Author: Bob Gay, GEARS
Covestor model: Luxury Liner
Disclosure: Long HP, FFIV, BEXP, KLAC, RIMG, IRF, PWER, WFT, LNN, PKOH, CAT, RHI
The bells rang for a few weeks early in the month of June. The Luxury Liner buys shares of improving fundamentals companies when the share price drops to the bottom of the historical price volatility range. The larger population of such depressed stocks produced by the modest correction early in the month allowed me to sop up excess cash in portfolio with buys for a large number of “bells ringing.”
On June 9, I added to the portfolio Helmerich & Payne, Inc. (NYSE: HP), F5 Networks, Inc. (NASDAQ: FFIV), Brigham Exploration Company (NASDAQ: BEXP), KLA-Tencor Corporation (NASDAQ: KLAC), Rimage Corporation (NASDAQ: RIMG), International Rectifier Corporation (NYSE: IRF), Power-One, Inc. (NASDAQ: PWER) and Weatherford International Ltd. (NYSE: WFT). On June 13, I added Lindsay Corporation (NYSE: LNN), then on June 16 I bought Park-Ohio Holdings Corp. (NASDAQ: PKOH), Caterpillar Inc. (NYSE: CAT) and Robert Half International Inc. (NYSE: RHI).
I produced a presentation that provides details on some of these decisions – it can be viewed here.
With the sharp price advance in the last week of the month, the buying opportunity has passed and now the Luxury Liner is back on the defensive. The second quarter financial statements that feed the GEARS data engine will appear in the next few weeks. Looking at the first quarter numbers, we saw a decline in average sales growth and gross margin of U.S. companies. The bottom line improvement at the average company was created with lower operating costs (SG&A) and lower interest costs. That is deterioration in earnings quality.
It is still too early in the cycle for a broad peak in corporate growth to emerge. Here is a brief review of the first quarter numbers and an anticipation of the second quarter update.
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.
Sources:
GEARS presentation: http://www.the-gears.com/wmv_files/igetwmv.aspx?wmv=bells2011-07-06
GEARS review of corporate growth: http://www.the-gears.com/wmv_files/igetwmv.aspx?wmv=review2011-1
