Recent renewed concerns for a slowdown in China and ongoing concerns in Europe took a toll for investors exposed to the financial markets. During the 2nd quarter of 2012, the Dow, S&P 500 and Nasdaq lost 2.5%, 3.3% and 5.1%, respectively.
Regardless of the negative market movements, investors still need to stick to a clear strategy, and to adjust their exposure to risk as market conditions change.
Quarterly Performance Review
Last quarter, the virtual portfolio created on kapitall.com outperformed the market. This portfolio managed concurrently with real money. The purpose of this approach is to test and track investing ideas before entering real-life trades.
As markets deteriorated in May and June, the portfolio was dragged down too. The S&P 500 bounced back, but the portfolio failed to recover proportionately with the market:
The performance would have been much worse had the portfolio not been in nearly 50% cash. During the first quarter, Breitburn Energy (BBEP) was sold. The company was added back during the second quarter after shares sold-off and is now the largest holding:
Top 5 Holdings
BREITBURN ENERGY PARTNERS LP
ELECTRONIC ARTS INC
CLIFFS NATURAL RESOURCES INC
Breitburn's shares peaked in the first quarter at around $19, and closed recently at $17.02. The oil and gas company pays a dividend of $1.82, yielding 10.69%. During an investor presentation in April, the company pointed to its oil/natural gas proved reserve of 35%/65%, respectively. Shares may have dropped because of natural gas prices plunging. For 2012, 72% of the gas production is hedged. As natural gas prices recover, investors will warm to shares in Breitburn again. The company is already hedged between $5.55/mmbtu and $7.12/mmbtu between 2012 and 2015.
Hewlett-Packard (HPQ) continued to be a drag on the portfolio, as shares declined and closed recently at $19.57. HP now has a total return of negative 18% for portfolio. HP was of interest after Seth Klarman's Baupost Group initiated a position in the company in 2011. HP, which pays a dividend yielding 2.70%, reduced its workforce, reiterated a multi-year turnaround strategy, and set a goal of earning $4 per share (non-GAAP) in 2012. Investors may be concerned with Microsoft's (MSFT) announcement of the surface tablet, which alienates PC makers like Dell (DELL) and HP. The concern is unwarranted, because Microsoft's new Windows 8 tablet design will force HP to innovate. Microsoft has yet to announce a price for the Surface. If HP can sell a Windows 8 tablet at lower prices but with improved quality, HP will turn-around its PC group even sooner.
Electronic Arts (EA) is another reason why the portfolio dragged, even as the S&P recovered in June. EA closed recently at $12.02, continuing a non-stop decline that began in November 2011. EA has a market capitalization lower than Zynga (ZNGA) ($3.82 billion versus $3.95 billion for Zynga). Investors favor Zynga shares, pointing to its mobile strategy and divergence away from Facebook. EA recently reaffirmed development on Facebook by releasing SimCity Social on the site. Profit from the app may surprise investors, but its presence will be positive when EA releases SimCity in February 2013.
Cliff Natural Resources (CLF) shares collapsed between April and May, dropping from $70 to $50. Cliff Natural closed recently at $48.01. The company pays a dividend of $2.50, yielding 5.21%. Ongoing weakness in China will limit upside for the company. Investors should note that China recently cut key interest rates, and relaxed loan-to-deposit rates. The moves are aimed to support the slowing economy.
In the U.S., Cliff reduced its thermal coal sales and production volume by 300,000 tons to 800,000 at its Toney Fork Mine in June. The company still maintained its full-year 2012 metallurgical coal sales forecast at 6.0 million tons and production volumes at 5.5 million tons for North America.
Seadrill Limited (SDRL) shares recovered in July after dropping to $32 in June. Shares closed recently at $35.64, and pays a dividend of $3.28, a yield of 9.20%. Secured contracts with counter parties at an average of 5 years for drill ships and favorable financing terms make Seadrill a compelling investing idea. Even with the allocation at 5.7%, the company is a candidate for being a bigger position, should its shares pull back during the summer months.