Author: Bob Gay, GEARS
Covestor model: Luxury Liner
Disclosure: Long all securities named
August was an exciting month of rarities. The large drop in share prices was rare enough, but the unusual stock price volatility also provided great opportunities to trim the Luxury Liner portfolio from defensive and anticipating a correction to aggressive and ready for a rally. I used the steep down days in August to reduce this model’s hedge position and use the cash to buy.
The Luxury Liner buys shares of companies with improving fundamentals, where the share price drops to the bottom of a historical price volatility range. This spring, after nine months of generally rising share prices, the population of depressed shares was very small, so the Luxury Liner had a large cash position and a large hedge, with a significant investment in BGZ, the triple short Russell 1000 ETF. As the summer’s correction ensued, I was buying, first to absorb the cash and then selling the hedge down to its current (9/11) lower size, to provide cash to buy more.
August was also a month of new numbers, as American companies reported their financial statements for the fiscal quarters ended June and July. Generally, the numbers looked good and the population of improving companies remains high. Here is a brief recording of mine (http://www.the-gears.com/wmv_files/igetwmv.aspx?wmv=review2011-2) with a review of the second quarter numbers.
During the summer’s market correction, particularly on days of steep price declines, within the population of companies with improving fundamentals, buy ideas appeared for me in industrials, energy and technology sectors.
New buys in the industrials were Alcoa (AA), Freeport McMoran Cop-Gold (FCX), Stillwater Mining Co (SWC), Commercial Metals (CMC), Intrepid Potash (IPI), General Cable (BGC), Lincoln Electric Holdings (LECO),Albemarle Corp (ALB), Ingersoll Rand Co (IR), Graco Inc (GGG), Agco Corp (AGCO), Eaton Corp (ETN), and Lufkin Industries Inc (LUFK).
New buys in energy were National Oilwell Varco (NOV), Ametek Inc (AME), Input Output Inc (IO), Exxon Mobil Corp (XOM), Devon Energy Corporation (DVN), Apache Corp (APA), Patterson Uti Energy Inc (PTEN), Baker Hughes Inc (BHI), Nabors Industries (NBR), and Consol Energy Inc (CNX).
New buys in technology were Citrix Systems Inc (CTXS), Sapient Corp (SAPE), NCR Corp (NCR), Newport Corp (NEWP), FEI Co (FEIC), Atmel Corp (ATML), Sanmina-sci Corp (SANM), Skyworks Solutions Inc (SWKS), Electronics For Imaging Inc (EFII), Adtran Inc (ADTN).
I also found some new buy ideas in healthcare, but the population of depressed shares has been smaller in that more defensive group. In August I bought Mine Safety Appliances Co (MSA), Zoll Medical Corp (ZOLL), Ultratech Stepper Inc (UTEK), Universal Health Svcs (UHS), Starwood Hotels & Resorts (HOT), SCP Pool Corp (POOL) and Clear Channel Outdoor (CCO).
The Luxury Liner is more trimmed in anticipation of a rally, but there is more to be done. The short position (via BGZ) is much smaller than it was at the beginning of last month (8/11), but is still the largest position in the model as of 9/1 and is available to provide cash to facilitate more buys.
The financial system has been awash with liquidity since the 2008 financial crisis, as every central bank in the world seemed eager to perform their role as lender of last resort and savior of the banks. Asset values generally rose and price volatility was unusually low. That shifted in August and we have entered into a period of higher volatility.
The Luxury Liner model has great flexibility to act upon the higher volatility.
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.
