Author: James Roberts
Covestor models: Fortune’s Most Admired, StockDiagnostics
Alcoa (AA) and Freeport McMoran (FCX) were sold from my portfolios in October because the materials industry group has been sinking in popularity for months. In fact, my investment strategy has been altered so that such a costly occurrence is not as likely to happen again.
I am now incorporating the composite rating from Investors.com into my strategy with the idea of favoring companies with high readings, while eliminating companies from the portfolio with low and declining ratings. In order to maintain proper diversification, however, some companies with low ratings may be maintained. I advocate exposure to a diverse group of investment styles while making sure that both large and small cap stocks are represented.
My Fortune Most Admired portfolio contains few, if any, small caps. Consequently, I will not be able to include smaller companies in it. The predominant investment styles are growth and value. By including the Investors.com composite rating, I am leaning towards the growth/momentum investment style.
Free cash flow metrics are a value criteria that I use in my other models. I am sure that I am influenced to some degree by free cash flow in the Fortune Most Admired model, as well. I am including some stocks like Lowe’s (LOW), Johnson and Johnson (JNJ), and Berkshire Hathaway Class B (BRK-B) that represent the value style. QQQ (Nasdaq 100) was added to the portfolio because it overlays with the Fortune Most Admired Companies list to a 74% degree, owing to its capitalization weighting. Apple, Inc. (AAPL), for example, is around 14% of the QQQ. In addition, QQQ is heavily weighted towards technology, aside from Apple. Technology stocks are in many instances historically undervalued, thus adding to the value style of the portfolio.
The inclusion of the value style and Berkshire Hathaway (which holds no technology), in particular, should help mitigate the relatively high turnover that I anticipate in this model.
Sometimes a stock can be purchased that is attractive from both a value and momentum perspective. Dell, Inc. (DELL) has elements of the value approach while also exhibiting a favorable Investors.com rating. Dell is considered a technology stock in the Most Admired list, despite the fact that the company made a name for itself as a retailer of computers.
If QQQ is classified as being entirely technology, the technology exposure in this model would be 28%. There are, however, quite a few non-tech names in QQQ. I am thinking of names like Amazon (AMZN), Comcast (CCS), Starbucks (SBUX), Whole Foods (WFM), and CoPart (CPRT). The “Most Admired” model has approximately 25% exposure to technology as of 11/1/11.
