Sunday, March 4, 2007

Portfolio A1 Update for 03/04/07

When I first announced that I would be using this space to talk about a live portfolio I was operating, I was more than a little concerned that the timing might not be ideal and that I should wait for a possible market correction before I rolled out a new portfolio. I based this opinion on my experience that the predecessor portfolios to A1 had demonstrated a greater propensity for outperforming the SPX benchmark in up markets than in down markets. Perhaps I should have listened to my gut…

Well, whether we have that correction already in hand or are in the early stages of a more substantial bear market, it is time to drill down on the A1 portfolio. As you can see from the attached equity curve below, A1’s performance has slipped below that of the SPX as a result of a week in which the five holdings were battered more severely than the indices. Due to last week’s performance, the system’s ranking of RIO (a favorite holding over the past two years or so) has dropped, triggering a sale. RIO has been replaced by RKT, a packaging company whose stock has tripled over the past year. RKT sports a relatively modest P/E 16 for 2007 earnings and a 1.9 PEG that puts it well below the industry average. In addition to a revenue growth story that is in sharp contrast to the industry trend, RKT has demonstrated continued pricing power it its markets. This is not a sexy stock, but the company appears to be executing on all cylinders and is attractively valued.

A glance at the equity curve suggests that this portfolio has a higher beta than the SPX; while this is case at the moment, largely due to the volatile AMKR, swapping RIO for RKT should decrease overall portfolio beta.

For the record, PCCC and AMKR are currently rated as the #1 and #2 stocks in this portfolio. In this challenging market environment, the performance of these two stocks should set the tone for the early performance of this portfolio and dictate the size of any drawdowns which may need to be scaled to return the portfolio to the green.

Finally, I should probably have already explained that this portfolio is a long only equity portfolio. It is not allowed to short stocks, buy or sell options, or avail itself of ETFs of any kind. As a result, the system does not make an effort to hedge any positions, regardless of the market conditions. The coming week should have a lot to say about how well this strategy is suited for the current market environment.


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