Invest By Model

Is Top 20 Risky to Buy Here?

I got a great question today from a prospective subscriber regarding timing.  He was wondering if it is too risky to buy the Top 20 Model Portfolio in its entirety today.  While I can't answer that question (I have no crystal ball), I did want to share with everyone some perspective.  Timing is always difficult, and the easiest answer I can give is do at least half now and then give yourself a fixed amount of time to get invested to a level that is appropriate for your own situation.

Now, what's my REAL answer?  While stocks are up about 27% (from VERY depressed levels) this year, the Top 20 Model Portfolio is up about 67%. As you are probably aware, though, the 20 stocks in the model aren't up that much.  We have shifted the names in the model over the year, and, as of 12/22, the median return of the current holdings YTD is just 7%.  The average is up just 1%.  In fact, the most any single stock is up this year is 54% (Timberland, which we owned at the beginning of the year and picked up again this quarter), while 7 (over 1/3) are down over 20%.  I use a momentum gauge, and our portfolio was at just 0.11 (slightly above neutral).  The S&P 500 is 1.0 (think of it as extended by one standard deviation from the mean), so we up less YTD and up less short-term.

All of that is for perspective.  I have used my best judgment (the same one that has gotten us where we are) to set the portfolio up optimally.  When I look at valuation, we have a median PE of just 14X (the S&P 500 is trading at about 15X 2010).  Our portfolio, though, has MUCH better balance sheets.  Most of the positions are in companies with cash in excess of debt.  I also believe that our names are generally less cyclical than the overall market.  So, while stocks could fall, I would expect our names to hang in better.  I think we can do better in a flat to higher market, but we will most likely lag a big rally unless we make some big adjustments. 

I hope that I have explained why I view the current model as safer than the market (lower valuation, better balance sheets, less cyclicality).  In any event, don't come to the conclusion that because the model did so well this year that it is likely to "revert" in the days ahead.  We are set up very differently today than we were a year ago.  What pleases me is that we have been doing better than the rallying market lately (thanks Small-Cap) despite having better downside risk exposure.  Let's hope it continues...

Thank You for Your Patience!

We are finishing up a great year quite nicely.  I think I did a good job of explaining why the model wasn't performing very well earlier this quarter, and I am glad to see that we have had some of the types of dynamics that I have been expecting (Healthcare back in favor, Small-Caps rebounding sharply).  We had a fantastic week, as you can see below, in the Top 20.  Last week, our YTD numbers were about 37% ahead of the S&P 500.  The index gave up a little this week, but we advanced.  That's my fantasy (where my stocks go up and no one else's do).

Performance as of 12/18/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	63.26 %	4.27 %	5.83 %	22.90 %	63.69 %	18.68 %
S&P 500	24.96 %	-0.49 %	3.73 %	21.32 %	27.67 %	-17.24 %
Difference	38.30 %	4.76 %	2.10 %	1.58 %	36.02 %	35.92 %

CG/B had a good week too, but only slightly.  Still, considering how much cash we have, it is nice to see the improvement over the past month (though the market has been flat).  We have taken the exposure up a bit, though this is a function of attractive stocks and certainly not any ebullience on my part.

Performance as of 12/18/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	22.95 %	1.08 %	2.54 %	11.07 %	23.92 %	15.87 %
S&P/Bond 60-40	18.18 %	-0.18 %	3.14 %	15.33 %	19.34 %	0.51 %
Difference	4.77 %	1.26 %	-0.60 %	-4.26 %	4.58 %	15.35 %

I had a subscriber ask me what I think of the market, and I thought I would share it.  I think that I tend to have an ok market call, but it's secondary to my analysis on individual stocks.  Here is my reply (from yesterday):

I expect to print 113 on spy and 45 on qqqq in coming days, with IWM leading the way.  I remain concerned intermediate-term.  I think we could see some tax-deferred sales in early January, but I actually think that the market holds up fine until probably mid-January at the earliest.  I am not that optimistic about the economy (or stocks), but as a game-player, this is how I see things for now.

 

Yowsa!

Top 20 moved to a new all-time high-water mark:

Performance as of 12/11/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	62.27 %	3.93 %	8.62 %	19.83 %	60.28 %	17.95 %
S&P 500	25.38 %	0.93 %	6.64 %	18.33 %	29.82 %	-16.97 %
Difference	36.89 %	3.00 %	1.98 %	1.50 %	30.46 %	34.92 %

I am excited to see only positive numbers on the difference line!  From month-end, our YTD advantage expanded about 7%.  We have about as extreme a market cap difference as possible relative to the S&P 500, and smaller stocks are doing better.  Our heavy exposure to Healthcare has been helping too.

For CG/B, the news was good, but not that good:

Performance as of 12/11/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	22.78 %	1.62 %	3.12 %	10.25 %	24.70 %	15.70 %
S&P/Bond 60-40	18.35 %	0.85 %	4.74 %	13.85 %	21.42 %	0.66 %
Difference	4.42 %	0.77 %	-1.62 %	-3.60 %	3.29 %	15.04 %

Since month-end, the advantage to the composite index of stocks and bonds has picked up by about 3/4 of 1%.  Our high cash exposure continues to be a drag.  Interestingly, over the past month we have been able to overcome the slight rally. 

Excellent Start to December

This quarter has been quite challenging, as smaller caps have been significantly underperforming larger ones.  The shift seems to have abruptly reversed this week, and both models performed well (especially Top 20).  Since Monday, 1/2 the stocks in the Top 20 have increased by 5% or more.  Here is what the returns look like now:

Performance as of 12/4/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	59.48 %	7.06 %	9.90 %	16.09 %	75.32 %	15.93 %
S&P 500	25.27 %	5.93 %	9.36 %	18.61 %	34.15 %	-17.04 %
Difference	34.22 %	1.13 %	0.55 %	-2.51 %	41.17 %	32.97 %

We picked up almost 4% on a YTD basis in the past 4 days and have now outperformed over the past three months.  For those following the models and my thinking, we have struggled with having too conservative a view in terms of exposure, with very heavy exposure to Healthcare.  Fortunately, we appear to be back on track.  The Top 20 names at present have a median market cap of just $758mm.  Only 3 of the names have any debt at all (all below typical company), and most have vast amounts of cash.  All of our stocks have tangible book value, and the typical price to tangible book value ratio is <3X.  The typical PE is below the market (median is 15X).

Here is what CG/B looks like:

Performance as of 12/4/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	21.89 %	2.49 %	3.43 %	9.40 %	31.05 %	14.86 %
S&P/Bond 60-40	18.26 %	3.99 %	6.57 %	13.68 %	24.16 %	0.58 %
Difference	3.62 %	-1.50 %	-3.14 %	-4.28 %	6.89 %	14.28 %

While we picked up a little ground so far this month, the high amount of cash as well as the conservative nature of the stocks continues to be a drag.  These stocks typically have net cash, a 2.2% dividend yield and a PE of 15.  As I look at the performance, I am dissappointed that we have slipped a bit, but the strength of the model shows up in the fact that the model has worked relative to the market when it was falling and when it has been rallying.  Since inception, the benchmark is essentially unchanged (bonds up a bit, stocks down a bit), but the model is up almost 15%.  It has been more return and less risk.  While the duration of this rally has surprised me, I would expect to see some challenges to stocks in the coming year.  I think that CG/B should do relatively well in that environment given our high cash and conservative positioning.

One More Month to Go

Not a great month, one way or the other.  As I have been mentioning, the major divergence between smaller companies and larger companies really has been hurting the models.  Here is Top 20: Performance as of 11/30/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	53.76 %	3.12 %	3.57 %	18.49 %	66.35 %	11.77 %
S&P 500	24.07 %	6.00 %	7.05 %	20.50 %	25.39 %	-17.83 %
Difference	29.69 %	-2.88 %	-3.47 %	-2.02 %	40.97 %	29.61 %

While the model advanced for the month, we did give up some ground relative to the market.   CG/B was hurt by the same small/large dynamic as well as having too much cash in a rallying market:

Performance as of 11/30/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	21.35 %	2.20 %	2.84 %	10.44 %	28.43 %	14.36 %
S&P/Bond 60-40	17.94 %	4.15 %	5.64 %	14.89 %	20.33 %	0.30 %
Difference	3.42 %	-1.95 %	-2.80 %	-4.45 %	8.10 %	14.06 %

Are You Thankful?

Friends and Subscribers,

I hope as you contemplate over this holiday you find it easy to appreciate all that is good in your life.  Hopefully, you are blessed with good health, family and friends that care about you, a feeling of accomplishment with your work and the good fortune of having achieved other goals in your life.

I want to share something with you regarding the Invest By Model service.  I am very grateful to have been involved in this endeavor for the past 18 months.  It started with a call out of the blue from someone who had a vision, a vision that matched mine:  Provide a framework for do-it-yourself investors to save money and get better performance than they might by investing in a mutual fund. 

I am thankful that the concept has been proven.  The two models have substantially outperformed the market and have delivered performance that stands above the crowd of folks who collect 1% of the assets under management or more to try to beat the market (which few do).  With that said, this endeavor has been substantially below my expectations in terms of being a business success.  We have had few subscribers despite lots of people willing to give it a shot on a free-trial basis.  My technology partner, Rainbox Holdings, and I can't continue to offer this service without generating some sort of return on our efforts.

I would be grateful for those of you who follow along to consider subscribing.  If you aren't willing to do that, won't you perhaps share your feedback with us regarding why you aren't willing to subscribe?  Email me, and I can put you in touch with my technology partner who would appreciate the opportunity to speak with you directly or perhaps via email.  What can we do to make this work for you? 

As much as I enjoy this pursuit and feel proud of the performance record I have generated, I find it necessary to make a decision within the next six months regarding continuing.  I am hopeful that those of you who like some of the aspects but aren't willing to pay what I view as an almost nominal amount will tell us what we can do to make this more valuable to you. 

Thanks in advance for your input, and thanks to our subscribers for your support thus far.  Happy Thanksgiving to you and your families.

Alan (alan@analystforhire.com)

CG/B - 2 Substantial Dividend Hikes Announced

HRL, which also reported today and set 2010 guidance slightly above the consensus, hiked its dividend 10%.  BDX raised its dividend 12% and increased its share repurchase authorization from 7.5mm to 17.5mm shares. 

The driving theme of the Conservative Growth/Balanced model is to identify companies that have dividend growth potential but limited downside due to valuation and capital structure, and these two examples have embodied this principle.

The Word on the Turd

We recently added a stock that hasn't been doing well to say the least.  Today it fell by another 16% or so to a 52-week low.  Such is the risk when one plays with falling knives, something I don't do that often.

The situation with this stock is that their recently announced corrective actions apparently aren't satisfying the FDA, though it remains a voluntary action at this time.  The worst-case scenario would be a complete recall or something that approximates that cost, as it could lead to bankruptcy.  Until I get a better handle on the situation, I am not adding to the model portfolio.   I called the company very early this morning, but I haven't heard back yet.  I don't expect that what I hear will change my near-term caution.  At this point, I feel like the model has enough exposure that I will be quite happy if it rallies back without being able to add.  With that said, I do hope to add in the future, even at a higher price, if there is more clarity on this issue.

Update

We had a few reports this week.  RAVN reported in line, MPR was weak (but orders were strong) and SCVL was a blow-out.

Top 20's performance looks like this:

Performance as of 11/20/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	54.82 %	0.37 %	7.38 %	24.10 %	100.10 %	12.54 %
S&P 500	23.51 %	0.26 %	8.90 %	22.12 %	48.80 %	-18.21 %
Difference	31.31 %	0.11 %	-1.53 %	1.98 %	51.30 %	30.75 %

The model was up just a bit on the week and picked up some ground relative to the market.  Nice to see the one-month and six-month numbers go positive!  The model has been stalled due to my having made it a bit too conservative in hindsight.  We remain conservatively positioned in terms of sector exposures and avoidance of debt, though we are heavily weighted towards smaller companies.

CG/B looks like this:

Performance as of 11/20/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	21.29 %	0.71 %	4.18 %	11.61 %	35.85 %	14.30 %
S&P/Bond 60-40	17.30 %	0.55 %	6.55 %	15.34 %	33.80 %	-0.24 %
Difference	3.99 %	0.15 %	-2.37 %	-3.73 %	2.05 %	14.54 %

We picked up some ground here too.  Our exposure isn't constrained as much as it is in the Top 20, which is supposed to be fully invested all the time.  In addition to having very conservative stocks, we have had a lot of cash since the summer.  Still, we are up very nicely since we launched 16 months ago and are now well positioned for challenging markets.

Portfolios Feel the Weight of Small Stocks

It wasn't a great week for either model, as the S&P 500 continued its advance while the smaller stocks held firm.  Tax-loss selling and end-of-year window dressing are weighing on many smaller stocks, some of which we own.  It's always a tough call on the "January Effect".  I try to be opportunistic but not get too hung up on the precise timing.  You will see an add-to in Top 20 that will be an attempt to play that angle.

Here is what Top 20 looks like:

Performance as of 11/13/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Top 20	54.19 %	0.67 %	7.39 %	25.76 %	81.01 %	12.08 %
S&P 500	23.68 %	2.08 %	8.54 %	25.08 %	23.10 %	-18.09 %
Difference	30.51 %	-1.41 %	-1.15 %	0.67 %	57.91 %	30.17 %

The model increased in value, but it really lagged terribly.  Still, we are up 30.5% YTD and well positioned for potential weakness in the market. 

Here is what CG/B looks like:

Performance as of 11/13/2009
	Year to Date	1 Month	3 Month	6 Month	12 Month	Inception
Conservative Growth/Balanced	20.47 %	0.69 %	3.73 %	11.89 %	31.92 %	13.52 %
S&P/Bond 60-40	17.15 %	1.45 %	6.30 %	16.90 %	19.53 %	-0.37 %
Difference	3.32 %	-0.76 %	-2.57 %	-5.01 %	12.40 %	13.89 %

We got hit with a double-whammy here, as the focus on smaller stocks as well as the heavy cash position inhibited the returns.  The model actually increased slightly, but we lost about 1.7% relative to the benchmark.  We have given up a lot of our relative advantage as the market has rallied, which isn't surprising given the nature of this model (conservative).  Still, with an almost 14% advantage since July 2008, it has managed to do relatively better over a very volatile time.  The model is positioned for a pullback - not sure if it is ever coming!