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:

Portfolio A1 Reconsiders DryShips (DRYS)

Last week I expressed my surprise that the portfolio had decided to sell out its position in DryShips (DRYS) after the stock registered a 27% gain in just four weeks in the portfolio. In retrospect, my skepticism looks warranted, as DRYS logged an 8.9% gain last week, while the stock it was replaced with, Shanda Interactive (SNDA), was only able to add 0.3% during the week. That differential, which meant a net of about 1.7% to Portfolio A1 last week, accounts for all of the 1.4% lost relative to the benchmark S&P 500 index last week.

Ironically, Portfolio A1’s stock ranking system has reconsidered this week and decided to add DryShips (DRYS) once again, while dropping the one other stock that has had two round trips in the portfolio: Terex (TEX).

While Portfolio A1 continues to try to run down the S&P 500, I am refining the next iteration of my public portfolio in the background and am readying for a January 1, 2008 launch. One of the most important changes is that this portfolio will not be a 100% mechanical system. It will be partly discretionary, so that I will be able to make decisions along the lines of overriding a sell signal in DRYS, if I don’t think it is appropriate.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Continues Upswing Behind Red Hot Mosaic (MOS)

Thanks to the Fed rate cut, three of Portfolio A1’s five holdings logged gains of 10% or more last week, led by a 12.2% gain in The Mosaic Company (MOS), which now sports an impressive 39.7% return in the five weeks it has been in the portfolio. Also part of last week’s winning trio were DryShips (DRYS) and Navistar (NAVZ). By the time the abacus was put to bed, the gap between the benchmark S&P 500 index and the portfolio had closed to 7.9%, the lowest margin since the mid-August plunge. With a total return of -3.08 since the February 16, 2007 inception, it is beginning to look like the portfolio may soon be back in green.

In the never ending quest for better performance (while keeping a deaf ear to any concerns about high turnover) this week the stock ranking system has jettisoned Sanderson Farms (SFM) in favor of Terex (TEX), an infrastructure play with significant exposure to China. A returnee, Terex was a very strong contributor to the portfolio earlier in the year.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Looks to Ag to Stop the Bleeding

The big story for Portfolio A1 is the recent drawdown, which is now registering a peak to trough drop of 29.7%, approximately triple that of the S&P 500 index benchmark. Since its inception (2/16/07), Portfolio A1 is now down 18.2%, vs. a 0.7% drop for the S&P 500.

Clearly, this has not been the place to have your money during the liquidity crisis – and the performance of this portfolio has given me a fair amount to think about. First of all, I usually have target drawdowns beyond which a portfolio or trading system automatically gets consigned to the trash heap. As I am an aggressive investor, the drawdown threshold usually falls in the 30-40% range. With Portfolio A1 now hugging the 30% drawdown line, I am tempted to shut it down. The question, however, becomes what to replace it with or whether to even bother with this portfolio feature on my blog. Here is my thinking at the moment: I will keep Portfolio A1 up and running until 1/1/08 or it reaches a 40% drawdown, whichever comes first.

Starting 1/1/08, I will unveil a new portfolio that is a hybrid between an automated system like Portfolio A1 and a discretionary system. As a result, it will incorporate more of my contemporaneous thinking about the markets and about individual stocks. It should also be a portfolio for which I feel greater ownership and accountability.

I toyed with a bunch of other ideas about what to do with this space on the weekend, but I kept coming back to my desire to highlight a specific portfolio and specific stocks. I look forward to the transition and hope that in the remaining 4 1/3 months, Portfolio A1 can regain some respectability.

Note that Portfolio A1 has finally decided to drop former high fliers Terex (TEX) and Southern Copper (PCU), replacing them with two companies with a strong agriculture component: Mosaic (MOS), a fertilizer company; and CNH Global (CNH) a Dutch manufacturer of agricultural and construction equipment.

A snapshot of the portfolio is as follows:

Portfolio A1 Last Seen in Woodshed

While the SPX, DJIA and NASDAQ Composite all feel somewhere in the 4.0 - 4.7% range during the past week, Portfolio A1 plummeted 9.2%, dragging the portfolio’s aggregate performance down below that of the benchmark S&P 500 index for the first time in four months.

Southern Copper (PCU) was the only holding to fare better than the indices, losing 3.3% on the week. The next ‘best’ performers, Mobile TeleSystems OJSC (MBT) and Terex (TEX), fell 7.7% and 8.6 respectively. Two other holdings logged double digit losses on the week, with Amkor (AMKR) off 11.9% and Pinnacle Airlines (PNCL) plummeting 13.6% by Friday’s closing bell. Pinnacle’s performance is largely responsible for it being dropped from the portfolio and replaced by Navistar International (NAVZ), a stock I owned some 23 years ago when it was International Harvester. While the company has had some extremely difficult challenges in the intervening years, a recent $623 million contract award to the military vehicles division suggests considerable upside potential. Navistar lost only 1.0% last week and has the potential for a significant upside surprise in more favorable market conditions.

There are no other changes to the portfolio for the coming 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:

AMKR Continues to Power Gains in Portfolio A1

With another week of strong gains, Amkor (AMKR) now has logged a cumulative gain of 33% since Portfolio A1 began 4 ½ months ago.

Weakness across the balance of the portfolio – with the notable exception of Terex (TEX) – has resulted in the portfolio underperforming the S&P 500 benchmark over the course of the past two months. For the full life of the portfolio, the gains of 4.8% continue to better the S&P 500, but by a margin that has slipped to 1.5%.

I should note that with the fractional losses of the two holdings added last week, Portfolio A1 now has had a total of four winning trades and eight losing trades to date. This is important because the intent of this portfolio is not to aim for a high percentage of winners by hitting a lot of singles, but to seek out doubles, triples and home runs, with the expectation that there will be many instances in which the portfolio is stopped out of losing trades. Based on past performance of similar portfolios, my guess is that it will probably take a year or two before this approach is evident from the portfolio statistics.

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

A snapshot of the portfolio is as follows:

Selloff Tests Portfolio A1

Portfolio A1 muddled through a difficult week in the markets, with losses of 7.1% in Tesoro (TSO), 5.3% in Rock-Tenn (RKT), and 4.5% in Terex (TEX) accounting for the bulk of the damage. As a result of the three hard hits, the portfolio’s margin over the benchmark S&P 500 index has fallen all the way from 4.75% to 1.70%. The coming week should provide a good test of the resilience of the portfolio’s holdings. Frankly, I would expect to see some changes if we don’t see signs of improvement in the options expiration week ahead.

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

A snapshot of the portfolio is as follows:

Portfolio A1 Roars Back Behind TSO and TEX

After two weeks of losing ground to the benchmark S&P 500 index, Portfolio A1 roared back last week, with all five stocks in the green. The strong performance was led by a 6.4% gain from newcomer Tesoro (TSO) and a 6.3% gain in portfolio leader Terex (TEX), which is now up over 29% in just 3 ½ months. The gains in TSO are particularly gratifying, as they allow me to get my hopes up that the fifth and final holding in the portfolio may now begin to add value rather than destroy it, as has generally been the case so far.

As shown in the graphic below, the portfolio now has a healthy 4.75% cushion on the S&P 500. This is below the year’s best 6.77% advantage from April 29^th, but at least is heading in the right direction once again.

For accounting purposes, it should be noted that TSO recorded a 2 for 1 split during the week.

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

A snapshot of the portfolio is as follows:

Portfolio A1 Struggles Behind TEX and TSO

Portfolio A1 had a difficult week. New addition Tesoro (TSO) dropped 10% from Monday to Wednesday, following the refiners down, yet rallied impressively to end the week just barely in the red. The situation was worse at Terex (TEX), which was Portfolio A1’s largest holding coming into the week. Terex struggled throughout the week and finished 8.5% off of Monday’s high. As bad as that sounds, the heavy equipment manufacturer is still flat for the past month and up 84% over the past year.

The week’s lackluster performance dropped Portfolio A1’s cushion over the benchmark S&P 500 to 2%, down from the 4.5% advantage as of last week.

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

A snapshot of the portfolio is as follows:

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: