Author: Andy Schornack
Covestor model: Financial Services
Disclosures: Long PRI
The performance in the portfolio for May was very disappointing. Although the portfolio outperformed the benchmark SPSY (S&P Financials Index) by 1.35%; it underperformed the S&P 500 Index by 0.66% according to Covestor’s calculations.
The months of May and so far into the beginning of June have seen several macroeconomic indications of a slowing recovery across the U.S. marketplace. Partly impacted by supply chain disruption from the Japan disaster and increased oil prices, the economy added few jobs and has seen higher weekly unemployment reports. My network within the small business community in the Minneapolis/St. Paul and Greater Minnesota marketplace has echoed a more conservative prediction on the growth in business through the balance of 2011. Most are still projecting growth, which I see as a material positive; however, gas prices are certainly a large concern among certain segments of the business community that rely on transportation in their businesses.
In general, I think the market has oversold the financial sector and I have taken the opportunity to make select investments, expanding the portfolio’s equity exposure in an effort to provide the portfolio with dividend income and capital appreciation potential. It should be noted that for the first time in the Covestor portfolio’s history, I have near 100% allocation to equities.
During the month of May, I liquidated the position of Lexington Realty Trust (NYSE: LXP). The investment thesis had played out in the stock over the past two years and the marginal opportunity for capital appreciation outweighed the existing solid dividend yield. This was driven primarily by increased share issuance and marginal capital allocation mitigating the overall returns of the business. This, coupled with QE2 expiration in June 2011, provided for a timely exit. I was certainly happy with the overall return in this investment during its holding in the portfolio.
The position added during the month was an investment in Primerica, Inc. (NYSE: PRI). Primerica operates in two primary business segments: selling term life insurance products, and investment and savings products. PRI was spun out of Citigroup in 2010 as part of Citi’s goal to reduce its balance sheet and divest non-core businesses. The business has since continued to post positive earnings gains and is trading, as of close of trading on June 7, 2011, at less than eight times forward 12 months earnings. Given its position and ability to continue to see significant comparable quarterly gains in term life insurance sales, I found the opportunity attractive.
Given recent pullbacks in the major banks, I have revisited my investments in this sector. Regulators and Congress continue to put forth regulations and laws without knowing the impact they’ll have. However, I don’t anticipate significant capital premiums that would stifle the model and force credit contractions across the United States.
The market has overreacted and this should play out over the second half of 2011 as the financial sector, I anticipate, will rebound.
Sources:
PRI earnings multiple from Yahoo Finance, https://finance.yahoo.com/q/ks?s=PRI+Key+Statistics
