Author: Andy Schornack
Covestor model: Financial Services
Disclosure: Long LXP, NYB, CWH-D, FMER, TWGP
February was the sixth straight month of model portfolio gains. A rising tide certainly lifts all boats, and this portfolio is no exception. However, I did spend particular time researching investments to position the portfolio into the right boats to weather the storms and the changing tides.
Over the month of February, concentrations in Lexington Realty Trust (NYSE: LXP), New York Community Bancorp, Inc. (NYSE: NYB), and Commonwealth REIT PRFD ‘D’ (NYSE:CWH-D) were reduced. All three remain larger positions in the portfolio, are solid companies, and provide attractive yields; however, after recent market advances, I wanted to lift the portfolio’s cash position for new opportunities.
The new addition to the model portfolio in the month was FirstMerit Corporation (NASDAQ: FMER). FirstMerit Corporation is a diversified financial services company headquartered in Akron, Ohio, with assets of $14.1 billion as of December 31, 2010 and 207 banking offices and 220 ATMs in Ohio, Western Pennsylvania, and Chicago areas. The bank in 2010 entered the Chicago market with two FDIC transactions after purchasing 24 branches from First Bank. This significantly increased its market presence in the Chicago MSA and provides further diversification and long-term growth opportunities. The bank was added to the portfolio for its future earnings potential, coupled with its dividend of $0.16/share per quarter, which yields 3.86% as of the close of trading on March 1, 2011. (Google Finance) The purchase fits into my regional bank thesis. As a bank with a good underwriting history and an opportunistic entry into the Chicago market, it is positioned well for the next several years.
On March 1, 2011, a portfolio position in Tower Group, Inc. (NASDAQ:TWGP) had a significant pullback which will impact the returns for the month of March. The drop on March 1, 2011 was driven primarily by 2011 guidance provided by the company below analyst expectations of $3.47. It is my opinion that this is an overreaction. The company beat analyst estimates in Q4 2010 on both revenue and earnings. In Q1 2011, the company articulated on its Q4 conference call that is will be taking a $46.2 million to $48.8 million or $1.12 to $1.18 per share charge to owners equity related to a change in the accounting of deferred acquisition costs. Yet at the projected earnings of $2.70 -$2.90, the company continues to provide good value, a dividend of $0.125/share per quarter (2.10% yield as of March 1, 2011 (Google Finance)), book value of $26.22 as of December 31, 2010, and has $12 million available on its share active repurchase program. The management consists of very capable, conservative operators based on historical combined ratios for the business. I purchased this investment for the portfolio at $23.88 in October 2010 and continue to see opportunity in this investment. (Data: Google Finance, Yahoo Finance)
The target portfolio yield is 3% and currently the portfolio provides for a monthly dividend stream. This is driven by the composition and historical timing of dividends from the different stocks in the portfolio and could change at any time. With a cash position in the portfolio along with stable dividends, it provides the portfolio flexibility to take care of market opportunities as well as provides additional protection against market pullbacks.
Sources:
“FirstMerit Corporation to Present at KBW Bank Conference” FirstMerit Corp, 2/22/11. http://www2.snl.com/irweblinkx/file.aspx?IID=100241&FID=10782850
“Tower Group Inc Key Developments” Reuters, 3/8/11. https://www.reuters.com/finance/stocks/keyDevelopments?rpc=66&symbol=TWGP.O×tamp=20110301012000
“Tower Group’s CEO Discusses Q4 2010 Results – Earnings Call Transcript” SeekingAlpha, 3/1/11. https://seekingalpha.com/article/255791-tower-group-s-ceo-discusses-q4-2010-results-earnings-call-transcript?source=qp_transcrip
