Author: CJ Brott, Capital Ideas
Covestor models: Macro Plus Income, ETF Only
While the ETF Only model remained fully invested throughout the month of February, the Macro Plus Income became fully invested as the February rally rolled on.
Although we are still convinced the market is due a pullback, we are not willing to fight the Fed indefinitely. So while we are keeping one eye on the door for our short term, momentum based investments, we continue to add to the longer term income producing side of the portfolio. In that spirit, we added three momentum holdings to the portfolio. They are:
1. Devon Energy (DVN)
Devon is currently riding the strength of oil prices while experiencing excellent drilling results in most of its mid-continent exploration programs. In the latest conference call they discussed what they think will be major discoveries in the Niobrara play and were even more excited by recent results in the Mississippian limestone. After farming out much of the cost of development in deals with Sinopec, the company remains cash rich with little debt and on the prowl for deals. In our opinion, with these strong fundamentals, this momentum stock should benefit from a strong market.
2. SPDR Technology ETF (XLK)
The SPDR Technology ETF is clearly benefiting from the run in Apple (AAPL). As of 3/2/12, almost 18% of the fund was represented by that single holding. More importantly to us, the fund has important holdings in Microsoft (MSFT), Intel (INTC), Oracle (ORCL), Cisco (CSCO) and EMC (EMC). With the exception of EMC, these stocks pay dividends and are emerging from 11 and 12 year bases. With strong fundamentals and great technicals, we think these old guard techs should be market leaders for years to come.
3. Spirit Airlines (SAVE)
While new to the market, the airline has been flying since the mid 1990’s. This ultra low cost carrier has built important routes from Florida to Latin and South America. Now it is expanding into the 48 states with routes into Dallas-Ft. Worth and Las Vegas. To our thinking, this is an exciting story with potential to double in price if oil prices should settle down or if he economy gains strength. Although it is a potential high flyer, an oil shock or severe market correction would force us to liquidate the position in favor of capital preservation.
The income additions to our portfolio should help to build up the steady stream of current income needed in a retirement account. Although we are not taking the income now, and if allowed to reinvest dividends we would surely do so, the strategy remains: add positions with high income so that, when needed, the dividends and interest could be withdrawn. With that end in mind we added two new stocks. They are:
1. Chesapeake Granite Wash Trust (CHKR)
This royalty trust spinoff of Chesapeake Energy owns interests in 69 existing horizontal wells in the Colony/Granite Wash play in Oklahoma. According to the offering documents, plans are to drill another approximately 125 wells of the existing royalty carve out. If things go as planned, the trust should produce payouts in excess of $4.00 per share. And if the yield holds at 12% the price could rise substantially. This fits our need for high current income with substantial upside potential.
2. Diana Containerships (DCIX)
This idea is based on a relatively new company in the container shipping industry. Although small, the company’s parent Diana Shipping (DSX) has proven to be a company with financial savvy and staying power. The parent has maintained a relatively strong balance sheet and survived a severe downturn in the dry bulk shipping business. We believe they will apply the same operational discipline in the container shipping business.
If successful, the company could yield handsome dividends along with appreciable growth prospects. Annualizing current dividends gives a current yield of 10%. If the company prospers, we hope to add to the position and participate in an expanding global economy while collecting high current income.
If the market continues to move up we hope to remain fully invested. However if a pullback starts and becomes severe the most likely candidates for sale in the portfolio will be the momentum stocks.
