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<< Return to Part 4

In this post, I will present an evolving idea as well as an evolving portfolio.

In tinkering with the idea of quantifying market turbulence so as to maximise the benefit to stock and portfolio selection, I had either a “Eureka moment,” or a finding of the “Bleeding Obvious.”

In looking at the specialty retail sector I saw that:

  • Some stocks, in this case AutoZone (NYSE:AZO) have breezed through this and other market turmoil events with little to no adverse impact.
  • Some stocks, for example Tiffany & Co (NYSE:TIF), have exhibited typical “fat tail” behaviour, not randomly, but mostly at times of elevated market turbulence. In normal periods, the stock has consistently outperformed.
  • Some stocks, for example OfficeMax (NYSE:OMX), have been truly beaten down, but not always at times of elevated market turbulence and not dominated by “fat tail” behaviour. Something different is at play, possibly a stressed earnings outlook.

The task at hand is to be able to identify, categorize and differentiate the price drivers of stocks exhibiting these characteristics.

The three stocks mentioned are compared against market turbulence as shown in the following two graphs.


(Click to enlarge)


(Click to enlarge)

THE PORTFOLIO

It is crystal clear from the above that if market turbulence and “fat tail” behaviour in a stock coincide, then it is unlikely that that stock will exhibit sustained out performance. Better to wait until the turbulence subsides and then identify the stocks with the strongest rebound potential.

Therefore our next suggested portfolio is made up of stocks characterised by AZO above. The 23 Sept portfolio does not build on the performance of the 2 Sept portfolio as we would like, but that is a function of the current downturn.


(Click to enlarge)

The stocks that comprise the 23 Sept Portfolio are:

RL

Polo Ralph Lauren

Apparel Retailers

FDO

Family Dollar Stores

Broadline Retailers

VFC

VF Corp

Clothing & Accessories

UA

Under Armour

Clothing & Accessories

HSY

The Hershey Co

Food Products

THS

TreeHouse Foods

Food Products

HUM

Humana Inc

Health Care Providers

CHU

China Unicom

Mobile Telecommunications

OCN

Ocwen Financial Co

Mortgage Finance

YUM

YUM Brands

Restaurants & Bars

IFF

International Flavours

Specialty Chemicals

PSA

Public Storage

Specialty Real Estate Investment Trusts

AZO

AutoZone

Specialty Retailers

PM

Philip Morris

Tobacco

WHAT I AM LOOKING FOR

It may take a while, but my feeling is that stocks such as Tiffany & Co should be on a watch list because:

  • Ex market turmoil, there is evidence that share price appreciation is underpinned by upward earnings revisions and earnings growth.
  • The current price weakness is characteristic of “fat tail” behaviour that may indicate weakness in stockholders rather than weakness in the stock.

If the latter is the case, then it is possible that, once this turmoil event subsides, stockholder dynamics will move in TIF’s favour, as has happened in the past.

Disclaimer: The content in this document is provided as general information only and should not be taken as investment advice. The contents in this explanatory paper shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author. The author may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility.

Source: Evolving Portfolio (Number 5)