Energy, Euro Stocks Weigh Down My Portfolio But I'm Not Selling Yet

 |  Includes: ANV, CHK, PWE, TEF
by: Davy Bui
  • Enlightened-American Portfolio: +7.5% in 2012 (my actual IRR, including cash balance - follow the link to get full details)
  • Dow Jones Industrial Average:+8.6%
  • Nasdaq: +19.8%
  • S&P 500: +12.8%
  • DJ Wilshire 5000: +13.4%
  • Russell 2000: +13.3%

As markets continue their phenomenal 2012 run into April, my portfolio finally succumbed to the drag caused by my large cash holding, now at 26% of my assets. While I remain close to the Dow, I trail the other major U.S. indices by at least 5 percentage points and the NASDAQ is far from view, nearly tripling my 2012 performance. Not only is the large cash position a hindrance, but my over-weighting of oil, gold and European stocks has held back the portfolio.

While hedge funds may be rushing to get on the long side after the market's run, I remain firmly committed to a value investing philosophy and will not pare stocks in hopes of boosting my return figures. However, that does not preclude the possibility that some positions may need to be pared for fundamental reasons.

The biggest laggard thus far is Telefonica (TEF), which I discussed in a previous article. At this point, I think the market has already priced in another dividend cut, but perhaps the biggest risk is a messy outcome in the eurozone that leads to Spain exiting the common currency. If that were to happen, shares would weaken substantially, perhaps another 20-30% in my estimation.

But Telefonica derives 75% of its revenue in Brazil, the UK, Germany and other countries on more solid economic footing and should be fine in the long term. While shares are currently trading below my basis price of $18.26, there is no hurry to build a position here. I may look to add to my position should TEF fall below $16 but I also have open naked puts at $15 which if exercised, would add to my holdings at a price below $14.

My holdings in Chesapeake Energy (CHK) preferred D stock is the only non-option position besides TEF that is showing a loss for the year. The natural gas market looks bleak and with winter over, conditions look set to weaken further, with some analysts expect prices to fall below $2/mcf. While I remain skeptical of management (as detailed in this previous article), the attractive asset profile of the company, along with the nice yield on the preferreds, persuade me to continue holding this position and see if management will successfully manage the transition to more liquids-based production while trimming its debt. If yes, the preferreds should move up past $100 and if not, there's probably not much downside from here and I'll be paid to wait.

Penn West Petroleum (PWE) is another stock which has badly lagged the market but as I wrote back in January, I wanted to sell PWE somewhere in the $18-$22 range. At the time, shares were trading above $20 and in an effort to wring a few more points out of the stock, I sold in-the-money June 2012 $20 covered calls for $2 premium. This added another 10% gain, while arranging for me to exit at $20 but not before also collecting another dividend payout.

Since then, PWE has fallen slightly below $20 and the June calls that were sold for $2 last closed at $0.85. With 75 days left until expiration, these calls will increasing lose value as June approaches. If shares hover around $20, I may take the opportunity to roll the calls over.

As for new positions, Allied Nevada Gold (ANV) now seems attractive in the low $30s. While I have yet to buy shares, I have sold $30 June naked puts which, if assigned, would open a position below $29 per share. At this point, I think I may have erred in writing the puts and not buying the shares outright. However, with gold in somewhat of a correction, I expect to eventually be long ANV at some point.

Disclosure: I am long TEF, PWE.

Additional disclosure: Long CHK preferred D shares. Short PWE covered calls, short TEF naked puts, short ANV naked puts.