Wednesday, April 6, 2011

Investment Report - April 2011: Opportunistic Levered

March was another volatile month. The month ended on a solid note with the Opportunistic Levered model ending with a 2.3% gain compared to a slight loss for the SP500. Considering this model ended the month with considerable leverage on the long side, its always very positive when it outperforms the market in negative months even if the loss was negligible.

As mentioned in the March Investment Report, the market was in need of a selloff and the SP500 got that in the form of a roughly 7% drop to the intra-day low of 1,249 on March 16th. While many experts continue to expect and expected a larger selloff, in our view this was the buying opportunity we were waiting on.

Added More Long Exposure
Since we expected a drop to around 1,250 to be close to a bottom in the SP500, we added more long exposure around the middle of March. Specifically we added exposure to the oil services and commodity sector to benefit from the rebuilding in Japan and continued emerging market growth. Also our research focused on stocks that had recently seen drops in the 10-20% range from recent highs in February.

United States Steel (X) was a new position expected to benefit from the increased demand for steel in Japan while also benefiting from a closure of steel mills due to the earthquake and tsunami. X also benefits from having its own source of iron ore allowing them to benefit from rising commodity costs while competitors are squeezed.

Weatherford International (WFT) was another addition added on the 15th aimed at benefitting from the higher oil prices. WFT was also hit by a tax restatement placing concern on their financial controls. While the tax issue is a concern, it doesn't appear to place any long term distress on their business. The drop has turned out to be a gift as other oil service companies were hitting high notes in mid March.

Freeport-McMoRan Copper & Gold (FCX) was a position we added to on the 16th as the market was hitting its lows. FCX was a long term holding that was trimmed earlier this year and reinitiated at the end of February. Copper hit a peak earlier this year and has struggled since, but all signs exist that copper supply will struggle to keep up with Asian demand.

The purchase of FCX concluded a string of buys that added exposure to commodity and emerging markets from mid February to mid March. All in all, ICICI Bank (IBN), ChinaCache (CCIH), and Radware (RDWR) were bought in addition to X, WFT, and FCX bringing the model to leverage of 1.7.

No Sells Yet
No positions were sold in March as the market was selling off leaving stocks more attractive to buy then sell. With the six additional positions added, the current holdings list has reached a level higher then the historical average for this model and above our desired level.

In the next few months expect the position total to drop back to the expected upper limit of 25 via either out right sells or position consolidations like the Alpha Natural Resources (ANR) buyout of Massey Energy (MEE). Also, Cephalon (CEPH) recently got a bid from Valeant Pharma (VRX) leaving the likelihood that this model will cash out of CEPH with the stock already trading above the $73 offer.

Conclusion
The market remains attractive at these levels. Expect some bumpy earnings reports as some sectors like technology could have Q1 numbers impacted by the disaster in Japan. Though this model is virtually fully invested, any sell offs in leading technology companies would be seen as buying opportunities and not a reason to panic sell.



Disclosure: Long all stocks mentioned in client and personal accounts. Please review the disclaimer page. 

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