AB Analytical Services

January Returns: Much Ado about Nothing

Everyone seems so concerned with the market these days.  One of my favorite trend indicators, the view of Investors Business Daily, clicked "market correction" late in January.  Bob Prechter is bearish again, a place he likes to be anyway.  When it was all said and done, January was disappointing but not that surprising.  Ultimately, it was just two bad days.  I had shared a view with my friends at TradeKing late in the year suggesting potential profit-taking ahead.  If you review that article, which listed 58 names (29% from Tech) that I felt were vulnerable, you might be interested to learn that the average decline was over 6%, well behind the overall market.  Check out things like emerging stocks too - anything that rallied hard in 2009 paid back some of the gains in January.  I had discussed the rotation issues earlier this month, and the chart got even clearer.  I don't have the time to update that graphic that I shared, but clearly the two strongest areas of the market last year have been hardest hit this year:  Technology and Materials.

Here is what the returns across market caps and by sector look like so far this year:

I color-coded this so that the reader can quickly focus in on areas of strength and weakness.  Green indicates beating the market by 2% or more, while red reflects the opposite.  While we see some areas of "strength", note that the only sector up for the year so far is large-cap Healthcare.  A few quick observations:

• Market cap didn't matter so far (check out my view on December being the new January for Small-caps), but Sector did 
• Tech, last year's big winner, is clearly the big loser - Materials too
• The "middle of the pack" from last year continues to do relatively well, but the laggards are lagging still (Utilities, Telecomm)

I don't have much more to add - clearly Tech, which started the year at 19% of the S&P 500, is the major drag.  It makes sense - profit-taking.

I continue to like my portfolio positioning in the Top 20 Model Portfolio.  We were actually up on the month.  Again, we are heavily weighted towards smaller, value-oriented names from predominantly the Industrial, Healthcare and Consumer Discretionary sectors, with no exposure to Materials or Energy and very limited exposure to Technology (we picked up a name after it dropped sharply).

I shared my views earlier this month that I think that we are still in a bear market.  With that said, though, I don't think that this past month's action is troubling, at least yet.  I continue to think that the market grinds higher into March. 

Disclosure:  No stocks mentioned

Request: Support a Great Cause

A Special Request

We all have our causes.  Some of them are important to us because of the circumstances of our lives.  Often we reach out to organizations that have helped us or our loved ones.  Sometimes we see an unmet need, and we want to support those who are trying to meet it.  Sometimes, though, we just stumble upon it.

I am on the Executive Committee of the Board of the Houston Area Women's Center.  I knew of the organization only very distantly a few years ago because I knew the CEO through my synagogue.  A friend of mine who was on the Board asked me to join the Finance Committee in late 2008, and I reluctantly agreed. 

After serving on the FC and learning more about the organization, I was asked to join the Board of Directors and to head the FC.  While I had learned more about what the organization does, I was still pretty clueless about its mission, but I agreed, again reluctantly.

More than a year into this now, I have really embraced this cause.  I have listened in on hotline calls and have heard personal stories of how the organization has saved the lives of battered women and their children.  I have been very fortunate in my life never to have known a victim of domestic violence or sexual abuse, but it is a scourge on our society.  Just this week in Houston, we read on the front page of a man killing his ex-girlfriend with a crowbar and in front of their children. 

In any event, I am reaching out to my readers in hope that they will help me in my somewhat modest goal in the scheme of things:  I would like to raise $5000 through my participation in a "run" next month.  You can visit HAWC's website to learn more about what the organization does (it provides a 24-hour hotline for domestic violence and sexual abuse victims, a 120-bed shelter for women and children, free counseling and educational outreach):  www.HAWC.org.

If you care to contribute to furthering the mission of this organization, I would appreciate your supporting me in the run.  You can do so by visiting: 

http://www.hawc.org/faf/donorReg/donorPledge.asp?ievent=334740&supid=282570022

Whether you choose to support this organization or not, I do hope that you will learn more about domestic violence and sexual abuse.  There is no place for them in our society, so please become aware and help put an end to them in your community as well.

Thanks,

Alan

Dividend Hikes Point to a Return to Normalcy

For those of you caught up in the antics on Capitol Hill, you may not have noticed something this week that I found quite extraordinary.  As of Friday morning, I was able to identify 18 companies that resumed paying or increased their dividends in this holiday-shortened week.  Here they are:

Company	Symbol	Increase
Carnival	CCL	Reinstate
Standard Motor	SMP	Reinstate
Finish Line	FINL	33.3%
Tiffany	TIF	18.0%
Family Dollar	FDO	14.8%
Intel	INTC	12.5%
El Paso Pipeline Partners	EPB	12.5%
Pall Corp	PLL	10.3%
Omega Healthcare	OHI	6.7%
Enterprise Bancorp	EBTC	5.3%
Washington Post	WPO	4.7%
McGraw-Hill	MHP	4.4%
TC PipeLines	TCLP	3.5%
Polaris Industries	PII	3.0%
Spectra Energy Partners	SEP	2.5%
Wesco Financial	WSC	2.5%
ONEOK	OKE	0.9%
Consolidated Edison	ED	0.8%

The list is broad and covers all shapes and sizes of companies, from mega-cap Tech company Intel (INTC) to companies many of us have never heard of.  In any event, after a year of record slashing, with many companies cutting or eliminating their dividends, it is nice to see more optimism.  I saw chatter too of the resumption of share repurchase programs as well.

While it would be nice to say that this is the kind of sign that suggests a higher market, I wouldn't go that far.  While on the one hand, capital-rich companies (though not all of these hikers fit that bill), are in a position to reward shareholders, there is a whole plethora of companies that need capital.  In the table below are equity deals that were priced just this week:

Company	Symbol	Size (mm)
Charles Schwab	SCHW	$500
El Paso Pipeline Partners	EPB	$236
Inergy	NRGY	$181
AMAG Pharna	AMAG	$174
Hersha Hospitality Trust	HT	$155
Orient-Express	OEH	$138
Aegean Marine	ANW	$128
Nordic American Tanker	NAT	$122
InterMune	ITMN	$99
Centene	CNC	$96
Fifth Street Finance	FSC	$77
KIT Digital	KTD	$31
China Marine Food Group	CMFO	$30
Achillion Pharma	ACHN	$20
Curis	CRIS	$16
		$2,003

It's so cliche (and self-serving) for stock pickers like me to say that this will be a year for the stock pickers, but it really is shaping up that way out of the gate.  I am sticking to my strategy that I have shared since 2007 of focusing on companies with strong balance sheets and/or defensive businesses.

Disclosure:  Long FDO in a foundation I manage and in both of my model portfolios

Don't Tax the Fat-Cat Bankers

Class warfare continues post-meltdown, with the latest greatest idea to tax the larger recipients of TARP bailout funds, an idea that makes little sense to me.  As I have stated before, the mess in which our country remains mired is not the fault of greedy Wall Street alone (though it sure shares the blame).  We had a collapse in the regulatory environment, a culture of excess and politics of "don't worry, be happy" on both sides of the aisle.

What really happened, and who’s to blame?  Too much leverage is clearly what happened, but who is to blame is certainly subject to debate.  In any event, as we move forward, hopefully we will create checks and balances so that we don’t have a mortgage industry creating liar loans and a banking industry that is allowed to be so vulnerable to falling asset prices.  The answer, ultimately, is that we, as a society, need to continue this process of deleveraging at all levels.

Ironically, as the government tries to get Wall Street to “pay”, it allows banks through the Federal Reserve’s monetary policy, to rob from savers due to the artificially low interest rates.  I am not sure what the tax really accomplishes and am curious why just the banks and not other industries that received government help (not that I am suggesting that!)

 

Rather than creating a tax that may be unconstitutional and that is certainly punitive in nature, arbitrary and not likely to contribute to a long-term solution, I propose that we consider eliminating or restricting the deductibility of interest expense.  Some of you may not be aware, but consumer debt used to be deductible against income for individuals.  It’s been a while, but it was eliminated in the 1980s.  Today, corporations are still encouraged to borrow and discouraged to pay dividends, which are not deductible as expenses but are taxable to the recipients.

 

I am not sure if we should eliminate or just limit the interest expense deductibility, but it would certainly be more punitive to those who are more leveraged, like banks.  The social good is clear – companies would not be incentivized to take too much risk by sharing the cost of borrowing with the taxpayer.  I believe that changing the tax code would be economically and morally superior to the attack that our President and Congress are waging against Wall Street.

2010 Begins with Powerful Sector Rotation

When prognosticators look at the past in order to predict the future, they usually pick between two schools of thought:  Extrapolation or Mean-Reversion.  In layman's terms, extrapolation is essentially "the trend is your friend", while mean-reversion is "the tide rises, the tide falls".  Last year, a year of extremes in terms of both the magnitude of the rally but even more the diversity of the move among the economic sectors, saw Technology stocks rise almost 60% while Utilities and Telecommunication Services stocks rose less than 10%. 

Two weeks into a new year, both schools of thought are wrong so far.  There has been mean reversion to some degree, as the best performing sectors are lagging, but so are the worst performing ones!  The middle of the pack has emerged as an early leader, as you can see in the chart:

The middle of the pack (Industrials, Health Care, Financials, Energy and Consumer Staples) make up 61% of the value of the S&P 500, while the laggards last year (Utilities and Telecommunication Services) comprise only 6.5%.  I don't want to say that they don't matter, but the market doesn't really depend upon them.  The winners from 2010 (Technology, Materials and Consumer Discretionary) represent the balance, about 32.5%, with Technology, the largest sector, representing 19.5%.

So far, it looks like some profit-taking in the strongest sectors, but the profits are being plowed back into the market.  Investors are clearly avoiding the low beta sectors at this point.  Let's take a look now under the hood.

Technology was last year's star by far, benefiting from too steep a sell off in November and surprising earnings resilience throughout the year.  It's not surprising at all to see some selling after a big run, and I believe that we have just experienced some deferred sales from 2009 as investors wanted to postpone taxes or to "window-dress" their portfolios.  I think of Technology in several buckets, including software, hardware and semiconductors.  So far, the semiconductors are creating the drag, with several names down between 5 and 10%.  The widely followed PHLX Semiconductor index (SOX), which rose almost 70% last year, is down over 4% in 2010.  On average, the other two areas are up slightly.

Materials, a pretty small part of the market at under 4%, were boosted last year by Freeport-McMoran (FCX) and Dow Chemical (DOW), while Monsanto (MTC) tempered the sector's return somewhat.  Those trends continue so far into the year.

Consumer Discretionary, which earned third place last year, was just too cheap a year ago.  While  the Retail component stood out, with the SPDR S&P Retail (XRT) up almost 75%, the whole sector was very strong.  So far this year, Media and Retail appear to be holding it back somewhat, though the returns are positive.  With that said, though, I count 9 of the 79 names as being up double-digit so far and only one down more than 10%.  The sector isn't exactly for sale!  I have found several investable names, most of them smaller, with a value/defensive posture.  You can check out my Top 20 Model Portfolio to see the five names that represent 21% of the portfolio.

Industrials actually had a decent year last year, but United Parcel Service (UPS) and especially General Electic (GE) masked that performance.  The bulk of the sector is comprised of Capital Goods (75%), with the balance in Transportation (20%) and Services (5%).  Investors have piled into the Capital Goods companies, with 5 of the 38 names up more than 10% and the median return up 4.75%.  This has become one of my favorite sectors, even though I am not expecting the economy to be strong.  Like the Consumer Discretionary names in my Top 20 Model Portfolio, the 7 names representing 35% are skewed towards value.

Healthcare's performance last year was very mixed, with biotech and pharmaceutical stocks holding back returns.  The Amex Pharmaceutical Index (DRG) rose just 13.33%.  The large biotech companies were generally weak, while the smaller ones did well.  The biotech companies in the S&P  500 include (in descending market cap):  Amgen (AMGN), Gilead (GILD), Celgene (CELG), Biogen Idec (BIIB), Genzyme (GENZ) and Cephalon (CEPH).  The best of the bunch was only up 12.3%, yet the Amex Biotech Index (BTK) rose a stunning 46%.  Of course the overall sector was plagued by fears of Obamacare as well as some surprising softness in sales caused by the economic slowdown.  So far this year, investors are snapping up some of the larger names, with 3 of the Top 10 names (Pfizer (PFE), Merck (MRK) and United Health (UNH) all up over 7%.  The interest seems greatest in device manufacturers and insurance companies.  The Top 20 Model Portfoliostarted the year most heavily weighted towards Healthcare (and especially devices, as we hold some S&P 500 names as well as smaller ones), and it is now at 33% (six names) after the sale of a Healthcare name and the addition of an Industrial.

Financials, the very worst sector in 2008, recovered only modestly in 2009, ending up below the return of the S&P 500.  REITs had a decent year, with the iShares Dow Jones US Real Estate ETF (IYR) returning 23.3%, but banks held the sector back.  As 2010 kicks off, we have seen a big reversal, with IYR down a bit year-to-date, but banks, especially regionals, soaring. 

Energy was a tale of two cities last last year.  It was the worst of times for refiners as well as integrated companies with significant refinery exposure, while the rest of the sector did quite well.  Given that almost half of the market cap of the sector is in a few names, like Exxon Mobil (XOM), Chevron (CVX) and Conoco Phillips (COP), the 2009 performance for the sector was quite misleading.  The median return for the sector was a stunning 44.7%.  So far this year, 7 of the 39 names are up more than 10%.

Consumer Staples, which not surprisingly lagged the rallying market last year after outperforming in 2008, are dominated by a handful of names:  WalMart (WMT), Procter & Gamble (PG), Coca-Cola (KO) and Phillip Morris (MO), all of which are over $100 billion in market cap and contribute in total about 1/2 the market cap of the 42-member group.  Investors cared little last year, and they don't seem to care yet this year.

Utilities lagged last year as well, not surprisingly, though they finished very strong.  The 4th quarter enthusiasm hasn't carried into 2010, as regulatory concerns are weighing (especially in Florida).  I contributed an article on the sectorto my friends at TradeKing in December, and people more knowledgeable than I am about the sector might benefit from checking it out.  I would add that the resurgence in Industrials, if it is to be believed (a big if) suggests that Utilities may see a recovery in industrial power demand.

Telecommunication Services is just 9 stocks, only 2 of which matter:  ATT (T) and Verizon (VZ).  The stocks puzzled folks last year for failing to perform, but the harsh reality of a very competitive environment became clearer this past week, with the two big guys now nursing close to 8% losses after earning a bit less than their dividend in 2009.

So, that's a peek at the start of what should be in my view a year of continued rotations from and within sectors.  I don't expect the market to be in a substantially different neighborhood a year from now, so I plan to be a mean-reverter.  For now, I am heavy in the sectors I described above and definitely tilted towards small-cap and towards value.

Disclosure:  No position in any stock mentioned

These Fibs Don't Lie: Still a Bear

This is a time of year when people feel compelled to make annual forecasts.  If the past two years have taught us anything (that we should have known anyway), the market will do what it wants and then some.  An old adage that I have found useful is that the market does whatever will hurt the most people the most.  While I would like to think that the market is a bit friendlier than that, the truth is that the market is unpredictable.  Good investors know that the key to success is capital preservation during challenging markets and a willingness to take risk when appropriate. 

So, is now a "challenging market" or an "appropriate time to take risk"?  While I don't believe that we are necessarily at the end of this rally, I still characterize the market as a bear market or at least still a transitional market.  It is certainly not a buy and hold market.  I know that it's subject to a lot of debate, but it shouldn't be so hard to characterize the long-term trend in the market.  While it's not really my point in this article, the economy continues to suffer from structural challenges that should take years to resolve.  Any efforts to avoid the cure (extended slow growth so that balance sheets can be repaired) by our government or the Fed risk a multitude of other problems.  Maybe this doesn't kill the market, but it should keep returns constrained.

When I try to characterize the market, I look at the S&P 500, as it is the bulk of the market.  Yes, though I sure spend almost all of my time looking for opportunities across a larger set (i.e. small-cap), the fact is that most people, by definition, have most of their money in the S&P 500 since it represents such a large part of the overall market.  The S&P 500 had a huge bull move into the end of the century and then what was a normal bear market.  It was followed by a run at the old high, but it was goosed by very easy money.  This past move down was not a normal bear market:

How do we characterize the recovery?  One thing to look for would be taking out old support, and we aren't there yet in my view.  A better method, though, in my experience, is to discuss Fibonacci Retracements.  If you aren't familiar with the concept or the thinking behind it, I urge you to investigate it.  Retracements typically will be a minimum of 38.2% to a maximum of 61.8% (though that is not exactly correct - there are higher retracements).  The thinking, then, would be that if the market recovers 62% of its decline, then  we must be in a new trend.  At this point, looking at the peak in 2007 to the trough in March of 2009, the market has recovered 52.6% of its decline.  If you are bearish (which I am not for now), that isn't good news, as it could (and probably will!) rally another 7% or so.  1229 is the next real definitional test in my view.  Take a look at a daily chart or weekly chart that goes back into 2008 and you will see that there is a lot of old support around that level too.

Now some technically inclined pundits (I am not one of those - I am a stock picker) are pointing to the retracement in the NASDAQ, which has clearly exceeded the 61.8% retracement thanks to its composition that favors growth sectors relative to Financials.  I don't see this necessarily as a harbinger for the whole market.  It's ROTATION!  Heck, even this week we saw people fly into the lowly Financials, which are for now the best sector on the year.  The elixer of easy money (low interest rates and a soaring market) is bringing back the casino mentality that has gotten us where we are to begin with.  But I digress...

To look deeper into what's going on, I wanted to look at the sectors that comprise the S&P 500.  There are 10 of them, and there are ETFs for all but one (I substituted a very close one for Telecommunications).  As you can see in the graphic below, 3 of the 10 sectors are above the 61.8% recovery, while 4 have yet to recover even 1/2:

My takeaway is that certain parts of the market may seem to be in a bull market because of their recoveries, but the overall market has a challenge ahead.  Let's see if it can take out all that resistance 7-10% above here. 

For now, I have my model portfolios positioned rather interestingly.  The Top 20 Model Portfolio, which by design is always pretty much fully invested, has no Energy or Tech exposure.  It is heavy in Health, Consumer Discretionary and Industrials.  Almost all the names are small-cap.  The portfolio holds several positions that I would characterize as deep value and/or contrarian.  My Conservative Growth/Balanced Model Portfolio, which allows me some flexiblity in asset allocation, is just under its 60% targeted equity exposure, well under its 40% bond exposure and, thus, a bit heavy in cash.  The stocks there are smaller than typical for the S&P 500.  In aggregate, we match the S&P 500 dividend yield but we do so with signficantly better balance sheets (almost all names have net cash).   The foundation I manage has a 60/40 mandate too, but it isn't necessarily "conservative".  It pretty much looks like the Top 20, with equity exposure at 72% (the maximum I allow is 75%) and bonds at about 20%.  I expect to be reducing equity exposure in the coming weeks.

Disclosure:  No stocks mentioned

2010: Same Strategy, Different Players

I find the business of professional investing to be very similar to the business of professional sports.  In investing, the customers of a mutual fund want and deserve a competitive return on their investment for the price that they pay. ETF/Index fund guys are cheap and are willing to settle for mediocre, while others are willing to pay up for performance that hopefully exceeds mediocre but usually lags.  The owner of the fund hires a manager (sometimes the same guy or gal), and that person is responsible for finding the investments. 

In professional sports, the fans of a team want and deserve a good return on their investment for the price that they pay too.  The owner hires a manager who is responsible for building a team that includes a coach and players.  The manager has to work within a budget and has to produce results.  If a player isn't cutting it, then he gets cut.  When I was growing up (let's call it the 70s and early 80s), fans knew their teams well.  Walter Payton was a Bear last year, this year and next year.  Earl Campbell was an Oiler.  I could go on, but I will quickly get out of my league!  In any case, we all know that today players come and go like the wind.

Most investors should feel the same way about their funds as they do about their hometown team, as turnover is typically very high in their mutual funds.    I am guilty of this as well.  It would be nice if everyone could find their companies in which they invest, act like long-term owners and then reap the long-term capital gains over time.  Unfortunately, it's not the way it works any longer.  Transaction costs (commissions especially, but also the bid-offer spread) have plunged compared to decades ago, and, absent those barriers, humans will be humans.  Doing something seems to be a better use of time at the time than doing nothing, but it often hurts us.  As an example, I did something good early in 2009, buying Intuitive Surgical (ISRG) below 100.  But a few months later, I did something again, and it wasn't good.  It seemed good at the time booking that 50% gain, but had I held on, it had another 100% to go from there.  I don't recall what I did with those proceeds, but I know it didn't do that well!

I am a little philosophical today over this because I do wonder if I end up better off by trying to improve my returns by constantly changing up the players.  The answer for us collectively is clearly no on average by definition,  as for every winner in a short-term trade, there is a loser.  Still, I would like to believe that for the nimble, we can "earn through churn".  I bring this up because I churned a LOT in 2009.  A client of mine has an annual stock-picking contest where its employees contribute a list of names and number of shares at the beginning of the year (with no cash or shorts).  I was included in the 2009 contest.  Of the 5 participants, the very worst static portfolio returned 34%.  The very best returned 59% (more on that later).  It frustrated the heck out of the principal of the firm, as their client portfolios didn't do quite as well as the worst picker.  There are lots of reasons why, but clearly market timing hurt (raising cash on the way down and not getting it redeployed on the way up quickly enough).

The +59% static portfolio winner was mine.  I contributed my Top 20 Model Portfolio as of 12/31/08.  Fortunately, all of my trading during the year in that model actually added to the return, as we closed the year at just under 69%.  That was a lot of work, though, for not really that much more gain.  Had I not been so fearful that the rug was going to get pulled out, I might have had the courage to stick with things like ISRG, NetApp (NTAP) or even America's Car-Mart (CRMT) a bit longer.

In any event, I probably want to always believe that turnover is justified, as otherwise my life would be a lot more boring.  So, consider that admission as I make the case for why the current investment environment demands a high turnover strategy. 

In 2010, the market will be up... and down.  It could crash, but probably won't.  It could soar, but probably won't.  I am very humble in terms of having conviction about this, and, from what I read, this is probably not too uncommon.  The economy has to deal with the training wheels coming off - artificially low rates could rise, unfunded government spending and tax-crediting must abate.  God help us if China's growth proves to be an illusion.  Companies will find it harder and harder to improve operating costs as they did last year unless revenue growth comes back (and it likely won't). 

2009 was all about things not being as bad as they could have been and PE ratios reinflating as easy money (for investors and banks, anyway) was abundant.  2010 will most likely be about the supply of stocks, whether it's more former LBOs coming back to the market, insiders unloading or companies that are getting life-lines due to low borrowing costs raising equity as they extend their debt or move it from the banks to the capital markets.  So, I guess my expectations are that the run-up of the last 9 months continues for a while, but then runs into a wall.  The portfolio I share below won't perform that well if the economic recovery proves to be quite strong.  No need to worry, though, as I will crank up the churn!

In 2009, my strategy was to invest in out-of-favor companies with strong balance sheets and strong competitive positions for the most part.  I ended up with my 20 names having a high concentration in Consumer Discretionary despite my view that the economy would absolutely stink in 2009.  Here are the names, symbols and economic sectors:

ALLERGAN INCORPORATED	AGN	HlthCare
AMERICAS CAR-MART INC	CRMT	ConsDisc
AMERICREDIT CORPORATION	ACF	Finance
BIOMED REALTY TRUST INCORPORATED	BMR	Finance
CARLISLE COMPANIES INCORPORATED	CSL	Industrl
CARPENTER TECHNOLOGY CORP	CRS	Material
CATALYST HEALTH SOLUTIONS INC	CHSI	HlthCare
CHEVRON CORPORATION	CVX	Energy
CISCO SYSTEMS INCORPORATED	CSCO	Tech
EZCORP INCORPORATED CL A	EZPW	Finance
HORMEL FOODS CORPORATION	HRL	Staples
LADISH COMPANY INCORPORATED	LDSH	Industrl
MENS WEARHOUSE INCORPORATED	MW	ConsDisc
MIDDLEBY CORPORATION	MIDD	Industrl
NATIONAL INSTRUMENTS CORP	NATI	Tech
NETAPP INC	NTAP	Tech
RAVEN INDUSTRIES INCORPORATED	RAVN	Industrl
SHOE CARNIVAL INCORPORATED	SCVL	ConsDisc
THOR INDUSTRIES INCORPORATED	THO	ConsDisc
TIMBERLAND COMPANY	TBL	ConsDisc

The 2010 picks include 3 that were in the model at the beginning of 2009 as well:  EZCORP (EZPW), Hormel Foods (HRL) and Timberland (TBL).  After I share the names (but not the weightings, which are available with a free trial at Invest By Model), I will share some details about what the portfolio looks like:

ACETO CORPORATION	ACET	Industrl
ALLEGIANT TRAVEL COMPANY	ALGT	Industrl
BARD C R INCORPORATED	BCR	HlthCare
BUCKLE INCORPORATED	BKE	ConsDisc
CARDIAC SCIENCE CORPORATION	CSCX	HlthCare
CERADYNE INCORPORATED	CRDN	Industrl
DORMAN PRODUCTS INCORPORATED	DORM	ConsDisc
EZCORP INCORPORATED CL A	EZPW	Finance
FAMILY DOLLAR STORES INCORPORATED	FDO	ConsDisc
FOOT LOCKER INC	FL	ConsDisc
HORMEL FOODS CORPORATION	HRL	Staples
MARTEK BIOSCIENCES CORPORATION	MATK	HlthCare
MET-PRO CORPORATION	MPR	Industrl
NATIONAL PRESTO INDUSTRIES	NPK	ConsDisc
SOMANETICS CORP COM NEW	SMTS	HlthCare
ST JUDE MEDICAL INCORPORATED	STJ	HlthCare
SYNOVIS LIFE TECHNOLOGIES INC	SYNO	HlthCare
TIMBERLAND COMPANY	TBL	ConsDisc
TITAN INTERNATIONAL INCORPORATED	TWI	Industrl
VOLCANO CORPORATION	VOLC	HlthCare

Here are some overall parameters:

• Forward PE:   14X median
• 2009 return:   7% median
• P/TB:  2.5X median
• Net Debt to Cap:  18 of 20 have net cash, with -21% net debt to cap median
• Market Cap:  median of 850mm

It should be clear from both the statistics and a cursory review of the names that this is a pretty contrarian and value-oriented portfolio, similar to last year's in structure despite the names being so different.  Volcano (VOLC) was a small position, and we eliminated the balance today (January 5th) after a 54% rise from our May purchase.  On the other side comes an industrial with a low P/TB, lots of cash and not such great performance in 2009 (-2% after a 37% rise in 2008).  Many of the companies I included had a pause of sorts in 2009 after doing a lot better in 2008, and we scooped many of them up late in the year (and a few, unfortunately, earlier).  I would include MPR, ALGT, ACET, DORM, FDO, SYNO, MATK, STJ, BCR and EZPW in that group (lagged in 2009 after beating in 2008).

One final observation is that I don't believe in closet indexing.  You may notice that I don't have any Energy, Materials or Technology, while I have a ton of Consumer Discretionary, Industrial and especially Healthcare.  Some of this is intentional (Energy), but, for the most part, it has to do with a focus on what I think is really cheap.  The cheapest tech stocks look expensive to me compared to the cheapest health stocks.  If you are using some of these ideas, you might consider that there is a great risk of deviating from the S&P 500 due to the size of these companies but particulary due to the concentration in certain sectors.  Hopefully that deviation will be positive!

Disclosure:  Of the 20 names recommended for 2010, all but VOLC are in the Top 20 Model Portfolio or other model portfolios (being sold today).  All but VOLC and NPK are in a porfolio that I manage (see my holdings)