Author: Jean-Luc Nouzille, Bristlecone Value Partners LLC
Covestor model: Large Cap Value
Disclosure: Long CSCO, APOL, DELL, S
What a difference a month makes! After declining by more than 7% in September, the S&P 500 index roared back in October by almost 11% and is now (as of 11/9) down about 1% year-to-date (source). The index logged its best monthly gain since December 1991, and October was the first month it has gone without two consecutive days of declines since October 2006. The Large Cap Value Model portfolio was up 9.75% for the month.
It is somewhat difficult to explain what brought this renewed optimism. Expectations for 3rd quarter corporate earnings and economic growth were probably too pessimistic going into October. As companies reported throughout the month, investors appeared relieved. Late in the month, the announcement that Europe might finally have a plan to deal with the aftermath of the Greek tragedy (pun intended) had a favorable impact as well, as did the news that the American economy grew at 2.5% annualized during the 3rd quarter, a pace that beat expectations and seems to indicate that another recession is not in the cards, at least for now.
We did not make any trades during October. Stocks that contributed positively to performance were Cisco (CSCO), Apollo Group (APOL), and Dell (DELL). The only detractor was Sprint (S), as all other stocks increased during the month. Sprint spooked investors following some poorly disclosed information about their network technology strategy and the cost of subsidizing the iPhone. Once the dust settled, it became clear that Sprint could not sell millions of iPhones, meet its debt repayment obligations, and continue investing in its business without raising cash.
After being our worst performer last month, Cemex was our best performer in October, rising by more than 38%. The company reported 3rd quarter earnings, showing a modest improvement in revenues and cash flow. Expectations were low and the stock price reacted positively to the increased likelihood that the company will meet its debt covenants by year-end without any drastic steps. News of stronger than expected economic growth in America helped support the stock as well.
