Invest By Model

Thanks!

This will be my last communication on this blog regarding Invest By Model.  Again, despite very strong performance in both the Top 20 and the Conservative Growth/Balanced model portfolios since our launch in 2008, I decided last month that I could no longer continue to devote my efforts to this project.  I have dedicated myself full-time to the opportunies in the legal cannabis market and am currently offering 420 Investor, a community focused on investing in publicly-traded cannabis-related stocks.  I expect to be part of several other ventures as well, including a fund that makes direct investments as well as an information service to connect private companies with private investors.

Through 4/11, here is how the models look:

Performance has improved lately in both models, both of which have lagged since the Fall.  I am very proud of the longer-term performance, whether on a one-year basis, where both models are ahead of the appropriate indices, or, especially, the since-inception results.

I am sharing some month-to-date performance detail as well:

Top 20 has outperformed the declining S&P 500 by about 0.8%.

The stocks in CG/B have held in very well, declining just 1.3% compared to the 3% loss in the broad market.

The website will no longer be accessible after Tuesday.  Finally, I want to thank you for the confidence you have shown in me over the years and to express my gratitude to my partners at Rainbox Holdings for their help in designing and supporting the technology that made Invest By Model work.

I wish everyone the best and hope that our paths may cross again!

 

Best,

 

Alan Brochstein, CFA

www.420investor.com

Market Limping into Quarter-End

Stocks are up 1% including dividends with just a day to go in Q1.  Here is how the models look:

Top 20 continued to give up its recent gains, though it is still enjoying a strong month after a weak start to the year.  For the week, the model fell 1.58% compared to a 0.44% drop in the S&P 500.  For March, Top 20 is up 2.1% compared to the S&P 500 being roughly unchanged.  EZPW and WFMI both declined more than 5%, and five other names fell 3-5%.  3 of the holdings rose by 3% or more.

Conservative Growth/Balanced had a very strong week, rising 0.53% while the benchmark of 60% stocks and 40% bonds fewl 0.15%.  For the month, it is up 2.4% compared to the index being unchanged roughly.  8 of the 12 stocks rose despite pressure on the market, with no stocks moving more than 3% in either direction.

Reminder

We will continue to manage both models through 4/15, but Invest By Model will close at that time. We will not be adding any new names to either portfolio but may reallocate.  There are no earnings reports scheduled between now and 4/15 for any holdings in either model, but there could be pre-announcements.   You are welcome to check out www.420Investor.com, which is currently $42 per month (and expected to rise in the near future), with a full refund offered within 30 days.  I am sorry that I don't have any referrals that I can make.

 

 

 

Top 20 Trades

We are trimming most of the energy company and adding to two below-average names with above-average expected returns.  The energy company, which received an acquisition bid, could attract another bid.  As it stands, the acquiring company didn't perform well initially and could rally too.  With that said, the story has pretty much played out, and the acquiring company is not as cheap as the company it is buying and also has a lot of debt.

The buys both offer 50% or so to my one-year projected target.  The consumer stock is a bit riskier, so its position size will end up smaller than the healthcare company.  The trades yield some extra cash - not a bad thing right now in my view.

Options Week Recovery

The market rallied back  this past week.  Here is how the models look as of 3/21:

Top 20 gave up a little ground, mainly on Friday.  For the week, it rose 0.53% while the S&P 500 rose 1.38%.  For March, the performance remains robust, with a 3.77% return compared to 0.48% for the S&P 500.

 

Conservative Growth/Balanced is also having a good month after a rough start to the year, with a 1.86% return compared to the 0.12% return for the index of 60% stocks and 40% bonds.

 

Special Note

Invest By Model will close on 4/15/14.  I notified subscribers earlier this week that my 420 Investor service, which has more than 1500 subscribers now, requires my full attention.  I have also announced the closure of my swing-trading alert service, The Analytical Trader, as well as the end of the last of my institutional consulting relationships.  Thank you for your interest and support over the years.  My contact information, should you need it, is [email protected].

 

Alan Brochstein, CFA

 

Market Pulls Back

The market struggled near the flat-line again, pulling back substantially.  Here is how the models look as of 3/14:

Top 20 had a stellar week, driven by the EPL acquisition announcement.  For the week, the model returned -0.25%, while the S&P 500 pulled back 1.91%.  This leaves Top 20 up 3.23% month-to-date, while the index has dropped 0.89%.  NEM was a standout performer, while AEO performed poorly following earnings.

Conservative Growth/Balanced posted performance that basically tracked the 60% stock and 40% bond index, with the model rising 0.08% while the index dropped 0.12%.  While the 0.2% gain wasn't particularly impressive, it's interesting that the model was able to outperform despite being underweight bonds, which had a decent week.  The stocks in the model did outperform the S&P 500 significantly, with WSM and NEM contributing nicely.  The month-to-date performance in this model has been good, though the model continues to have a rough quarter (after a great 2013).  So far, it has rallied 1.15% in March compared to a 0.3% gain for the index.

Outlook

I want to reiterate the caution that I have shared recently.  The situation in Russia may be more important to the market than many realize.  RSX, the Russia ETF, broke to a two-year low, and emerging markets (see VWO) look tentative.  I continue to project that the market could be under some pressure over the next month or so.  Again, 1700 on the S&P 500 would seem a likely limit to the downside, perhaps 1650.  My year-end forecast remains 1968, which, translated into English, is a decent but not great year, and I think we will experience more peaks and valleys than we did in 2013.

Market Marches On

The month got off to a good start despite turbulence Monday.  Here is how the models look:

Top 20 had a very strong week, rising 3.48% compared to the 1.04% gain in the S&P 500.  The recovery in the name that we sold Friday helped, but several of the stocks jumped more than 5%, including a double-digit gain in IRG following its Q4 earnings reort and 5%+ moves by LMNX, MASI, NEM and ROSE.

Conservative Growth/Balanced also recovered from its rough start to 2014, gaining 1.06% compared to the 0.41% jump in the index of 60% stocks and 40% bonds.  Bonds were weak, and the model is underinvested (about 25% exposure).  The position we sold on Friday helped, but it was a relatively small holding.  NEM rose 5%, with most of the rest of the holdings returning within a couple of percentage points of the market.

Outlook

While the market remains resilient, I still expect flattish to slightly down performance in March and into April.  The weakness in January may have proven to be the lows of the year, but I anticipate a reasonable chance of testing them or possibly making a new low in the 1650-1700 area.  My year-end forecast of 1968 for the S&P 500 remains my best guess, and this represents just 5% price return from here.  

 

Top 20 and CG/B Trades

The exit in CG/B is due to valuation - even with a revised target, there appears to be less than 20% upside over the year.

The exit in Top 20 follows a very disappointing Q4 and outlook.  While I expect that the company will overcome these challenges and improve its operations, I think it could take time.  The stock has bounced nicely in the past few days - patience rewarded for not blowing the stock out immediately.  Our buy is a turnaround story that could yield quicker results.  I get a 43% return to my one-year expected price on the buy, while the sell offers less than 30%.

Stocks Sailing Strong

With two months down, the bull market lives on, making new highs this week.  Here is how the models look as of the end of February:

Top 20 had a rough week with two earnings-related challenges that resulted to double-digit percentage mark-downs.  For the week, the model dropped 1.2% compared to a 1.3% rise in the S&P 500.  Consequently, the month's performance lagged, with the model rising 3.17% compared to the the 4.57% rise in the S&P 500.  For the month, the model enjoyed strong performance from EZPW and EPL, but the drag from CLH, CAG and BGFV offset their contributions.  

Conservative Growth/Balanced rallied just 0.07% this week, trailing the 1% return from the 60% stock and 40% bond index.  For February, the model returned 1.03% compared to 2.96% for the benchmark.  The bond index has returned 2.02% so far in 2014, and the model has been underweight, which has contributed to about 0.3% of the underperformance.  For February, CAG was the only real drag on performance that stood out, but most of the stocks did trail the S&P 500.  

Outlook

The early-in-the-year weakness that we discussed at year-end proved to be a buying opportunity.  The market appears to be in "bull mode", but the likelihood of a powerful continuation appears low.  Oddly, the S&P 500 is beating both small-caps as well as mega-caps, with mid-caps representing the best returns so far.  We continue to expect a choppy year with the potential for about 10% total return in stocks and low or slightly negative returns on bonds.  The signals we watch are not flashing too much caution except for dollar weakness relative to the Euro, which is bullish for stocks until the trend reverses.  The market seems to be discounting weakness in emerging markets for now.  The bottom-line is that March could see a pullback that leaves the Q1 returns a bit negative after four straight positive quarterly returns in the S&P 500.

Trades in Top 20

We are exiting two technology names and trimming another, with the balance being deployed into two very oversold names, one of which was a recent purchase, and repurchasing a healthcare name that we sold earlier this year.  The large-cap stock we are selling offers 40% to the one-year target, while the smaller one yield 29% and the one we are trimming offers 40% as well but is a bit overbought.  The add offers 54% and is very oversold. The two new names offer 48% (the consumer discretionary name, which is extremely oversold) and 42% (the healthcare name, which is modestly oversold).

Market Churns as Options Expire

The market was pretty quiet considering that it was options expiration.  Here is how the models look as of 2/21:

Top 20 had a strong week, rallying 1.06% while the S&P 500 dropped 0.08%.  This leaves the model up 1.2% more than the market so far in February but still down 1.11% in 2014.  The major drivers of the performance this week were the general strength of smaller stocks but also the surge in Energy stocks.  We also had a retailer bounce back.  Four stocks improved by more than 3%, and only one stock fell by more than 3%.

Conservative Growth/Balanced basically tracked the market, declining by 0.07% while the index fell by 0.03%.  The performance in February has been weak, with the model up 0.96% compared to 1.95% for the 60% stock and 40% bond index.  So far in February, two stocks have increased by 5% or more, while two have declined by that much.  Most of the stocks have increased, but the median return is certainly below the S&P 500.

Outlook

I continue to expect the markets to churn in Q1.  It's possible that the lows were set earlier this quarter (though I see risk to 1700 and possibly 1650), and a break to new highs would lead me to be more bullish technically.  I have no change in my expectations that the market should achieve high-single digit returns in 2014.