Time to Look At Conservative Growth Stocks

Two months ago, I launched my second model as part of my Invest By Model service for individuals, the Conservative Growth/Balanced model portfolio.  Concurrent with the launch, I contributed a series of articles to Seeking Alpha describing the process and highlighting each of the names that made the cut.  If you would like to refer back to the articles on the individual securities, here they are:

Energy (CVX) Industrials (ASF, CSL, ITW) Consumer Discretionary (BBBY, COLM, LOW) Consumer Staples & Healthcare (WAG, JNJ) Financials (CFR, FII) Technology (CSCO, NATI) I am extremely pleased to report that with the S&P 500 essentially unchanged from the mid-July launch, the portfolio is up in excess of 10%.  While the intention of this article isn't to gloat, I am quite pleased, as I own several of the stocks in the model.  What I would like to address in this review is the reason for the strong performance and the prospects of sustainability.  First, though, I would like to address the performance.  As I mentioned, the portfolio, which has been invested near its maximum of 75% stocks since inception, has had a small amount of turnover.  Specifically, we added to COLM in late July, trimmed NATI and used the cash plus additional cash to start a new position in Raven (RAVN) and to add to ASF and BBBY in mid-August, sold 1/2 of LOW to add to RAVN in early September and then trimmed COLM and CSL on 9/19.  Each of these transactions was disclosed on my Invest by Model blog.  As an aside, trades are priced at the average of the high and low on the day following my decision (which is a challenge in these volatile markets!).  The performance, as I mentioned, has been strong, with all but one of the stocks rising since the launch (WAG is down slightly - FII is actually up if one includes the large one-time dividend).  Several of the stocks have increased in excess of 20%, including CFR, COLM, CSL, LOW and NATI.  The benchmark for the model is a blend of 60% of the S&P 500, which is unchanged roughly, and 40% of the Lehman Aggregate Bond Index, which is up about 2% roughly.  Performance, then, is over 9% ahead of the benchmark.  Why? Among the reasons that stand out the most are the low exposure to Energy, the high exposure to Consumer Discretionary, the extremely high quality nature of all of the companies in the portfolio and some luck.  The low exposure to Energy was intentional, with just 4% of the portfolio going into CVX at the launch.  This represented a huge underweighting, as a neutral position would have been almost 9%.  CVX, which is actually up slightly since the launch, has been one of the better names in the sector as well.  I loaded up the portfolio with exposure to Consumer Discretionary stocks, especially to retailers.  In fact, at the launch, the weighting was 14% compared to a benchmark weighting of just 5%.  Our weighting in Industrials was of similar magnitude.  These sectors have performed relatively well, but the stocks in the model even better.  Check out the graphic below (click to enlarge) to see how clearly the Energy/Consumer Discretionary positioning has helped.  I believe that these names were extremely undervalued as investors had avoided these primarily domestic companies.  Each of the companies in the portfolio has many characteristics of "high quality", including strong balance sheets, industry leadership, and good management.  I believe that investors have turned to these companies during these trying times.  In fact, even in Financials, our stocks have done well, as they aren't especially exposed. Finally, I mentioned luck.  One of my favorite sayings is that it is better to be lucky than smart, and I stand by it.  I believe that the high levels of short-interest in many of the names in the portfolio has resulted in strong performance as the shorts have covered.  The reasons for covering include hedge fund liquidations, a desire to reduce exposures during very volatile markets and the new rules on naked shorting and the potential for disclosure requirements.  So, the strong performance is a result of good sector positioning and picking the right stocks (and getting a little lucky!).

Disclosure:  Long ASF, BBBY, COLM, CSCO, CSL, FII, NATI, RAVN

Comments

[NOWHEREMAN:]

Take your profits. Luck isn't in my investing dictionary especially if I have to look to the Government to generate a short squeeze to generate that profit.

Nothing has changed as far as discretionaries are concerned.

2008 Sep 22 08:36 AM

[Alan Brochs...:]

We have reduced our exposure to consumer discretionary by selling some LOW and COLM...

2008 Sep 22 09:37 AM