Despite the various challenges including the U.S. fiscal cliff, and Europe’s sovereign debt crisis, October was the month where the US GDP surprised on the upside. The housing market continued to recover, with housing stocks delivering positive earnings surprises. Recovery in the jobless claims and other economic indicators dampened gold prices.
The S&P 500 Index (SPX) was down 1.9% for the month of October. Both crude oil (6.5%) and gold price (2.9%) tumbled. The disappointing performance of information technology stocks in October (down by almost 5%) was due to some disappointing earnings news by companies such as IBM (IBM), Google (GOOG) and Apple (AAPL).
It turned out that our decision to sell GOOG in September was the right one. We are still bullish about IBM and AAPL in our portfolio despite some near term difficulties for these companies. Facebook (FB) is another stock in our portfolio where we remain bullish. The positive earning surprise in October has strengthened our conviction about the future growth potential of the company with regard to revenues from mobile advertising.
Energy stocks were also down in October (around 2%). The refiner stock in our portfolio Tesoro (TSO) fell on speculation that a win by Mitt Romney may threaten restrictions on U.S. crude exports, a moot point now that President Obama won a second term. Furthermore, TSO delivered disappointing earnings for Q3 due to supply and production disruptions.
Our sector rotation strategy continues, with recent acquisitions such as PulteGroup (PHM) and Lennar (LEN). Another dimension of the recovery in consumer spending is the performance of the online travel industry stocks in our portfolio: Expedia (EXPE), TripAdvisor (TRIP) and Priceline.com (PCLN) all reported healthy earnings.
For us, these earnings surprises were expected, as our sector rotation strategy predicted these stocks to be well-positioned with the ongoing recovery in the economy. We continue to believe in sustained growth in the US and argue that the energy and housing-related industries offer best opportunities.
We were not active in October other than reducing our exposure to Coach (COH). Despite our positive view of the stock and the stellar earnings report, we believe that the company may be facing further competition in the middle-range luxury goods market especially in China from the likes of Michael Kors (KORS) and according to our stock-selection model, the stock no longer ranks in the top 20%.
The investments discussed are held in client accounts as of October 31. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
