Introduction to Best Portfolio for 2009

Hello and welcome to my portfolio, which I am calling the Best Portfolio for 2009.

Needless to say, this has been a very tough U.S. equity market on the long side. As January unfolded, I became convinced that we were shaping up for some great bargains in value stocks, and that the worst of the carnage for many sectors has passed. The purpose of my contribution is to help investors refocus on fundamentals, sound portfolio management practices, and making a profit from what I expect to be a choppy, fairly flat market that offers some excellent bargains for sharp investors. The inception of the portfolio that you see below is as of Jan 30, 2009 closing prices, when all positions are entered for the first time.

I will be commenting on selected stocks, as well as overall portfolio construction and strategy. The portfolio will be updated with results on a weekly basis, so it will be easy to follow along with the gains or losses and the comparative results vs. the S&P 500. I will also try to update viewers with my trades as they are made or filled, with some brief comments as to why that trade looks good at that time. This is not a heavily-traded portfolio, so that should be easy. When dividends accrue, they will be recorded as income on the Ex date.

The basic strategy is to buy good, solid stocks that have some downside protection, with no debt problems, as well as reasonable upside potential, even in a tough economy and market. Whenever any stock is up at least 12% from my entry point, I will enter an order to sell a covered call against that stock, unless there is a very large dividend about to go “Ex” in which case I may wait to lock in the dividend, depending on market circumstances. Whenever I get taken out of a position through call exercise, I will then re-deploy the capital into a new position within a few days, or add a bit to an old position that has taken a temporary hit. I will attempt to collect dividends and covered call premium as the portfolio waits for the upside moves, should they emerge. If we get into a protracted bear scenario, at least I will be holding decent stocks, in a fairly diversified portfolio, with solid balance sheets, some income potential in many cases, and I will collect premium on expiring calls written against some of the positions.

I feel that this approach combines relative safety with the pursuit of some income generation as well as exposure to limited upside, which may occur very suddenly at times, considering the pounding that many of these stocks have suffered through over the last year or two. I have no illusions about a powerful bullish resurgence to 12,000 on the Dow, or 1,000 on the SP500, at least not this year. My year-end prediction for the SP500 is somewhere between 750 and 925, and if I had to guess, I would favor the upside. So I am not bearish, rather I would say I’m cautiously optimistic for a gradual stabilization and a return at some point to normal credit markets. We are a long way from that at this point, however, so it’s best to play it safe and not go all in on growth or risky stocks with questionable survival prospects.

Therefore the strategy is to select bargains, based on fundamental research, and hold while collecting call premium and in some cases substantial dividends or distributions in the case of MLPs, and then if the position gets taken out, at least it’s a profit, and on some positions, it may be possible to collect a dividend or two, some expiring call premium, and then get taken out upon exercise for a three-way profit. No leverage will be used, and the portfolio starts at $1,000,000 USD. Simple enough, right?

Check back over the weekend for a review of the week, and some comments as to activity in various names. At the close on Wednesday, February 4, the portfolio had already risen 1.68% thanks to solid moves in MSFT, NI, EXC, BTU, FCX and RIO. There was a large 18% loss in HL due to a poor refinancing, and also TPP. Meanwhile, the benchmark SP500 Index was up 0.77% for the three sessions.

• Themes - Safe Stocks, write Covered Calls against solid performers, purchased at bargain rates with good or + Balance Sheets.
• Try to achieve return in low teens due to Call income, dividends, and occasional spikes which take out positions
• Sprinkle in a few deep-value resource plays, such as WTN, QUA and SVM in Canada.
• Maximum number of positions is 30 best names.
• Screen for Debt Repayment Risk - the standard should be that CFO > 2 times annual debt due next TWO years.
• Avoid chemicals, retail, REITs, financials, and E & P sector; focus on utilities, pipelines, consumer.
• Also like specific tech, a few medical, PMs, and some infrastructure & mining/resource.

(Click to enlarge)

Comments

[Patrick Garot:]

Good discipline. I look forward to reading about and tracking your portfolio.

Feb 05 03:52 PM

[Paul from C...:]

Forget about fundamentals and chart the market. It's telling us the long trench is down. Sell now on this escape hatch and short. Buy SDS.

Feb 06 12:23 AM

[minifesto:]

Good thinking. I have been switching from some of my biotech favorites into the old uglies at bargain basement prices especially helped by selling calls. Going from Cinderella to the ugly sisters!. Not as exciting but hopefully equally rewarding. I speak as an investor with 50 years experience still having fun. My motto is you have to have TIME - tenacity, imagination, money and experience.

Feb 06 04:41 AM

[mc2406:]

??? SDS is down about 25% in last two months-- the S&P is actually up over 10% since Dec. 2.


On Feb 06 12:23 AM Paul from California wrote:

> Forget about fundamentals and chart the market. It's telling us the
> long trench is down. Sell now on this escape hatch and short. Buy
> SDS.

Feb 06 10:58 AM