NBTY Call Is a Good Example of the Best Investing

by: Stephen Castellano

NBTY, Inc. (NTY) led the "high-quality" model portfolio today, moving up 4.83% for the day, following our report recommending purchase and up 5.37% from our StockTwits alert Wednesday afternoon urging the same. We thought we would highlight this recent recommendation and a few others to elaborate a bit on our approach to uncovering stock ideas and making long-term stock recommendations.

So far for the month-to-date, we have seen a total of three "high-quality" stocks sell off following "wrong" downgrades or estimate revisions by the sell side. We have written reports on these stocks, which include Gilead Sciences, Inc. (NASDAQ:GILD), DeVry, Inc. (NYSE:DV) and NBTY, Inc. mentioned above.

Even though these stocks will likely disappear from our "high-quality" quant-driven model portfolios as a result of downwardly revised analyst revisions, we have urged long-term investors to purchase the shares. Based on our analysis, the sell side downgraded these stocks for the wrong reasons - by focusing on near-term uncertainty and negative anecdotal detail without giving credit for the powerful underlying trends of cash flow growth and ROIC against very strong relative valuation.

There is uncertainty in any business; it is management's job to anticipate and manage that uncertainty. If management has already consistently demonstrated its ability to manage this risk, they should be given the opportunity to continue to do so. Especially when a lot of the risk has already been beaten out of the stock for the "wrong" reasons.

Despite recent appearances, we are not serial dip buyers. In fact, we were looking forward to lambasting NBTY, Inc., given its apparently poor history of meeting investor expectations. But a quick read of the information on hand clearly, in our opinion, did not point in that direction.

As much as we like to fawn over ourselves there will be times where we are wrong. But we really do not think in terms of being right and wrong. Instead, like the management teams of the companies we follow, we only try to manage risk as best we can. If we see a stock that has sold-off for the "wrong" reason at a valuation point which is low enough to justify purchase for a long-term portfolio holding, we will make that call. Otherwise, we just advise a sell, and move on to the next relatively better idea. This type approach of ours is not "gut" strategy investing; it's a risk/reward approach which allows for human judgement to override the "facts" of a quantitative model.

We recommend following our model portfolios as the basis for a strategy in its own right. In addition, we find the model portfolios a useful tool to track a basket of "high-quality" and "low-quality" stocks in order to quickly and opportunistically to take advantage of any potential mis-pricings that may occur.

Ascendere Long/Short Strategy Daily Update
'High-quality' stocks in the unlevered long portfolio rose 0.22% and 'low-quality' stocks in the unlevered short portfolio rose 0.53% for Wednesday, April 28, 2010. This compares to a rise of 0.65% in the S&P 500.

For the MTD, 'high-quality' stocks in the unlevered long portfolio are up 3.45%, ahead of the S&P 500 (ex dividends) at 1.88%.

'Low-quality' stocks in the unlevered short portfolio are up even more for the MTD at 4.35%.

Market Neutral Portfolio
As a result, the Market Neutral Model Portfolio declined -0.31% today and is now down -0.89% MTD.

Moderate Long/Short Portfolio
Given the 120/80 long/short weighting in the Moderate Long/Short Model Portfolio, it declined -0.16% overall for the day. The Moderate portfolio performance is now up 0.66% MTD versus 1.88% for the S&P 500, excluding dividends.

The Moderate Long portfolio is up 4.12% for the month and the Moderate Short portfolio is down -3.52%.

Aggressive Long/Short Portfolio
Given the 200/0 long/short weighting in the Aggressive Long/Short Model Portfolio, it appreciated 0.44% overall for the day. The Aggressive portfolio performance is now up 6.75% MTD versus 1.88% for the S&P 500, excluding dividends.

'High-Quality' Long Stocks Performance
The best daily performers in the long portfolio included NBTY Inc. up 4.83%, Kinross Gold Corporation (NYSE:KGC) up 3.32%, and Coca-Cola FEMSA S.A.B de CV (NYSE:KOF) up 2.24%.

The worst daily performers in the long portfolio included Chipotle Mexican Grill, Inc. (NYSE:CMG) down -2.71%, Limited Brands Inc. (LTD) down -2.16%, and Big Lots Inc. (NYSE:BIG) down -1.72%.

'Low-Quality' Short Stocks Performance
The best daily performers in the short portfolio included Activision Blizzard, Inc. (NASDAQ:ATVI) down -4.46%, Range Resources Corp. (NYSE:RRC) down -2.78%, and Nasdaq OMX Group Inc (NASDAQ:NDAQ) down -2.66%.

The worst daily performers in the short portfolio included SunTrust Banks Inc (NYSE:STI) up 4.79%, China Unicom Hong Kong Limited (NYSE:CHU) up 4.03%, and Nabors Industries Ltd. (NYSE:NBR) up 3.33%.

Despite the move up in the S&P 500 today, our Long/Short indicator continued to move down, pointing to the potential of a net short weight in about ten trading days.

About the Model Portfolio
The Ascendere Long/Short Model Portfolio Strategies are "tactical tilt" portfolios that buy the highest quality stocks and sell the lowest quality stocks while maintaining a net long or net short position at all times. They are composed of about 80-100 stocks and rebalanced monthly.

Investors focusing on daily performance could find monitoring our model portfolio useful as a proxy for what is working in the market in general as viewed through the lens of "high-quality" versus "low-quality" stocks.

In addition, daily readers can be apprised to changes in our proprietary long/short indicator, which has been successful at capturing general trends in the market.


Disclosure: None