Author: Andrew Fletcher, Fletcher Wealth Management
Covestor model: Fundamental Targets
April 2011 was another good month for stocks, with an increase in both the S&P 500 and the broader market. The Fundamental Targets model outperformed the S&P 500.
Trades
No purchases were made in April. The portfolio maintained approximately 10% in cash throughout the month, as none of the stocks on the watch list were attractively valued.
No holdings hit their sell targets during the month. However, three companies approached their targets and may be sold in the near future. Additionally, some energy stocks may soon be sold to lower the portfolio’s exposure to that sector.
April winners
NRG Energy, Inc. (NRG) finished the month substantially higher. Due to scheduled share repurchases in 2011, and a low price to book value, this independent power producer’s stock price still possesses substantial upside potential.
A strong 4Q 2010 report sent Weight Watchers International, Inc. (WTW) higher as well. Due to the recent run-up in price, WTW should be ripe for a pullback as profit takers sell out of their positions. After the pullback, the stock price should rise on the strength of the Weight Watchers name, due to licensing agreements with food companies and lost demand from the economic travails of the past few years.
WellPoint, Inc. (WLP) is a larger health insurer with a low P/E to its industry (as of 5/1/11). With benefits derived from health care reform, this stock is positioned well for potential upside.
FirstEnergy Corporation’s (FE) low cost nuclear and coal power plants have added much to the bottom line over the years. Management’s commitment to increasing shareholder wealth has been shown via increased dividend. The Allegheny Energy acquisition will both add to FE’s customer base and increase its generation capacity. I believe that will drive the stock price higher.
National Grid PLC (NGG) also has a low P/E to the industry average (as of 5/1/11). Continued commitment to dividend growth, as well as being one of the largest utilities in the world will allow NGG to pursue other acquisitions and projects not available to smaller scale operators, increasing the stock price in the process.
Another major player in its industry, ExxonMobil Corporation (XOM), has more upward movement in store. Between the world’s largest refiner’s AAA credit rating and its large pile of idle cash, Exxon will be able to complete projects with a lower cost of capital than many other companies.
Pfizer’s (PFE) acquisition of Wyeth led to major cost cutting, which has resulted in a high dividend yield. There is still opportunity for the stock to rise as its dividend yield returns to the norm for other companies in the S&P 500.
With the high initial cost of constructing motorsports stadiums, International Speedway Corporation (ISCA) holds a virtual monopoly in this industry. ISCA has negotiated large television viewing deals to offset the drop in ticket sales. As consumer discretionary spending increases, ticket and concession sales will increase.
April laggards
The remaining five stocks underperformed my benchmarks for the month. In short, here’s why I continue to hold them.
With the introduction of more government regulation into the financial sector, there are few companies that can compete with Western Union’s (WU) coffers on compliance spending. The need for money to be moved, whether to the college kid in the next town, or the family on the other side of the world, will exist for a long time.
Exelon (EXC) continued to trade at a discounted P/E to other companies in its industry (as of 5/1/11). In today’s political climate, Exelon’s low cost nuclear power plants continue to prove an asset to the company. The purchase of Constellation Energy Group offers a chance to further diversify earnings streams.
Regal Entertainment Group, Inc. (RGC) is the largest movie theater operator in the United States. As consumer discretionary spending increases, movie-going and concession purchases will increase.
Nucor Corporation’s (NUE) ownership of the supply line that leads from processing scrap metal to production of basic steel units to the production of more specialized products strengthens the future prospects for this company.
The diagnostic labs of VCA Antech, Inc. (WOOF) will continue to add to the value already provided by over 22,000 independent animal hospitals in the United States. Additionally, since veterinary medicine is largely a cash business, WOOF has immediate access after providing the service to their payments, instead of having to wait for the insurance company to approve and mail the payments.
Conclusion
The overall market headed higher for another month. I’ll continue to choose strong individual companies value-priced versus their industry peers. Look for the energy bull market to slow over the next several months, and watch for some stocks to pull back as traders take profits.
