Author: American Values Investments
Model: American Heroes
At American Values Investments we intend to stick to our American Hero investing strategy. That means during the first quarter we will determine which stocks have the best long term outlook. We will also evaluate our diversification to see if there are significant opportunities. As year end reporting winds down, these factors will be more apparent.
At that point, we will begin the rebalancing process, which forces some selling high and buying low. Stocks will be evaluated on the prospects of their long term contribution to the model and some will be replaced. Our equal weight strategy means the remaining stocks that have appreciated the most will be reduced and those that are behind will be increased. A stock with above average performance could be removed if its valuation significantly exceeds its potential. A poor performer has either become a good value or has fundamental challenges. Any new stocks will be bought at the equal weight.
We use a proprietary analysis of fourteen different fundamental metrics to determine stocks for inclusion in the model. Preliminary evaluations indicate that as many as eight (or a third) of the portfolio could be replaced. A combination of factors, including new heroes, fundamental changes, and sector allocations are contributors. If all the changes are made, that would be at the high end of the range of our historical changes – four to six is more in the middle of that range. The American Hero Index will also be rebalanced to equal weight, and the participants will be adjusted based on the current hero scores as determined by the research process.
The fourth quarter of 2010 – as the whole year of 2010 – was good for equities in general and American Hero Company stocks in particular. Can we expect more of the same in 2011? There are some good arguments that say we can. Over 70% of the time the third year of a presidential term has been positive for stock returns. Typically, both political parties are doing all they can to help the economy as the next election cycle approaches. Many of the macro-economic statistics point to moderate growth.
The stock market itself has been a pretty good leading indicator of where the economy is headed. Earnings continue to grow. Federal, state, local, and foreign debt levels could provide some headwinds. Slow revenue growth may also be a hindrance and the lack of jobs does not bode well for consumption. Price to earnings ratios are a bit above historical norms. Some say we are in a range-bound market which could mean a correction or slow down depending on what the boundaries of the range are before the next extended bull market.
Higher equity returns derived from earnings growth are more sustainable. But higher equity returns derived from speculation and/or emotions are more suspect to downward revision.
