regarding the coming year or so and am forecasting a rally to 1600 on the S&P 500. Implicit in this forecast is my expectation that we can rally to about 1400 by year-end. You can link to my recent article (see below) for my rationale.
While my outlook is bullish, do keep in mind that I was overly optimistic this year. Further, while my outlook does influence security selection for Top 20 as well as the other models and equity exposure for CG/B and SSETF, it's not my primary focus. Picking good stocks is what I expect will ultimately help the performance of Top 20 and CG/B, while rotating between certain sectors and other segmentations of the market will prove to be the most likely driver of performance for SSETF.
Articles
- Bullish on the Market - Seeking Alpha
- Food Stocks - TradeKing
Final Thoughts
Earnings season is mostly over, though we have a few more companies that have quarters that ended in October reporting over the next few weeks. We had a few companies in Top 20 that disappointed, many that were fine and not enough that wowed me. As I look at the portfolio, I find several very disappointing performers still. While I feel like a lot of the pruning that we have done has been helpful (like TECUA, for one), there is, unfortunately, more to do. Our very smallest position (the biotech) is definitely on the launch pad, but we have a few others I am considering as well. If it starts with a "D", it is very cheap and oversold, making the timing a bit more challenging. I have identified several potential replacements.
It's easiest to eliminate the "pain" of a troubled position by just selling it, but that's not always the best plan of action. I give a lot of thought to the timing of the buys for our models, and I give as much to the timing of sells. I am frustrated that I have had so many "problems" with which to contend this year, feeling at times like a triage nurse. We got it right on TECUA, MFLX (could have done better maybe) and SKX. Rest assured, though, I don't marry our stocks, and I don't trade "cost". Porfolio management is a continuous process, and my goal is to have a portfolio that can beat the market over the next year. It doesn't beat it every day, week, month or even quarter, and not every security works (that's why it's the Top 20 and not the Top 1). So, this is a long way of saying that we have some trades to do over the next few weeks.
Alan Brochstein
November 01, 2011
All 3 Models Beat Benchmarks In October
October ended weakly but was still one of the best months in the past several decades. We were able to recover relative underperformance in Top 20 and Sector Selector ETF and to extend the lead against the benchmark in Conservative Growth/Balanced:
Top 20 soared over 13%, beating the S&P 500's 10.93% gain by 2.14%. The model was helped by its exposure to smaller stocks, as the Russell 2000 index jumped over 15%. We had two stocks that we held for the entire month decline, while two others rose 28% and 40%. Quite frankly, our sector exposures weren't very helpful, as we didn't have above-market exposures to the two strongest sectors (Energy and Materials). We were very overweight the 3rd best (Industrials). We also had no exposure to the three weakest sectors (Staples, Utilities, Telecom).
Conservative Growth/Balanced returned 8.34% compared to its benchmark of 60% stocks (+10.93%) and 40% bonds (0.11%) rising 6.76%. We were near our maximum exposure of 75% in equities most of the month, which accounted for most of the relative gain. Stocks were quite mixed, with returns ranging from 1% to as high as 19%. The rally in CSCO helped a lot, as it was our largest position. In a big rally such as we experienced, it can be very difficult for conservative stocks to keep up, so this was a reasonable performance.
Sector Selector ETF rallied over 14.2%, beating the S&P 500 by almost 3.3%. Heavy exposure to Small-Caps, Emerging Markets and Financials were the key drivers of the strong performance. The only two positions that didn't match the S&P 500 were Technology and Mega-Caps, both of which we reduced early in the month.
