Institutional Interest High in These Nine Large Caps

Stocks of all sizes and shapes are trading up today, but which ones will continue to do well if the market holds up?

In the graphic to the right (courtesy of Yahoo) I highlight nine large cap stocks that appear to be the biggest targets of institutional interest not just today, but when the markets moved up in spurts last week too. Those that made the cut did so on the basis of several price factors and several volume factors. The list consists of five technology names (MSFT, AAPL, RIMM, ORCL, and DELL), two mining/metals stocks (RIO, FCX), and two energy stocks (PBR and CHK). Interestingly, two of the nine companies are based in Brazil.

At the very moment at least, these nine companies look to be at the top of the heap: quality stocks at attractive valuations, with considerable institutional interest. I would expect these names to continue to lead the way in subsequent bull moves.

Note that one company on this list may be somewhat of a special case. Chesapeake Energy (CHK) CEO Aubrey McClendon was forced to sell “substantially all” of his 33 million shares last week to meet a margin call. With that forced selling completed, the stock is bouncing back today.

Brazil Rallies While China Struggles

As the chart below shows, speculative money has been cautious about China since late October, but still bullish on Brazil, as indicated by the strong performance in EWZ, the iShares MSCI Brazil Index ETF. Not only is EWZ showing a gain for the year, but in an impressive display of strength, it has rallied more than 30% off of the January low. This performance puts EWZ not only well ahead of the most popular Chinese ETF, FXI, but also considerably ahead of the broad market emerging market ETF, EEM, known formally as the iShares MSCI Emerging Markets Index.

While EWZ is a great way to play the Brazilian market, there are several ADRs that are worth singling out as well. My Portfolio A1 holds Tele Norte Leste Participacoes SA (TNE) and has also been long Brasil Telecom Participacoes SA (BRP) in recent months, but there are even better plays. In fact, of the handful of long-term global holdings that I believe you could almost buy and forget about, two of my favorites are Brazilian giants. At the top of the list is Petroleo Brasileiro SA (PBR), a.k.a. Petrobras, the superbly managed national oil company that is pushing the envelope in the ultra-deep recovery space with their massive Tupi oilfield. Close behind is Vale (RIO), formerly know as Companhia Vale do Rio Doce, the metals and mining giant that recently extracted a 65% price increase in iron ore prices from Baosteel, the largest steel company in China.

In a healthy global economy, PBR and RIO are two of the best blue chip oil and iron plays out there. For those wishing a broader, more diversified play, EWZ is hard to beat, especially as Brazil continues to outpace China.

Portfolio A1 Beats SPX by 15.5% in First Year, Helped by Commodity Theme

With two of the five focus positions in agriculture and energy, the commodities theme has been good to Portfolio A1. W&T Offshore (WTI), the oil and gas exploration and production company, is now up 15.4% in the two weeks it has been in the portfolio. Last week’s biggest winner was Terra Industries (TRA), which posted a 10% gain for the week, moving up with the red-hot nitrogen fertilizer space.

After one full year of performance (since the February 16, 2007 inception), Portfolio A1 officially goes in the books with a return of +8.23%, compared to a -7.25% move in the benchmark S&P 500 index over the same period, a net performance gain of 15.48% by the portfolio over the benchmark.

In terms of risk-adjusted return, the graphic to the right shows that Portfolio A1 has had an average beta of 1.48 and an impressive annualized alpha of 23.58% during the first year that the portfolio has been up and running.

In many respects, this portfolio was established to provided focused approach to "fishing for whales." That approach has been largely successful if a little inconsistent during the first year, landing such strong momentum stocks as of MOS, DRYS, TEX, PBR, RIO and others. Part of what makes finding so many big winners possible is a very high annual turnover. At 674%, this is clearly a trading portfolio, not a buy and hold approach. Losses are generally cut quickly and a new hook goes over the transom almost every week. I look forward to seeing how the portfolio fares in the second year, as we begin that year with what looks to be an extremely challenging investment environment.

Portfolio A1 to Best SPX By 20% in 2007

On the heels of a strong fourth quarter, it looks as if Portfolio A1 will finish 2007 with at least a 20% advantage over the benchmark S&P 500 index since the portfolio’s February 16^th inception. With one trading day left in the year, Portfolio A1 has a 23.4% gain, a full 21.8% better than the 1.6% gain in the SPX during this period.

I will publish some additional statistics once 2007 is in the books, but suffice it to say with the likes of MOS, DRYS, TEX, PBR, RIO and others in the portfolio over the past 10 ½ months, we have been fishing in very rich waters.

In addition to the usual equity curve and summary information, I have added a list of positions that were closed out during the year.

There no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Mosaic (MOS) Continues to Lead Portfolio A1

The title is probably a considerable understatement, but what else can you say about a stock that is up 91% in only ten weeks in the portfolio?

The amazing run of The Mosaic Company (MOS) has helped to push Portfolio A1’s performance to a cumulative return of 14.15% since the portfolio inception on February 16, 2007. This is 8.67% better than the 5.48% returned by the benchmark S&P 500 index during the period.

Mosaic’s performance has triggered a number of thoughts about portfolio design, backtesting, and the likelihood of catching lightning in a bottle. Simply stated, in the 8 ½ months that Portfolio A1 has been up and running, it has purchased 27 stocks. Almost half of these stocks are up 50% during this period and 30% (MOS, DRYS, BRP, PCU, PBR, RIO, CNH, and SNDA) are up an astonishing 100% or more. The bottom line is that I believe it is possible identify stocks that have a high likelihood of doubling or tripling in one year (with attendant risk, of course) and build portfolio rules to maximize the probability of capturing those gains during the time they are held in one’s portfolio. I will expand upon this going forward, but Portfolio A1 should provide some evidence to support that contention.

There is one change to the portfolio: Navistar International (NAVZ) has been dropped and is being replaced by returnee PepsiAmerican (PAS), the beverage bottler. There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

After Two Months, Portfolio A1 Is 5% Ahead of the S&P 500

Now that has been two months since Portfolio A1 was launched, I feel that sufficient time has elapsed to begin taking a cursory look at some of the portfolio statistics.

The first statistic that jumps out at me is annual turnover. While many may see a 327% annual turnover rate as high, this portfolio is designed to be actively traded, with the potential for turnover as high as 2000-3000% per year. So far, the system has culled three of the original five holdings. Of those three, only RIO has been a high performer since it was dropped from the portfolio. On the other hand, the post-sale performance of NTY and PCCC has been middling at best. So it appears that the system is doing a good job of cutting free losers – and I have no problem erring on the side of doing this too soon rather than too late.

In terms of the stocks that have been retained, four of the five current portfolio holdings are up at least 13% to date. The laggard, WCG, is up 2%, but it has only been two weeks since it was added to the portfolio. Again, this is just the type of performance I am looking for.

From a risk perspective, I look at maximum drawdown, which is the maximum peak to trough drop, regardless of time period. In the case of Portfolio A1, the 2/27 correction resulted in a 13% drawdown from the 2/26 high – a period during which the S&P 500 lost a little over 6%.

Though it is not included in the calculations on this graphic below, individual stock betas and correlations are an important component of portfolio risk. Four of the five stocks have betas in the 1.2 to 2.2 range; the fifth, AMKR, currently has a beta of about 5.0, which is partly responsible for why the current weighted average beta of the portfolio is 2.6. With the increased passage of time, I will look to the Sharpe Ratio as a means of measuring risk-adjusted returns.

Of course, total return and active return (defined as total return minus benchmark return, with the benchmark being the S&P 500 in this case) are two numbers that I keep a very close eye on. I am pleased to report that Portfolio A1’s return of 7% for the first two months is 5% better than the 2% return logged by the S&P 500.

There are no changes to the portfolio for the coming week.

A snapshot of the portfolio is as follows:

Portfolio A1 Update for 3/11/07

As the graphic below indicates, Portfolio A1 is currently trailing the benchmark SPX return by 1.5%, in large part due to the performance of PCCC, which is down 14.6% since it was purchased as part of the initial group of five holdings on 2/20. In spite of the poor performance, PCCC continues to be the top rated stock in our portfolio, though it is likely that without some near-term buying support, the RSI component of our stock ranker will force a sale in the next week or two.

It should be noted that the one stock from the original group of five that has been sold, RIO, did bounce back 6.9% in the past week. The stock that replaced it, RKT, was up 3.9% in its first week in the portfolio. There are no changes to the portfolio this week.

The equity curve, which is starting to look suspiciously like a duck to me, continues to show a high beta performance.

Current portfolio details are as follows:

Portfolio A1 Update for 03/04/07

When I first announced that I would be using this space to talk about a live portfolio I was operating, I was more than a little concerned that the timing might not be ideal and that I should wait for a possible market correction before I rolled out a new portfolio. I based this opinion on my experience that the predecessor portfolios to A1 had demonstrated a greater propensity for outperforming the SPX benchmark in up markets than in down markets. Perhaps I should have listened to my gut…

Well, whether we have that correction already in hand or are in the early stages of a more substantial bear market, it is time to drill down on the A1 portfolio. As you can see from the attached equity curve below, A1’s performance has slipped below that of the SPX as a result of a week in which the five holdings were battered more severely than the indices. Due to last week’s performance, the system’s ranking of RIO (a favorite holding over the past two years or so) has dropped, triggering a sale. RIO has been replaced by RKT, a packaging company whose stock has tripled over the past year. RKT sports a relatively modest P/E 16 for 2007 earnings and a 1.9 PEG that puts it well below the industry average. In addition to a revenue growth story that is in sharp contrast to the industry trend, RKT has demonstrated continued pricing power it its markets. This is not a sexy stock, but the company appears to be executing on all cylinders and is attractively valued.

A glance at the equity curve suggests that this portfolio has a higher beta than the SPX; while this is case at the moment, largely due to the volatile AMKR, swapping RIO for RKT should decrease overall portfolio beta.

For the record, PCCC and AMKR are currently rated as the #1 and #2 stocks in this portfolio. In this challenging market environment, the performance of these two stocks should set the tone for the early performance of this portfolio and dictate the size of any drawdowns which may need to be scaled to return the portfolio to the green.

Finally, I should probably have already explained that this portfolio is a long only equity portfolio. It is not allowed to short stocks, buy or sell options, or avail itself of ETFs of any kind. As a result, the system does not make an effort to hedge any positions, regardless of the market conditions. The coming week should have a lot to say about how well this strategy is suited for the current market environment.