Thursday, November 10, 2011

Investment Report - November 2011: Opportunistic Levered

October was an exceptional month with a 47.9% gain versus the 10.8% gain for the benchmark leading to a 37.1% outperformance. Unfortunately, this was only a small recovery from the July, August and September selloff. With many stocks in the model still trading far below the July highs, substantial upside remains just to recapture those levels.

Though global GDP growth came under pressure during the summer and fall months, US corporations are reporting record profits. The yield curve remains very positive suggesting an attractive environment exists for equities. On a daily basis, it's becoming more apparent that the summer swoon was more of investor panic than a economic reason suggesting a return to even the April and May highs of 1,370 on the S&P 500 is probably warranted.

China remains a key focus of the model. While investments in China based stocks have been greatly reduced, the model still relies heavily on the demand for materials and construction related items coming out of China. With inflation easing and the Shanghai Composite index bottoming out during October, it appears that the hard landing fears are diminished providing for great upside in the sector. While some China based stocks appear awfully cheap, the risks of fraud continue to hold us back from additional investments for now.

Top Performers
Considering the strong gains in the S&P 500, it should be no surprise that this model had several stocks with very sizeable returns. The gains were led by crane manufacturers and retail. An interesting combination of global and domestic growth. Crane manufacturers Terex (TEX) and Manitowoc (MTW) both had gains of roughly 60% after both companies reported earnings better than expected. Retailers Liz Claiborne (LIZ) had a gain of 60% as it worked towards a transformation into three top brands and away from its namesake brand that it sold to JCPenny (JCP). Retailer Sears Holding (SHLD) had a 36% gain as it moves to externalize its valuable brands and monetize the vast real estate holdings. The other top gainer was Riverbed Tech (RVBD) up 38% after reporting earnings much better than expected. The stock spent Q3 selling off on expectations of weak demand, though RVBD ended up reporting stronger results than originally expected before Q3 started. Similar to the results of TEX and MTW, these companies saw massive summer sell off though results weren't even impacted. Fear over rode reality in these cases.

These gainers highlight the basic principles of this model. The model looks for stocks in the middle of a transformation like LIZ and SHLD or stocks trading at levels below their potential value such as MTW, RVBD, and TEX. These catalysts help propel the stocks to much higher levels when realized.

Bottom Performers
Amazingly, even in such a strong month the market has losers. As previously noted in a Covestor blog post, the model made an ill timed entry into MF Global that resulted in a 60% loss to the position in October. See blog post here for more details. The other bottom performers were not big contributors to the models monthly performance mainly due to position sizes. The losers were Savient Pharma (SVNT), Atwood Oceanics (ATW), and SodaStream (SODA).

Conclusion
The momentum has clearly turned in favor of being long this market. The model remains highly leveraged to take advantage of the opportunities for individual stocks to rebound to summer highs. Europe still remains a major concern, but European leaders appear set on finding a solution which eliminates a global disaster scenario. It also makes equities very attractive at these levels.



Disclosure: Long TEX, MTW, LIZ, SHLD, RVBD, SVNT, ATW, SODA. Please review the disclaimer page for more details. 




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