Author: GEARS
Model: Luxury Liner
The fourth quarter corporate wealth numbers were very strong, with the entire market producing an earnings surprise pattern: high and rising sales growth, rising gross profit margins, falling SG&A expenses, lower interest costs, lower inventories and accelerating shareholder wealth – the strongest since 1996.
For the long term history of corporate wealth and its predictive value see GEARS asset allocation analysis.
The challenge for the Luxury Liner portfolio is to keep up with a rapidly improving market while maintaining a hedge against a market decline. To accomplish that, the portfolio must be moved toward companies that are accelerating shareholder wealth at a more rapid than average rate. That means higher sales growth and leveraged cash flow acceleration.
During the brief market correction associated with the Japan disaster, there were some opportunities to accomplish that shift. New buy decisions last month were Cohu Inc (NASDAQ: COHU), Potash Corp (NYSE: POT),Titanium Metals (NYSE: TIE), Expeditors International (NASDAQ: EXPD), Veco Instruments (NASDAQ: VECO), Radiant Systems (NASDAQ: RADS), Lattis Semiconductor (NASDAQ: LSCC), Sanmina Corp (NASDAQ: SANM) and Anadigics (NASDAQ: ANAD).
The market is broadly overbought with the majority of shares trading near the top of ranges. This is a good selling opportunity particularly for companies with decelerating shareholder wealth. Sell decisions last month were Colgate (NYSE: CL), Ross Stores (NASDAQ: ROST), Timberland (NYSE: TBL), AK Steel (NYSE: AKS), Questar (NYSE: STR), MDU Resources (NYSE: MDU), Teleflex (NYSE: TFX), Flir Systems (NASDAQ: FLIR), IBM (NYSE: IBM), Aymi (NASDAQ: ATMI), Power Integrations (NASDAQ: POWI) Inc, Silicon Labs (NASDAQ: SLAB) and Tellabs (NASDAQ: TLAB)
The result was a net increase in available cash and, with the hedge position at 10%, the luxury Liner is trimmed for a market correction.
The financial statements to be reported in the next few weeks will make the most difficult comparison with the prior year since the crisis. Already, even though the averages are very strong, frequency of improvement is dropping. The proportion of companies achieving a rising sales growth rate fell. Gross margin improvement was evident at less companies than in the prior quarter. Shares are broadly extended and the portion of sells to buys that we’re finding has increased.
With few really attractive buying opportunities in the market now, the Luxury Liner has cash and short exposure to weather a correction and stoke up for the next market advance.
To create a successful stock portfolio requires attention, consistency and discipline. Most of all, it requires an information edge. Years of research have shown that shares of companies that are profitable with rising shareholder wealth perform better.
