Invest By Model

With Just Two Days To Go, 2013 Exiting Strongly

Even in a holiday-shortened week, the market managed to rally, closing up three of the four days.  Invest By Model portfolios performed well:

Top 20 rallied 2.35% compared to the S&P 500's 1.31% gain, with most of the "beat" taking place on Friday.  The strong performance has helped close the gap in December, with the model up 1.88% and the market up 2.13%.  The model entered Q3 ahead of the market but is up just 5.39% compared to the smoking-hot 10.08% QTD return for the S&P 500.  Top 20 has been repositioned during the quarter and has several bounce-back candidates poised to benefit from the end of tax-loss selling, which now appears behind us.

Conservative Growth/Balanced rose 1.1% this week, well ahead of its 60% stock and 40% bond benchmark, which gained 0.63%.  December performance has been robust at 0.8%, 0.24% better than the index, while the model remains modestly behind the bogey for Q4, trailing by 0.78% with a 5.08% return.

Outlook

As I projected at the beginning of the year, 2013 was great for equities, much more than I had expected.  Recall that my original prediction was for 1664 on the S&P 500, though I revised that to 1740 during the summer.  It looks like we will close above 1800 - a fantastic year by any measure.

2014 should be modestly higher - my target is 1968.  There will be more challenges, and I am highly confident that the 2012 and 2013 experience of never trading at the prior year's levels will not repeat.  I expect that the trading will be defined between 1650 and 2000.  While the past few years have seen most of the equity returns related to higher PE, that game is getting old.  My target assumes an equal mix of PE expansion and EPS growth - hence the less robust outlook (though positive).  There is a reasonable chance that growth accelerates a bit, and we will see the market get concerned about rising rates in that case.  The reality, though, is that any growth expansion will prove modest.

I will have a more detailed outlook next week...

 

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Final Thoughts

I have been offering Invest By Model for over 5 1/2 years.  I really enjoy helping investors manage their money so that they can attain reasonable performance at very low costs, but I have to confess that as a commercial pursuit, Invest By Model is an utter failure.  This is disappointing, as the long-term performance of both models has been quite strong.  We have so few subscribers, that my time isn't justified, yet I have continued to offer the two models and to fully engage myself in sharing my best ideas transparently.  

As we approach year-end, I seek your input.  I am contemplating several alternatives, including ending the service, pursuing it in a different venue or just keeping it the same but charging more.  I would appreciate any input that you care to share with me - you can email me at [email protected].

Thanks,

 

Alan Brochstein, CFA

www.InvestByModel.com

Trades in Conservative Growth/Balanced

We are selling part of our position in a retailer that has done very well since we added it four months ago.  The stock is just moderately overbought, but the return to my one-year target is only 22%, which suggests trimming the position, as our exposure had reached over 5.5% of the entire portfolio.  We are adding to a healthcare name that we had trimmed two months ago and doubling the position so that it is no longer our smallest name.  This stock offers 27% to my one-year target, and the stock has retreated about 4% since our sale, despite a strong market.

New Highs

The markets blasted to new highs following the FOMC's move to begin "tapering."  Here is how we look:

Top 20 had a strong week, rallying 2.86% compared to 2.45% for the S&P 500.  The model is still lagging in December, down .45% compared to a positive move of .81% for the market, and for Q4, trailing the 8.67% return for the market by 5.69%.  We have several positions that are suffering from year-end tax-loss selling, though some of them began to bounce finally this week.

Conservative Growth/Balanced also edged out its index, the 60% stock and 40% bond index, posting a 1.62% gain compared to 1.51%.  This model trails its benchmark just marginally in December and 1.27% for Q4 so far.

Outlook

With just 6 trading sessions left, it seems likely that the year will end above my 1740 projected close.  The S&P 500 notched an all-time high of almost 1824 before closing at 1819, more than 1% above 1800 "ceiling" I had expected to be tough to penetrate.  While the year ahead could be good for stocks (I forecast a 1968 close, which is 8% higher than today's close), I expect a lot more volatility in 2014.  The market will likely be contending with higher interest rates as well as a new Chairman of the Federal Reserve.  Later in the year, we will have mid-term elections.  Of course, there is always that which can't be predicted either.  As one who has been bullish for several years. I don't think it gets much better than 2013.  That doesn't mean, however, that bad times lie ahead.  We have a lot of slack in the economy, especially in labor, and we can enjoy non-inflationary growth for several years.

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Have a great weekend!

 

Alan Brochstein, CFA

www.InvestByModel.com

Top 20 Trades

We are replacing a buy from late September that has soared 27% and now offers just 24% to the one-year target.  The stock is also extended.  The buy offers 40%.  We are also trimming a recent add that rallied 9% to shift into an energy name.  The expected returns are 38% on the name we are reducing and 66% on the name we are increasing. Note:  If you are tax-sensitive, you might wait a day or two on the trim of the technology name, as you will be able to take a short-term loss against a purchase earlier this year rather than the 11/18 transaction.

A Rare Down Week for Markets

After months of trudging higher, the markets reversed this week.  Here is how we look with 11 days of trading left in 2013:

Top 20 lagged, tracking the weakness in smaller stocks and dropping 2% compared to the S&P 500's 1.6% loss.  This has been a challenging quarter, to say the least, but it follows an exceptional quarter.  The main issue has been a few really weak stocks getting weaker.  In retrospect, I should have exited these names, as I recognized that there would be pressure for tax-loss harvesting, though it has been worse than I expected.  The names in the model portfolio were all over the place - one big loser had a nice rebound this week but a few remained under pressure.

Conservative Growth/Balanced fell 1.42%, which was 0.52% worse than the 60% stock and 40% bond index.  The model is having a fantastic year, but it has given up part of its gains achieved relative to the market earlier this year.

Outlook

I can't say that I am surprised by the market's slight retreat, as I had suggested 1800 might serve as a ceiling for this year.  The actual high was 1813.55 on the last day of November, a quiet Friday, and the market has been for sale since, but without a lot of pressure.  While we closed down this week, we are still above the high from October.  I expect that we could close near the 1740 level that I had forecast on 8/1 (up from an original forecast at the beginning of the year of 1664).  This would represent just a 2% decline from here.  More importantly, I don't sense a lot of risk to the market in the near-term, though I expect we could decline as much as 10% from the year-end closing level next year at some point.  My 2014 year-end forecast is still 1968 (16PE).

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Have a great weekend! 

 

Alan Brochstein, CFA

www.InvestByModel.com

 

Top 20 Trades

We are exiting two names that offer less than 20%  to my expected one-year targets.  One is a recent purchase that jumped sharply since we added in in late October.  I hope to add this back in the future, as I like the company, but the valuation seems too high.  The other is a longer-term holding that imploded in 2012 and came back strong this year.  I have less confidence in management and the story than I did a few years ago and prefer to move on, fortunately at a better price than it could have been had we thrown in the towel when they were facing challenges.  At this time, the stock is extended and moderately overbought.

We are adding two names that are already in Conservative Growth/Balanced.  The food company offers 30%, while the technology company offers 46% and is moderately oversold.  See the research pieces for more information.  We are also trimming a materials play.  The performance here hasn't been great, but the fundamentals have deteriorated.  The stock offers 37% to my one-year target and, thus, is being reduced to below average.  We are adding to a recent energy company purchase - 77% to my one-year target.  We are also adding to our gold miner - 76% to my target.  Both of these buys are very oversold.

One Up Day Erases Four Declines

I get the feeling the market is going nowhere fast.  After four consecutive declines, a fabulous Friday left the market near its record closing levels from late November.  Here is how the models look with just a few weeks left in 2013:

It was a rough week for Top 20, and this follows a rough month.  While the S&P 500 was essentially flat, smaller stocks lagged, as did Top 20, which lost 1.25%.  It seemed like our best-performing names were our smaller positions, and some of our larger ones were weak.  After a fantastic Q3, this quarter has been a real dud, with Top 20 rising only 2.16% compared to the S&P 500's strong 7.8% gain.  Part of the challenges has been extreme pressure on some of the losers that we have kept, though dumping TITN proved to be a good move.  I do think that the model is well-positioned as we enter the new year.  I may look to replace one or two names in the coming days.

Conservative Growth/Balanced had a reasonably good week, declining .48% compared to the .67% decline in its 60% stock and 40% bond index.  The model is lagging slightly in Q4, with a 3.75% return compared to the 4.57% gain in its benchmark.

Outlook

While we have broken through the 1800 ceiling, it still rounds to 1800.  I continue to expect a good year for stocks next year (1968 on the S&P 500 at year-end), though I expect that we will be down YTD at some point during the year (unlike both 2012 and 2013).  The large gains in the market this year are leading to some abnormal tax-loss selling, and I expect that we will see some of these big winners this year come under pressure as the new year begins and sellers who wanted to defer taxes hit the bid.

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Have a great weekend!  

 

Alan Brochstein, CFA

www.InvestByModel.com