Institutional Interest High in These Nine Large Caps

Stocks of all sizes and shapes are trading up today, but which ones will continue to do well if the market holds up?

In the graphic to the right (courtesy of Yahoo) I highlight nine large cap stocks that appear to be the biggest targets of institutional interest not just today, but when the markets moved up in spurts last week too. Those that made the cut did so on the basis of several price factors and several volume factors. The list consists of five technology names (MSFT, AAPL, RIMM, ORCL, and DELL), two mining/metals stocks (RIO, FCX), and two energy stocks (PBR and CHK). Interestingly, two of the nine companies are based in Brazil.

At the very moment at least, these nine companies look to be at the top of the heap: quality stocks at attractive valuations, with considerable institutional interest. I would expect these names to continue to lead the way in subsequent bull moves.

Note that one company on this list may be somewhat of a special case. Chesapeake Energy (CHK) CEO Aubrey McClendon was forced to sell “substantially all” of his 33 million shares last week to meet a margin call. With that forced selling completed, the stock is bouncing back today.

Brazil Rallies While China Struggles

As the chart below shows, speculative money has been cautious about China since late October, but still bullish on Brazil, as indicated by the strong performance in EWZ, the iShares MSCI Brazil Index ETF. Not only is EWZ showing a gain for the year, but in an impressive display of strength, it has rallied more than 30% off of the January low. This performance puts EWZ not only well ahead of the most popular Chinese ETF, FXI, but also considerably ahead of the broad market emerging market ETF, EEM, known formally as the iShares MSCI Emerging Markets Index.

While EWZ is a great way to play the Brazilian market, there are several ADRs that are worth singling out as well. My Portfolio A1 holds Tele Norte Leste Participacoes SA (TNE) and has also been long Brasil Telecom Participacoes SA (BRP) in recent months, but there are even better plays. In fact, of the handful of long-term global holdings that I believe you could almost buy and forget about, two of my favorites are Brazilian giants. At the top of the list is Petroleo Brasileiro SA (PBR), a.k.a. Petrobras, the superbly managed national oil company that is pushing the envelope in the ultra-deep recovery space with their massive Tupi oilfield. Close behind is Vale (RIO), formerly know as Companhia Vale do Rio Doce, the metals and mining giant that recently extracted a 65% price increase in iron ore prices from Baosteel, the largest steel company in China.

In a healthy global economy, PBR and RIO are two of the best blue chip oil and iron plays out there. For those wishing a broader, more diversified play, EWZ is hard to beat, especially as Brazil continues to outpace China.

Portfolio A1 Beats SPX by 15.5% in First Year, Helped by Commodity Theme

With two of the five focus positions in agriculture and energy, the commodities theme has been good to Portfolio A1. W&T Offshore (WTI), the oil and gas exploration and production company, is now up 15.4% in the two weeks it has been in the portfolio. Last week’s biggest winner was Terra Industries (TRA), which posted a 10% gain for the week, moving up with the red-hot nitrogen fertilizer space.

After one full year of performance (since the February 16, 2007 inception), Portfolio A1 officially goes in the books with a return of +8.23%, compared to a -7.25% move in the benchmark S&P 500 index over the same period, a net performance gain of 15.48% by the portfolio over the benchmark.

In terms of risk-adjusted return, the graphic to the right shows that Portfolio A1 has had an average beta of 1.48 and an impressive annualized alpha of 23.58% during the first year that the portfolio has been up and running.

In many respects, this portfolio was established to provided focused approach to "fishing for whales." That approach has been largely successful if a little inconsistent during the first year, landing such strong momentum stocks as of MOS, DRYS, TEX, PBR, RIO and others. Part of what makes finding so many big winners possible is a very high annual turnover. At 674%, this is clearly a trading portfolio, not a buy and hold approach. Losses are generally cut quickly and a new hook goes over the transom almost every week. I look forward to seeing how the portfolio fares in the second year, as we begin that year with what looks to be an extremely challenging investment environment.

Portfolio A1 to Best SPX By 20% in 2007

On the heels of a strong fourth quarter, it looks as if Portfolio A1 will finish 2007 with at least a 20% advantage over the benchmark S&P 500 index since the portfolio’s February 16^th inception. With one trading day left in the year, Portfolio A1 has a 23.4% gain, a full 21.8% better than the 1.6% gain in the SPX during this period.

I will publish some additional statistics once 2007 is in the books, but suffice it to say with the likes of MOS, DRYS, TEX, PBR, RIO and others in the portfolio over the past 10 ½ months, we have been fishing in very rich waters.

In addition to the usual equity curve and summary information, I have added a list of positions that were closed out during the year.

There no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Mosaic (MOS) Continues to Lead Portfolio A1

The title is probably a considerable understatement, but what else can you say about a stock that is up 91% in only ten weeks in the portfolio?

The amazing run of The Mosaic Company (MOS) has helped to push Portfolio A1’s performance to a cumulative return of 14.15% since the portfolio inception on February 16, 2007. This is 8.67% better than the 5.48% returned by the benchmark S&P 500 index during the period.

Mosaic’s performance has triggered a number of thoughts about portfolio design, backtesting, and the likelihood of catching lightning in a bottle. Simply stated, in the 8 ½ months that Portfolio A1 has been up and running, it has purchased 27 stocks. Almost half of these stocks are up 50% during this period and 30% (MOS, DRYS, BRP, PCU, PBR, RIO, CNH, and SNDA) are up an astonishing 100% or more. The bottom line is that I believe it is possible identify stocks that have a high likelihood of doubling or tripling in one year (with attendant risk, of course) and build portfolio rules to maximize the probability of capturing those gains during the time they are held in one’s portfolio. I will expand upon this going forward, but Portfolio A1 should provide some evidence to support that contention.

There is one change to the portfolio: Navistar International (NAVZ) has been dropped and is being replaced by returnee PepsiAmerican (PAS), the beverage bottler. There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio Adds PCU and PNCL, Drops ORH and PBR

In yet another reminder that this type of portfolio is not aimed at the buy and hold investor, Portfolio A1 has decided to drop Odyssey Re Holdings (ORH) and Petroleo Brasileiro (PBR) and replace them with high flying Southern Copper (PCU) and Pinnacle Airlines (PNCL), a regional airline whose traffic is up 11.2% so far this year.

Technical and fundamental factors were both in play for this particular portfolio reshuffling. It was the technical performance (down 8.7% in the four weeks it was in the portfolio) of Odyssey that was its undoing, while PBR suffered from a slight downtick in some fundamental metrics that more than offset a 6.2% gain in the two weeks it has been in the portfolio.

These two changes bump the annual turnover rate in this portfolio up to 415% and send us back to the drawing board to find three stocks that can match the performance and continued promise of stalwarts Terex (TEX) and Amkor Technology (AMKR).

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

A snapshot of the portfolio is as follows:

Portfolio A1 Swaps Oils: PBR for TSO

For someone who is largely a discretionary trader, one of the more difficult aspects of a fully mechanical trading system is sitting on the sidelines trying to get up the enthusiasm to root for stock that you wouldn’t otherwise follow. Rarely do I watch Portfolio A1 dump one stock in favor of another, pump my fist in the air and yell at my monitor, “It’s about time, dammit!” Today is one of those days, however, as I can let my lukewarm feelings about the refiner Tesoro (TSO) depart along with the stock, while at the same time welcome into the Portfolio A1 fold Petroleo Brasileiro (PBR), the state-owned Brazilian whose stock has traced almost a straight line over the past five years in rising from 5 to 65, all while generally paying a 2% dividend in the process. PBR has been a favorite of my discretionary portfolios for several years and I can only hope that it hasn’t gotten ahead of itself at this stage.

Speaking of newcomers, last week’s strong portfolio performance was led by newcomer Mobile TeleSystems OJSC (MBT), whose 7.5% weekly gain helped to more than double the portfolio’s advantage over the benchmark S&P 500 from 1.5% to 3.3%. With Russia and now Brazil, 2/5 of the portfolio is invested in ADRs; and when you consider that portfolio stalwart Terex (TEX) has a strong China component, it is worth noting that Portfolio A1's stock ranking system is unwittingly endorsing the BRIC growth thesis, albeit with limited exposure to India.

Now that my discretionary portfolio overlaps this mechanical portfolio as far as PBR, TEX and AMKR are concerned, it will be interesting to see if Portfolio A1’s performance changes dramatically, for better or for worse.

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

A snapshot of the portfolio is as follows: