>Author: Mark Holder
Covestor model: Net Payout Yields
Disclosure: Long LMT, COF, CSX, WLP, VOD, ITUB, LO
January was a solid month for this model, as it beat the benchmark (up 2.6% versus 2.26% gain for the S&P 500). For a Risk Score 1 model, the goal remains to outpace the benchmark by a slight amount each month with greatly reduced volatility as opposed to models in higher risk scores.
Trades
No trades were made in January, which will be typical, especially for a month so close to model creation in November. It’s expected that stocks will remain in the model for at least 6-12 months, when they will hopefully rotate out due to gains that have reduced the net payout yield below desired levels.
Top Performers (Data: Yahoo Finance)
The best performing stocks for January will likely surprise most investors. Both Lockheed Martin (LMT) and Capital One Financial (COF) had gains exceeding 13%. With defense budgets in question, LMT spent the 2nd half of 2010 in the dumps. With a dividend yield above 4% when 2011 started, it should’ve been little surprise that investors would finally turn back to this stock. Add in a solid buyback program and this stock was set to outperform.
Likewise, COF was another stock that missed the rally that began in September. Unlike LMT, COF didn’t have the yield support, but it does now have the earnings to support a return to higher dividends and possible buybacks.
Other top performers that garnered gains in excess of 7% were CSX Corp (CSX), Wellpoint (WLP), and Vodafone Group (VOD).
Bottom Performers (Data: Yahoo Finance)
Two stocks had very weak months with losses in excess of 8%: Itau Unibanco Banco Holding (ITUB) and Lorillard (LO) were hit pretty hard, for different reasons.
ITUB has been impacted by high inflation in Brazil that has led to higher interest rates. Being a strong bank in a country with bullish long term prospects, any drop appears short term.
LO was heavily impacted during the month from concerns regarding menthol bans. The company has a 6% dividend yield and spent roughly the same amount on share buybacks in 2010, leading to a 12% net payout yield. The concerns about the cigarette industry may be high, but the cash generation and decisions of management encourage us to remain invested. In fact, the annualized buyback yield from Q4 alone was roughly 10% after the company spent $285M on its own stock. This highlights how short term lower stock prices can actually benefit investors in these stocks.
Summary
After an initial weak month in November when the model began tracking results, it has remained consistently stable with the market. Any major outperformance by this model will be a struggle, as the market zooms ahead, favoring small and mid caps. The model strives to provide strong downside support when a correction eventually takes place. As the LO example shows, market or stock weakness can be relished in certain cases, making it much easier to sleep at night.
