Above The Money In 2012

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 |  Includes: CLNE, COO, FCX, GLD, MO, TRP
by: Mark W. Bertolin

Now that 2011 has closed out it's time to finalize first-phase planning for the New Year. There have been numerous articles regarding the European crisis, American politics and the general disconnection between fundamental company performance and macro global events on share pricing and value. Global events and uncertainties with USA debt have caused me to adjust my thesis for 2012.

Although most of the mass media would have you believe that a crisis is headed our way any minute businesses seem to be very resilient as is the market. I would be untruthful if I did not confess that the added volatility of the European crisis does cause me pause. But unlike the sky is falling crowd I plan on maintaining most of my positions. The major adjustment to my investing tactical plan will be to harvest cash through 2012 and NOT deploy it back into the market until the bargains are too compelling to pass up. In 2011 I reinvested trading capital and maintained my cash weighting. For 2012 I plan on being over indexed to cash. This change in tactics will provide me with the flexibility I believe I will need to take advantage of future bargains. For me flexibility is a prominent theme for 2012.

Changes to thesis 2012:

  1. Transition to overweight position in cash
  2. Increase portfolio dividend yield through options and higher dividend yielding stocks
  3. Increase bond exposure

2011

Target

Sector

Share

Share

Bond

16.46%

20%

Cash

15.67%

20%

Consumer Goods

8.50%

8%

Large Cap Funds

18.93%

5%

Materials

7.73%

5%

Medical

0.92%

5%

Retail

1.11%

5%

Technology

28.81%

12%

Utility

0.73%

10%

Industrial

1.14%

10%

Click to enlarge

By adding cash and increasing my bond exposure I will rebalance to a more conservative and hopefully less volatile growth and income portfolio. Portfolio performance for 2011 beat the S&P 500 (NYSEARCA:SPY) by 5.5% and the Dow Jones Average (NYSEARCA:DIA) by .5%. Not a spectacular performance but since this portfolio is a non IRA retirement income portfolio these results include living expenses. If expenses had not been deducted results would have been 5% higher.

Once I convert holdings to cash I will keep my eye on businesses that I want to own in 2012 and use Cash Secured Put orders to scale into positions at target prices. This strategy will minimize my risk of buying prior to the market adjusting downward. My risk with this strategic adjustment is that if the market improves and prices climb I won’t participate in the growth to the same extent as I would have if I had been fully invested.

(Click chart to expand)

Click to enlarge

Transaction Plan

Convert to cash

CLNE, COO, VFINX, GLD


CLNE: Clean Energy Fuels Corp., provides natural gas as an alternative fuel for vehicle fleets in the United States and Canada. It designs, builds, finances, and operates fueling stations; and supplies compressed and liquefied natural gas. This is an industry I believe in for the future but feel that 2012 will not be their year for explosive growth. I don’t think the government will be supportive of the technology until after the 2012 election. I will keep CLNE on my watch list.

COO: The Cooper Companies manufactures contact lenses and women’s healthcare products. It does not meet my dividend goals, currently yielding .09%. Earnings appear to be safe for now but with a consensus estimate of 2012 earnings at $4.90. I foresee risk to the EPS based on exposure to Europe and Asia that collectively represent 55% of CVI revenue. Most of the revenue for the Cooper Companies comes from the contact lens business unit. Constant currency revenue for the Americas Group decreased by 1% from the first to the fourth quarter 2011.

FVINX: The Vanguard Index 500 tracks the S&P 500. No options are available. I can’t beat the index if I stay invested with a fund that is a mirror of the index I am trying to beat. This is an old investment that I have been scaling out of and will continue to do so until its liquidated.

GLD: The SPDR Gold Trust replicates the performance of the price of gold bullion. I will maintain some exposure to gold but will decrease holdings in 2012. The historical correlation to inflation and risk seems to be broken and pricing has become both volatile and unpredictable. The rational for the recent price changes is unclear to me. If I don’t understand it, I shouldn’t own it. Option pricing and availability is good so covered calls will allow me to scale down of my position in gold.

Increase exposure to build dividend yield

FPRA, TRP,MO, FCX

FPRA, the preferred shares of Ford Motor Company. It manufactures and distributes vehicles and parts as well as financial services. Currently the yield is 7.1%. Share price is relatively stable. There is a risk of having the shares called if Ford decides to refinance debt but this is a high-yield way to be involved with the automotive industry.

TRP: Trans Canada Corporation operates an energy business concentrating in natural gas, oil pipelines and energy. Trans Canada yields 3.76% has EPS of $2.26. Share price is choppy ranging from $37 to $44. Options are lightly traded. I have a purchase target of $38.00. Regardless of the future of the Keystone XL project the company is set to make money in three areas I view as good sectors to be involved with during 2012.

MO: Altria manufactures and distributes tobacco products in the USA. Share prices have consistently increased during the past few years. Yield is 5.53% and EPS is $2.04. There could be litigation and governmental regulation headwinds in 2012 and a risk of reduced market share but it has pricing elasticity and have been able to pass on costs to consumers.

FCX: Freeport McMoran is a mining company producing primarily copper and gold. EPS is $4.95 with a yield of 2.72%. The stock price has been beaten down recently due to macro events. The price of copper and concern about building in both the USA and China have conspired to a share price decline. I have a purchase price target of $32.50. Options are readily available for both calls and puts, which I will use to scale into a deeper position. Prices have ranged from $61 to $$28.

To mitigate the panic attack of massive down days and bad news I will use covered calls to reduce holdings in an orderly fashion where they are available and scale out of positions where options are not profitable or available.

Disclosure: I am long TRP, FCX, MO, COO, GLD, CLNE, VFINX and FPRA.