Portfolio A1 Adds ORH and MBT; Drops IT and RKT

After a dreadful week that saw Gartner (IT) stock give up 10%, I was not surprised to see the company dropped from the Portfolio A1 holdings. On the other hand, I was surprised to see Rock-Tenn (RKT) dropped as well.

It turns out that the sale of IT was triggered by a significant drop in my stock ranking system, which was largely due to technical weakness. Even with last week’s disaster, we are still able to book a 6.5% profit in the stock over the course of our three month holding period. For RKT, the stock continues to be ranked very high in my stock ranking system, but it is sold because it has now dropped 20% from the post-purchase high, which automatically triggers a selling rule, one that kicks in now that RKT's gains have slipped to 2.8%.

By way of explanation, the 20% rule is designed to get me out of high fliers that may now be in the early stages of a large pullback; during a downturn, it will often also shift the portfolio from high beta stocks to more defensive holdings.

On that theme, I welcome Odyssey Re Holdings (ORH) a reinsurance company, to the portfolio, along with Mobile TeleSystems OJSC (MBT), an ADR for the Moscow-based cellular company.

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

A snapshot of the portfolio is as follows:

Portfolio A1 Seeing All Green

On the heels of last week’s lackluster performance, the portfolio roared to life this week, with all five of Portfolio A1’s holdings logging weekly gains. This enabled Portfolio A1 to stretch its performance margin over the benchmark S&P 500 from 1.7% to the current 4.2%.

Note that Tesoro (TSO) paid out a dividend of $0.10 on Friday. In keeping with the precedent established with the treatment of an earlier Rock-Tenn (RKT) dividend, I am automatically reinvesting the cash proceeds into the appropriate stock.

Once again, 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 Holds Steady as RKT Loses Altitude

For the second week in a row, at least one Portfolio A1 holding fell 10% during the week. Last week it was Tesoro (TSO), which continued to recover this week; the most recent victim is Rock-Tenn (RKT), whose fall was offset almost imperceptibly by a $0.10 dividend paid out on 5/21. While RKT has been a strong performer since being added to the portfolio during the first week in March, the recent weakness makes this holding vulnerable to being dropped in the coming weeks.

In spite of RKT’s difficult week, Portfolio A1 has increased its performance advantage over the benchmark S&P 500 to 2.2%.

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

A snapshot of the portfolio is as follows:

Strong Earnings at RKT Lift Portfolio A1

Strong earnings at Rock-Tenn Co. (RKT) helped propel the company to a 14% gain on Thursday, before a CSFB downgrade trimmed the stock price 4% on Friday. RKT’s weekly gain of 8.6% now makes it the top performer in the portfolio (up 24% in a little less than two months) and has helped to increase Portfolio A1’s advantage over the benchmark S&P 500 index to 6.8%.

It is worth noting that while four of the five holdings continue to sport double digit gains since being added to the portfolio, WCG’s lackluster week dropped it in to the red. Some analysts have expressed concern about WCG’s medical loss ratio; continued insider selling probably has done little to reassure investors.

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

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:

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.