Wednesday, February 8, 2012

Investment Report - February 2012: Opportunistic Levered

After a bad 2011, this year got off to a fantastic start with the model seeing a 25% gain in January easily outperforming the 4.4% gain for the S&P500. The model spent most of the month accumulating cheap stocks in order to take advantage of the market rallying against the proverbial 'wall of worry'.

January was an interesting month with stocks rising even in the face of what appeared like continued negative news out of Europe. With the continued focus on Greece, most investors stayed out of the stock market and missed that yields on Italian and Spanish bonds saw dramatic declines. The ability to isolate the problems to Greece and Portugal to a lessor extent were a big relief to a market pricing in a European blowup in December.

In addition, the decline in emerging markets inflation was a big benefit to the under performing stock class in the new year. Specifically fast growing countries like China and India saw multi year lows in inflation rates allowing monetary policy to pause and potentially ease as 2012 progresses.

Top Performers
The crane manufacture stocks of Terex (TEX) and Manitowoc (MTW) both saw massive gains in January. Signs of increasing construction demand in the US and the potential for continued strong growth in emerging markets conversed onto this sector that was still trading close to 52 lows.

The most impressive gain came from ChinaCache (CCIH) gaining nearly 75% jumping from $4 to $7. Unfortunately it was a very small portion of the portfolio at that point so the contribution to model  gains for the month were slight.

Other big gainers were Sears Holdings (SHLD) and SodaSteram (SODA). Sears was mostly a bounce back from sharp declines in the last couple months of 2011 because Chairman Eddie Lampert bought $150M+ in shares. On the other hand, SodaStream bounced from a long 5 month consolidation period. With all signs of a bullish holiday season for a home beverage maker, it could be positioned for a big run in 2012.

Bottom Performers
Hard to imagine that a portfolio that jumped 25% in one month could have losers, but this one managed to have 3 stocks with more than a minimal loss. The main culprit was the the drop of natural gas to 10 year lows. While the model attempted to focus on stocks benefiting from the high prices of oil or met coal, stocks with natural gas exposure were hit during the month.

The biggest loser was C&J Energy Services (CJES). The stock was down over 20% even though the hydraulic fracturing stock is focused mostly on oil plays. In fact, the company confirmed in early February that all of it's fracking fleets were now working on oil plays. Due to it's depressed stock price and huge earnings potential, C&J remains one of our top picks for the rest of 2012.

Carrizo Oil & Gas (CRZO) also had a bad month as the nat gas price declines impacted it. Noteworthy though, the company exited 2011 with more than 50% of its revenue coming from oil projects specifically in the Eagle Ford. The oil percentage will probably rise to 60-70% in a short time if nat gas remains this low. Currently, Carrizo is obtaining prices of NYMEX plus $9 for that oil.

The other major loser for the month was Monster Worldwide (MWW) dropping roughly 10% after a disappointing Q4'11 earnings report. The company actually had sizable gains heading into month end, but it dropped over 20% after the weak guidance for 2012.

Trades 
All of the trades in January were purchases as the model levered up with the rising tide. Foster Wheeler (FWLT) was added in a couple of purchases around $20. The stock was added back after dumping it towards the end of 2011. Foster Wheeler will benefit from a rebounding global need for construction of energy projects. Gafisa (GFA) was also added back to the model after dropping it in 2011.

The only new stock was OCZ Technology (OCZ). This leading provider of solid state drives (SSDs) saw exceptionally fast growth last year and expects to continue growing at a fast clip in 2012. With the tech stock valued at only 1x sales, the stock was too cheap to ignore.

Existing positions were increased in Lincoln Financial (LNC), Monster Worldwide, and Savient Pharma (SVNT) as the stocks appeared ready to rebound from 2011 lows.

Conclusion
The year got off to a solid start with more gains expected. The potential even exists for a market breakout to challenge 2007 highs. Clearly risks remain and investors have to remain diligent to manage risks.

For now, this model remains levered and ready to take advantage of fund flows out of bonds and dividend paying stocks into growth and emerging market stocks.


Disclosure: Long all stocks mentioned. Please review the disclaimer page for more details. 


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