Invest By Model

Trades for Top 20

We are doing some earnings season rebalancing in Top 20.  While not every decline is a buy, nor is every rise a sell, I do like to use the volatility to reposition when appropriate.  In this case, we are adding to two positions we had recently trimmed at higher levels.  We are also adding to another position that has increased since we bought it but looks promising still.  Finally, we are trimming a stock.

On the buy of the Consumer name, the quarter was very sloppy in my view, but my target, which looks out into 2014 and 2015 projected EPS, actually increased a bit to 83 .  The stock has dropped about 10% or so since we trimmed it.  On the Healthcare name, while I certainly regret not having trimmed more in retrospect, I think it makes sense to replace some of the stock we sold.  My target on this stock is 30 still after the report, which was ok but didn't justify the big run-up.  On the Energy name, which reports next week, my target is 64.  Finally, on the sell, the quarter was good, and the story remains on track, but my target, which is conservative, remains at 20 for now, though I may increase it to 22.  Still, even there, the position is a bit larger than I think is justified, with the stock up almost 19% in the five weeks since we bought.  The stock, which is heavily shorted, is a little overbought too.

Week Ends Down Slightly

After weeks of rallying, the market paused to contemplate a very full week of earnings reports.  Here is how the models look with three trading sessions left in July:

Top 20 was having a great week until today, when we had earnings misses #2 and #3.  For the week, these hits on SWI and OUTR dominated otherwise pretty good performance.  I regret now not fully selling OUTR when we recently trimmed it.  We ended up declining 0.9%, while the S&P 500 lost 0.02%.  Our July return is still slightly better than the market at 5.87% vs. 5.44%.

CG/B avoided the hits that Top 20 endured and had a good week, but it had been off to a slow start in July.  The model rallied 0.69% compared to the 0.07% gain for the 60% stock and 40% bond index.  For the month, though, it is up just 1.95% compared to a 3.34% increase in the benchmark.  Please note that BEN split 3:1.

 

Outlook

I don't have a lot to say in this area, as there was little news this week.  When I review July performance next week, I will include my most current thoughts.

 

Articles

• Intuitive Surgical - Liston Street Pulse
• A.T. Cross - Seeking Alpha
• Gentex - Seeking Alpha (Editor's Pick)
• Medical Marijuana, Inc. - Seeking Alpha

 

LIVE WEBINAR REMINDER

3 Stocks Beaten And Battered During Earnings Season

LIVE WEBINAR - Monday, July 29th - 6PM EST

Earnings season: We love it and hate it at the same time. While it can be crazy-busy, it gives us the type of news flow that creates opportunities that traders like Alan Brochstein of The Analytical Traderlove to exploit. With so much action, sometimes stocks end up overreacting. Join Alan for an hour on Monday at 6PM EST as he discusses his outlook for three examples of stocks where Wall Street overreacted potentially as he shares his trading outlook for each of them.

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Have a great weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

Market Rallies As Earnings Season Gets Going

The markets shook off some bad earnings reports and slightly troubling economic indicators this week and closed near their YTD highs set during the week.  Here is how our two model portfolios look:

After 4th of July fireworks to start the month, Top 20 gave up a little ground this week.  The culprit was Ingredion, which had a rather nasty reaction to its Q2 preliminary results, which were pre-announced early in the week along with reduced expectations for the rest of the year.  The issues were primarily related to Argentina and, to a lesser extent, Brazil, though North America's outlook diminished slightly as well.  I am not adjusting the position yet, but I am inclined to add once I am confident that the reaction is complete.  This stock is extremely inexpensive in my view.  Please refer to the research I shared at the time of our purchase, as I disclosed my rationale and also shared the South American exposure as a risk.  Despite a pretty big hit there (a cost of about 0.50%), we rallied during the week, gaining 0.41%, which was 0.32% worse than the S&P 500.  We benefited from strength in our high exposure to medical device companies, including the stock we sold, as well as continued strength in Small-Caps relative to Large-Caps.  For July, we are up about 6.8%, almost 1.4% ahead of the market.

CG/B was hurt even more by Ingredion's decline, which explains the entire performance lag this week.  The model decline by .33%, which was .91% worse than the benchmark (60% stocks and 40% bonds).  For the month, the model has increased 1.25% so far, but this trails the 3.27% return of the index.  In addition to the Ingredion hit, we are underweight stocks, which has cost about 0.8%.  The model is having a great year at +15.9% despite the near-term slippage relative to the index, which is up 10.7% YTD.

Outlook

As I indicated last week, the correction may be over.  It was easier for me to call the start than it was to call the finish!  I am still not convinced that we are totally out of the woods and am watching interest rates closely.  For Top 20, my big-picture outlook doesn't impact our allocation to stocks, as that model is always fully invested.  For CG/B, though, I have used discretion to reduce positions, but, as I have mentioned, these portfolio changes weren't really driven by my top-down view but rather what I see as risk/reward on the types of stocks that are appropriate for that investment strategy.

Again, I plan to update my 1664 year-end forecast for year-end (almost 2% below current prices) by the end of the month.  I have been very conservative in my valuation estimates in recent years, and my guess is that I will be raising my PE assumption by about 6% to reflect what are still low interest rates and improving sentiment.  Since the earnings projections aren't really changing, this change will boost my target by about the same amount, resulting in a 1764 target roughly (again, this is preliminary).  I had suggested at the beginning of the year that I thought that there might be some upside to my forecast.  While this sounds great, it's really not:  We are talking about another 4.4% increase!

An interesting change of late has been the jump in oil prices, perhaps related to events in Egypt.  Interestingly, the very large spread between domestic oil (i.e. West Texas Intermediate) and Brent Crude has collapsed.  Gasoline prices are tied to Brent, which has increased only modestly.  Additionally, there are some issues in the refinery industry that have resulted in gasoline prices being a bit under pressure.  I mention this because in addition to concerns over China being a potential risk-factor, rising gasoline prices have been a problem for consumer-oriented stocks in recent years.  So, another thing to watch...

Articles

• Cardinal Health - Liston Street Pulse (this is in CG/B)
• Looking for Slight Laggards - TradeKing
• Digital River - Seeking Alpha
• Multi-Fineline Electronix - Seeking Alpha

I also want to share my interview by The Life Sciences Report that was published last month.  I mentioned several names favorably, all of which have performed fairly well subsequently, especially Luminex.  I should have shared this last month - sorry for the oversight...

Have a great weekend!

 

Regards,

 

 

Alan Brochstein, CFA

www.InvestByModel.com

Top 20 Trades

We are exiting one of our smaller positions that has rallied sharply and is now overbought.  While I have increased my target, the expected return is less than 29%.  Our buy is extremely oversold and a somewhat contrarian play, down almost 40% YTD.  I believe that the stock offers over 40% to my one-year target.  See the research for more details.

Trades in Conservative Growth/Balanced

We are trimming a long-time position and adding to a recent one.  The buy offers 40% to my one-year target, and this is one of the most attractive names in the model, despite its below-average dividend.    The stock we are trimming has been a big disappointment, but it has bounced nicely recently.  The stock offers just 17% to my one-year target, which may prove to be too conservative.  At the reduced size, we still have the opportunity to participate if management can start showing some improvement.  Otherwise, I intend to replace the rest of the position.

New Closing Highs

The July rally continued, but both of the models tracked the market roughly.  Here is how we look two weeks into July:

Top 20 rallied 2.67% for the week and is up 6.41% in July.  It lagged the market by 0.34% but leads the S&P 500 by 1.72% so far this month.  Earnings season starts next week, with STJ reporting, but it really kicks in the following week.

Conservative Growth/Balanced, despite being very heavily skewed towards cash, rallied 1.58%, which was slightly behind the 1.69% jump in the 60% stock and 40% bond benchmark.  So far this month, it has lagged the index by 1.09%.

Outlook

After having been spot-on regarding my call for a move to 1530-1570 (1560 was the low), I was too slow to call a bottom.  The market has now returned close to its all-time intraday high of 1687, closing at about 1680.  Certain parts of the market have made new highs, while some others are quite far away.  We experienced a rotational correction, with profit-taking in certain sectors that had rallied too much.

At this time, I am still a bit cautious.  For one, the volume on the way back up has been absent, though this isn't necessarily so bad given that it's summer.  Second, we could be forming a double-top, which would be ominous.  Finally, we left behind a lot of "gaps", meaning that the trading action from one-day-to-the-next was disjointed, with the price ranges not overlapping.  I really don't have a high conviction now.  My best guess is that we could pull back and fill some of those gaps.  I will be watching closely.  The cautiousness never impacted the Top 20, though I did reduce equities in CG/B.  Keep in mind, though, that this was really driven by a stock-by-stock analysis and not just a market call.  I will be very slow to add stocks in to that model portfolio - no rush.

The dynamic of higher rates scaring equity investors is likely one that we will face for quite some time as rates begin to normalize.  The market freaked out last time the Fed shared its thoughts and reevaluated it this week.  Interest-rates dropped modestly, but there is a trend towards rising rates now.  Many of the interest-rate sensitive parts of the market feel like they remain for sale.  

Earnings season got its official start this week, and this, as well as options expiration next week, could lead to a little more volatility.  As I indicated, I will be revising my year-end forecast (or maintaining it!) towards the end of this month, as we are already above the 1664 that I had projected.  

Articles

• Pentair - Liston Street Pulse
• Dividends + Debt = Danger - TradeKing

Have a great weekend!

 

Regards,

 

 

Alan Brochstein, CFA

www.InvestByModel.com

Trades for Top 20

We are repositioning the portfolio modestly, trimming two recent gainers, adding to an underperformer and raising a bit of cash.  This is the second time to trim the Healthcare stock.  It was previously one of our largest positions and was still above average after the last sale.  The stock has advanced further and is what I would call extremely overbought.  It offers about 32% to my one-year target, which is substantially less than the typical stock.  I really like the company and believe that there is potential for acquisition as well as other catalysts, so I  think we should stick with the position, albeit at a reduced size.  One note:  For those of you who care, we bought this lot almost a year ago.  Given that we have enough cash to do the buy, you may want to wait and book the 24% LT gain..

The second sale is a recent buy that has rallied by 28% in fewer than 5 months.  It offers 30% to my target and was about average in size before this trade.  While I like the story, I would note that the stock has an extremely high short-interest and is somewhat controversial.  I am a little concerned about an acquisition that they just did being somewhat expensive as well.  With that said, I am keeping 2/3 of the position given what appears to be a very bullish chart and a low valuation.

We are using some of the cash to add to our ETF, which has been a real bad investment so far.  We first bought it over two years ago added more than a year ago.  The stocks in it are very cheap, and the markets are oversold.  According to MSCI, the index it tracks has a price/book value of just 1.5X, the forward PE is less than 10X and the growth rate in earnings should be double-digit.  The dividend yield is almost 3%.  Plus, it could protect us from depreciation of the dollar.  My one year target is 66% higher than the current price.  Here is a link to more information.

Recovery Extends In Quiet Trading

The market started the new month and quarter with a continuation of the bounce from 1560 early last week.  Here is how the models look:

Top 20 had a great week.  File this in the "you never know" category, but our biggest winner actually pre-announced a horrible quarter.  After making  a new 52-week low, EZPW turned around and ended up rising rather dramatically.  We had a bunch of other winners too.  For the week, the model improved by 3.64%, which was more than 2% better than the 1.63% rise in the S&P 500.  

Conservative Growth/Balanced, on the other hand, was flat, while its 60% stock and 40% bond index advanced almost 1%.  The lackluster performance was pretty widespread among the 14 names in the model, but it was the gold-miner that performed the worst.  The performance this year has been spectacular, and we have a lot less risk than the markets in this model right now given just 45% equity exposure and 20% bond exposure, 15% and 20%, respectively, below the benchmark as we focus on capital preservation at this time.

Outlook

I updated my outlook in the quarterly review last week, and I will repeat what I said:

In my Q4 report, I shared a forecast for 2013 of a very strong stock market, predicting a year-end close of 1664 on the S&P 500, and a weak bond market.  On the latter, I suggested:

Do NOT in Bernanke Trust, or you will get run over.  It won't be as bad as the stock market's bubble popping in 2000, because it can't (bonds have maturities), but do keep in mind that a 30-year bond will decline in price by 17% if rates rise 1%, erasing the next five years of income.  The risk-reward is terrible.  The most likely scenario is just a small rise, but there is a chance of a more vigorous rise if the economy picks up.  

In my Q1 review, with stocks up 10% and bonds already under pressure, I expressed some near-term caution, which proved premature, but suggested that my initial forecast for year-end might have been too conservative.  Of course, as the Q2 progressed, we blew away my year-end target, peaking at 1687.  The day after that peak, we reduced exposure as much as possible (adhering to the guidelines that govern cash levels and other attributes about the models).  I suggested then that we should drop to at least 1600 and more likely 1530-1570.  Here is a link to that communication.

As I said then, I will wait until another month or so to revisit my year-end forecast.  Presently, I expect that the correction could end in late July or early August, still with a likely low in the 1530-1570 area, but there is always a risk it drops more dramatically.  One big area of concern is the economic weakness in China.  I expect rising rates to be an on-going concern, but the impact on the economy should be muted.  Further, while it can have a negative short-term impact on investor psychology, rising rates won't likely cause investors to sell stocks.  First, rates likely won't rise dramatically - the economy just isn't that strong.  Second, while certain income-oriented stocks may have overdone it to the upside earlier this year, the historical relationship between interest-rates and the PE of stocks suggests that the overall market never priced in very low rates.  In other words, stocks seem to anticipate that interest-rates wouldn't forever remain at their ultra-low levels.

This week's action didn't really change my perspective.  We did move to new highs on the 10-year Treasury Note today, exceeding 2.7%.  

Articles

• Big 5 Sporting Goods - Seeking Alpha
• Ulta Beauty - Liston Street Pulse
• Opportunity in Russell Rejects- Seeking Alpha (Editor's Pick)
• Sporting Goods Stores - TradeKing

Have a great weekend  or rest of the weekend if you were fortunate enough to be enjoying  a long weekend.

 

Regards,

 

Alan Brochstein, CFA

www.InvestByModel.com

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