Tuesday, April 17, 2012

Investment Report - April 2012: Opportunistic Levered Portfolio


This model lost a disappointing 5.8% in March versus a 3.1% gain for the benchmark S&P 500. This model typical outpaces the major indices by a large margin in up periods so the last month was a major exception.

Since the end of 2011, this model has been running on the theme that the majority of stocks would retrace the losses experienced since the July 2011 levels. In essence, our theory all along has been any losses since that time period were from irrational fear of a second financial collapse that the Europeans were unlikely to allow. Naturally this fluctuates on a case by case basis where any individual stock could move a lot higher or lower depending on circumstances since then.

Unfortunately this theory took a major turn in March as investors piled into dividend paying stocks sending most major indices higher while at the same time selling the higher risk, global growth stocks. In some cases, it was just a small reversal of the gains from the last couple of months, but it other cases some stocks continued to face relentless selling pressure.

Some major gains occurred in the positions of Liz Claiborne (LIZ) and Monster Worldwide (MWW) as both companies gained from speculations of takeover bids. In either case, this model would be happy to take a premium bid and roll the money into other cheap stocks, but neither stock was bought specifically for the takeover theme. Both stocks remain incredibly cheap probably a contributing factor to the buyout themes.

Those gains were swamped by major losses in AerCap Holdings (AER), SodaStream (SODA), Terex (TEX), and numerous other stocks. For the most part, the selling just makes these stocks cheaper. Fluctuations will occur in some of these volatile stocks, but ultimately the expectation is that prices will eventually end up higher making the reward worth the risk.

Trades
Trading for the month was mostly limited to reducing positions in a couple of winners such as Dicks Sporting Goods (DKS) and Radware (RDWR).

A new position was initiated in leading mobile advertising firm Velti (VELT) as the company trades significantly below the recent and 5 year growth rates. The position in Foster Wheeler (FWLT) was eliminated mainly to reduce leverage though this stock was selected as it appeared from a technical view to be rolling over.

China
The biggest impact to the model has been the fear over global growth and especially China. As China growth begins accelerating in the second half of the year, we’d expect material stocks to roar back. Materials such as copper and met coal haven’t faced growing demand from both the US and China in a long time which could place significant stress on supply. Hence, stocks such as Alpha Natural Resources (ANR) and Freeport McMoran Copper (FCX) should benefit from dominant positions.

Conclusion
The market in general remains in an uptrend that likely will lead to multi year highs and possibly eventually to all time highs in the S&P 500. This remains in place even after weakness at the end of March and the start of April. This model while fully invested now will likely allow leverage to unwind with future gains.

After trimming a couple stocks approaching peak valuations, the remaining stocks owned or followed trade at extremely low valuations. Investors need to understand that growth stocks have underperformed the market during this rally since last October in favor of dividend stocks. It would not surprise us to see a period over the next few months where growth stocks surged ahead even as the S&P 500 stalls.



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




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