August was a decent month for this model with an active return of 1.02% (Portfolio was down 4.66% versus the benchmark S&P500 down 5.68%). Naturally on an absolute basis the results are disappointing, but this model is not designed to time the markets. The goal remains to outperform on the way down and remain even on the way up producing superior returns over time.
After several semi active months of trading especially in May and July, August saw no trades executed. Typically the model trades more in good markets as companies outgrow yields making them less attractive to keep. While down markets normally lead to higher yields and a improvement in the decision for keeping a security in the model.
Lorillard (LO) remained the largest stock in the model as the tobacco stock was able to post a nearly 5% gain in the month. CSX Corp (CSX) remained a top weight even though the stock plunged. The railroad operator remains tied to a cyclical business and was the 2nd biggest contributor to the portfolio loss in August. FirstEnergy (FE) remains one of the largest weights as the utility company ended August close to 52 week highs. Accenture (ACN) had the 4th largest weight in August, but it saw significant losses over fears the technology consulting company would be hit hard from a global recession. Campbell Soup (CPB) was another top weighted stock for August though it saw a small drop as well.
The market has seen significant losses this summer due to fears of a global recession. As the market got weaker, the net payout yields only got more attractive in most stocks in this model. 3% dividend yields turned into 4% dividend yields. 10% net payout yields turned into 12% net payout yields.
Not only do these stocks gain in appeal when the market drops, but investors can sleep at night knowing that weakness is an advantage for the typical stock in the model that has massive income and liquidity. This financial flexibility can be used to buy more stock, increase the dividend yield, or take advantage of a weaker competitor or new market. All adding up to strong companies and hopefully higher stock prices down the road.
Disclosure: Long all stocks mentioned. Please review the disclaimer page for more details.