Herbalife (HLF) Added to Portfolio A1

One fascinating aspect of a mechanical portfolio is that it will get you long companies that you often not even consider dabbling in. Such is the case right now, as Portfolio A1 has seen fit to drop Invitrogen (IVGN) and replace it with Herbalife (HLF), a company whose core business is in nutritional supplements and weight management products.

A year ago, the portfolio briefly held Herbalife competitor NBTY (NTY), so I should not be surprised to see this segment back in play. Last I heard, over 30% of Americans were classified as obese. An interesting cover story in the most recent Business Week, “Inside Drugmakers’ War on Fat,” chronicles the daunting problems facing companies whose efforts have focuses their efforts on weight loss drugs. The bottom line is that diet programs is a $33 billion dollar business, with no silver bullets in sight. Investment opportunities can follow either the hype cycles or the fundamentals, but there will always be long and short opportunities in this space. Herbalife reported a strong quarter on February 26^th and raised guidance for 2008. Those interested in learning more are encouraged to review their Q4 2007 earnings conference call transcript.

Getting back to the portfolio as a whole, Portfolio A1 lost some ground on the benchmark S&P 500 index last week and now sports a net performance gain of 16.9% over the index, with a 5.8% cumulative gain vs. an 11.1% cumulative loss in the SPX.

There no other changes to the portfolio for the coming week.

A snapshot of Portfolio A1 is as follows:

Portfolio A1 Likes Tesoro

It has been interesting to watch the Portfolio A1 stock ranking system search for a fifth a final holding for this portfolio. This week Enersis (ENI) has been dropped after drifting sideways for a week, to be replaced by Tesoro (TSO). In this instance, the change is more the result of Tesoro’s rising star than a particular dissatisfaction with Enersis: from mid-January to the end of April, Tesoro has more than doubled. Still, a May 3^rd earnings report failed to impress and appeared to stall the stock, yet gives the portfolio a chance to buy Tesoro in during what may turn out to be just a pause. I would love to see some stability in the holdings and I think TSO’s prospects are probably a little better than predecessors ENI, WCG (which looks to be recovering), NTY and PCCC.

In the bigger picture, the portfolio maintains its 4.5% cushion over the S&P 500, with a 7.9% gain since the February 16, 2007 inception.

There are no other changes to the portfolio for the coming week.

A snapshot of the portfolio is as follows:

After Two Months, Portfolio A1 Is 5% Ahead of the S&P 500

Now that has been two months since Portfolio A1 was launched, I feel that sufficient time has elapsed to begin taking a cursory look at some of the portfolio statistics.

The first statistic that jumps out at me is annual turnover. While many may see a 327% annual turnover rate as high, this portfolio is designed to be actively traded, with the potential for turnover as high as 2000-3000% per year. So far, the system has culled three of the original five holdings. Of those three, only RIO has been a high performer since it was dropped from the portfolio. On the other hand, the post-sale performance of NTY and PCCC has been middling at best. So it appears that the system is doing a good job of cutting free losers – and I have no problem erring on the side of doing this too soon rather than too late.

In terms of the stocks that have been retained, four of the five current portfolio holdings are up at least 13% to date. The laggard, WCG, is up 2%, but it has only been two weeks since it was added to the portfolio. Again, this is just the type of performance I am looking for.

From a risk perspective, I look at maximum drawdown, which is the maximum peak to trough drop, regardless of time period. In the case of Portfolio A1, the 2/27 correction resulted in a 13% drawdown from the 2/26 high – a period during which the S&P 500 lost a little over 6%.

Though it is not included in the calculations on this graphic below, individual stock betas and correlations are an important component of portfolio risk. Four of the five stocks have betas in the 1.2 to 2.2 range; the fifth, AMKR, currently has a beta of about 5.0, which is partly responsible for why the current weighted average beta of the portfolio is 2.6. With the increased passage of time, I will look to the Sharpe Ratio as a means of measuring risk-adjusted returns.

Of course, total return and active return (defined as total return minus benchmark return, with the benchmark being the S&P 500 in this case) are two numbers that I keep a very close eye on. I am pleased to report that Portfolio A1’s return of 7% for the first two months is 5% better than the 2% return logged by the S&P 500.

There are no changes to the portfolio for the coming week.

A snapshot of the portfolio is as follows:

NTY Replaced by WCG at Portfolio A1

Every once in awhile, a mechanical system does what the muzzled discretionary has secretly been hoping for all along. In this case, I got my wish and Portfolio A1 has dropped NTY and replaced it with WCG, the portfolio’s first foray into health care, a sector that has been performing exceptionally well as of late, as reflected in the XLV ETF, among other barometers.

NTY has been the one laggard in this portfolio, despite the recent run-up associated with possible buyout rumors. Generally, the discretionary trader in me looks to sell long positions on buyout rumors, but in this case Portfolio A1’s stock ranking algorithm dropped NTY due to poor performance relative to the other holdings and to WCG. A close look at the WCG chart shows that the stock’s price action strongly resembles that of a airplane taking off, as the stock as steadily gained altitude in the course of tripling from November 2005 to the present.

Apart from dropping NTY and adding WCG, there are no changes to the portfolio for the coming week.

A snapshot of the portfolio, which now has a solid 5% advantage over the benchmark S&P 500 index, is as follows:

(In other portfolio news, I have slipped to #3846 in the CNBC Million Dollar Portfolio Challenge. This is still in the top 1%, but below my ranking from last Wednesday and still some $700,000 out of the top 20. The good news is that earnings season is beginning this coming week – and with it some opportunities to take some big chances and make some big moves. Hey, if Zach Johnson can win the Masters, anything is possible!)

Portfolio A1 Continues to Rally Behind NTY

Buoyed by rumors that the company may be up for sale, shares of NTY rallied 4.8% this week, helping to propel Portfolio A1’s cumulative performance to 2.4% better than the benchmark S&P 500 index. This week’s strong performance means that all five holdings are now in the black, with TEX’s 7.8% return leading the way. Details of the recent performance of the holdings are as follows:

Once again, there are no changes to the portfolio for the coming week.

A snapshot of the portfolio is as follows:

(In other portfolio news, I am pleased to report that I am now #3158 in the CNBC Million Dollar Portfolio Challenge. While I am happy that my 29% return puts me in the top 1%, the last I checked the top 10 contestants were all sporting returns of better than 100%, meaning that it will likely take a return of 200% or more to be among the top ten finalists on May 14^th. I have already resorted to a one stock ‘portfolio’ and expect to be increasing my volatility and taking substantially more risk in the coming week.)

Portfolio A1 Update for 3/25/07

Portfolio A1 rallied vigorously last week and now leads the benchmark SPX by 1.7%. Four of the five holdings (all but NTY) are within 3% of their 52 week highs, with TEX logging a new all-time high on Friday.

There are no changes to the portfolio for the coming week.

Though I am still not sure of the significance, the equity curve continues to strongly resemble a duck, although as portfolio performance improves I am ever hopeful that we can fly out of range of Dick Cheney.

(On a distantly related note, I am pleased to report that I have moved in to the top 5,000 at the CNBC Million Dollar Portfolio Challenge. I am currently in the top 2% of all contestants for this challenge, using a discretionary trading system that has recently made strong gains in natural gas and copper. My goal is to be comfortably in the top 1% and taking a run at the money when the contest ends on May 14. I will pass along any news of interest as it develops.)

Portfolio details for Portfolio A1 are as follows: