January 2012 Portfolio Recap

Feb. 03, 2012 8:41 AM ET
John Cofran profile picture
John Cofran's Blog
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Value, Medium-Term Horizon, Portfolio Strategy, Deep Value

Contributor Since 2010

With over 29 years experience in the markets, John Cofran has managed a family office for over a decade. With over $20,000,000 in assets under management, he is a former Pricewaterhouse auditor with degrees in Finance, Accounting and Economics from Boston College. In addition to building several highly successful private businesses, John has also served as President and CFO of several international businesses. A value investor, he focuses on high margin of safety opportunities through a variety of conservative investment strategies. John's unique discipline and experience has allowed him to produce returns that far exceed the market, his peers and most world-renowned asset managers over the last two decades.

So far, 2012 is off to a strong start. Through February 2, 2012 the S&P 500 (SPY) is up over 5.3%, handily beating 2011's full-year performance. Impressively, the Nasdaq is up over 9.7% year-to-date. So, with January's impressive performance, the question remains: Where to from here?

Turning to 2011, we saw a similar 4% rise in the S&P 500 through Feb 3rd. An impressive 28% run-up between late August 2010 and mid February 2011 was halted on February 18, 2011. Five months of sideways action was followed by a stock market collapse in the Summer of 2011. Despite a 20.6% run in the S&P since October 1, 2011, we have yet to reclaim the highs of February 2011.

Fortunately, extremely low valuations in many blue-chips combined with necessary December 2011 tax-loss reallocations within the portfolio have yielded superb results. Through February 2, 2011 our portfolio has produced a 10.5% return, doubling the performance of the S&P. That performance is made even more impressive considering nearly 20% of the fund is invested in bond ETFs.

Thus far, the strategic shift discussed in my December 2011 Instablog post has paid off handily:

"As we have approached year-end, I have been aggressively selling losers to offset trading gains recorded earlier in the year. In addition, to achieve greater tax efficiency going forward, I have repositioned the portfolio for lower yield and greater dividend growth. I will be less active in capturing dividends in 2012 and more active adding to core positions on weakness. Currently the portfolio yields 6.84%, down from 8%+ through most of the year."

To help protect January's impressive portfolio gains, I have been actively selling long-dated out-of-the-money covered calls. Currently 39% of the portfolio has been hedged with covered calls, and the overall portfolio is hedged against a 3.6% market decline. I will continue hedging activities as the market rises and individual stocks in the portfolio demonstrate significant outperformance.

While seasonal bullishness is likely to continue in the short-term, I see significant headwinds as we approach the 1,350 level on the S&P. I expect a prolonged period of consolidation, and a possible 5% pull-back once the 1,350 area is reached. Longer-term, I maintain my 1,440 target price in the S&P.

Overall Sentiment: Neutral.
Portfolio Yield: 4.93%
Projection: Seasonal bullishness. S&P resistance at 1,350.

Top 5 Positions:

  1. iShares High Yield Corporate Bond (HYG)- 15.6%
  2. Apple (AAPL)- 4.7%
  3. Microsoft (MSFT)- 4.7%
  4. Teekay LNG Partners (TGP)- 3.9%
  5. Omega Healthcare Investors (OHI)- 3.3%

Disclosure: I am long HYG, AAPL, MSFT, TGP, OHI.

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