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:

IT In and PCCC Out at Portfolio A1

As I suspected might happen last week, PCCC’s performance lag has finally caught up with it and it will be dropped from the portfolio tomorrow and repaced by IT, otherwise known as Gartner, the research powerhouse that has been on a tear as of late, up almost 200% since April 2005. IT made a new 52 week high on Thursday, the 31st new 52 week high in the last year. IT has also raised guidance three times in the past nine months and announced a $200 million share buyback just last month.

The portfolio rallied relative to the S&P 500 this week and now sits 0.32% below the benchmark index. RKT, which became the first addition to the portfolio two weeks ago, has also become the top performer in the portfolio, up 6.9%.

A snapshot of the portfolio is as follows:

Portfolio A1 Update for 3/11/07

As the graphic below indicates, Portfolio A1 is currently trailing the benchmark SPX return by 1.5%, in large part due to the performance of PCCC, which is down 14.6% since it was purchased as part of the initial group of five holdings on 2/20. In spite of the poor performance, PCCC continues to be the top rated stock in our portfolio, though it is likely that without some near-term buying support, the RSI component of our stock ranker will force a sale in the next week or two.

It should be noted that the one stock from the original group of five that has been sold, RIO, did bounce back 6.9% in the past week. The stock that replaced it, RKT, was up 3.9% in its first week in the portfolio. There are no changes to the portfolio this week.

The equity curve, which is starting to look suspiciously like a duck to me, continues to show a high beta performance.

Current portfolio details are as follows: