Author: Bob Gay, GEARS
Covestor model: Speedboat
Disclosures: None
The Speedboat is not well equipped to deal with a market correction. When the market has a down wave, the Speedboat peak to trough can be severe. But each down wave provides opportunities and the Speedboat is designed to rise with a rally.
To prepare for a correction, I have raised cash and reduced leverage with sell transactions for Papa Johns (NASDAQ: PZZA), Belo Corp (NYSE: BLC), ITT education (NYSE: ESI), Pulte Home (NYSE: PHM), Maximus (NYSE: MMS), Stericyle (NASDAQ: SRCL) Intevac (NASDAQ: IVAC) Applied Micro Circuits (NASDAQ: AMCC), OSI Systems (NASDAQ: OSIS) and Harris Corp (NYSE: HRS).
With share prices down in recent weeks, buying opportunities are more common. This is not a long term market top, but rather a leadership transition. The history of business cycles shows that the early stage of the recovery is driven by demand for consumer durables. After about two years the consumers stop advancing and capital expenditures begin, propelling corporate profits higher for the next and last two years of the business cycle. We are at that transition now.
GEARS’ Consumer Cyclical sector index shows the peak, with sales growth and gross profit margins lower and inventories up. The late cycle groups are Basic Industry and Technology. Both are showing strong numbers in the recent reports.
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.
