Thursday, January 6, 2011

Investment Report - January 2011

This report focuses solely on the Opportunistic Levered Portfolio, but contains general information that relates to all of the Opportunistic models. The investment returns relate to subscription data available at Covestor.com. 

December was another excellent month for the Opportunistic Arbitrage model as the streak of months exceeding 9% gains extended to 4. The model was up 10.92% versus 6.53% or a active return of 4.39%. Not bad, but not as much relative performance as hoped for in this risky model.

Despite the strong market in December with the SP500 up over 6% on a relatively straight line up, this model faced a very volatile time period with numerous big winners and several stocks that actually saw 5%+ declines. When investing in small and mid cap stocks one has to be cognizant that these stocks can be very volatile on a daily, weekly, and even monthly basis. As one wise investor once said, its better to make a volatile 15% then a straight line 12%. In the end, investors are better off ignoring the daily price swings and focusing on the end results.

The market remains extremely cheap as the economy continues to regain growth and add jobs, but it's important to remain vigilant for market corrections as the gains since the end of August have been large. Subscribers should expect more volatility in returns over the next few months, but keep an eye out for the ultimate prize. The goal isn't where your portfolio is at in the next couple of months, but where it ends up in the next year or more.

One of the major reasons for the volatility of this model was Puda Coal (PUDA). PUDA started the month off strong surging nearly to $17 only to have the rug pulled out from investors with a secondary offering at $12. This crushed the stock mid month only to see it rally back to near break even by the end of the month. Considering the offering is being used to finance coal mine consolidations in China any price around the offering provided an exceptional long term value. The disappointing part though was the excessive discount given in the offering.

Regions Financial (RF) provided the biggest return of over 30% probably catching most investors off guard. The regional banks had a good rally into year end. Terex (TEX) provided the greatest contribution to the portfolio return as construction and commodity stocks mostly saw good returns. The other big gainers all fell into this category including Foster Wheeler (FWLT), Alpha Natural Resources (ANR), and Freeport McMoRan Copper & Gold (FCX). With those 5 stocks averaging gains in excess of 20%, it backs our disappointment that the model only had a 10.9% gain.

The major loser for the month was Limelight Networks (LLNW). Whether due to pricing concerns in the CDN sector or fears that Apple (AAPL) was in the process of launching its own network, LLNW had a very weak month. The other major losses came from biotech companies and a Chinese copper recycler that had a negative allegation tarnish its stock price. Rigel Pharma (RIGL), Savient Pharma (SVNT), and Cephalon (CEPH) averaged losses of 5% for the month. Lihua International (LIWA) remains a top pick due to its involvement in copper recycling and refinement in China regardless of a repeat allegation that has been refuted by the company.

Though the individual stocks were very volatile, the overall market wasn't. Hence, this model had zero transactions for the first month in a while. For now the portfolio will continue to ride what is expected to be another good stock market in 2011. Several short ideas have been contemplated to not only hedge recent gains but to take advantage of possibly over extended markets, but the mantra of never shorting a dull market has held true so far. That will likely end sooner then later so I'll keep on looking for the right entry points.

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