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:

WCG Out and ENI In at Portfolio A1

Information technology research powerhouse Gartner (IT) posted a strong first quarter and raised guidance and raised full year revenue and earnings guidance before the bell Thursday, then rode bullish analyst comments up 8% Friday, helping to offset some of the continued weak performance from WellCare Health Plans (WCG), which is being dropped from the portfolio. WCG has been a significant drag on portfolio performance and is largely responsible for reducing the cumulative performance advantage over the benchmark S&P 500 from last week’s 6.8% to this week’s 4.4%.

The story of the individual holdings continues to be one of four strong performers in search of a fifth and final holding that will provide a little more diversification without dragging down performance. With WCG out, the portfolio now turns to Chilean hydroelectric company Enersis (ENI) to see if it can fill that bill. Will Frankenhoff outlined the bull case for Enersis at Motley Fool in February. Since reporting earnings on April 25^th, Enersis has moved up another 10%, but Portfolio A1’s stock ranking system is undeterred and believes Enersis still represents a good value.

For the record, the portfolio’s proprietary ranking system ranked 7804 stocks this week. ENI had an overall rank of 35, but was selected because one or more of the following buying rules eliminated the higher ranked stocks:

• Market capitalization > $250 million
• Average volume over the past 20 days > 300,000
• Friday’s closing price > 10

Finally, stocks cannot be added to the portfolio if their inclusion will push any sector weighting to over 30% of the portfolio.

There are no other 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:

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:

Portfolio A1 Continues Solid Performance

Four of Portfolio A1’s five holdings – all but WCG, which was purchased on Monday – can now claim double digit returns. As WCG (WellCare Health Plans) has been a top performer in the red hot health care sector, the current composition of this portfolio looks as strong as it has been since the launch eight weeks ago. During those 8 weeks, Portfolio has gained 4.4%, while the benchmark S&P 500 has declined 0.2%.

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

A snapshot of the portfolio is as follows:

NTY Replaced by WCG at Portfolio A1

Every once in awhile, a mechanical system does what the muzzled discretionary has secretly been hoping for all along. In this case, I got my wish and Portfolio A1 has dropped NTY and replaced it with WCG, the portfolio’s first foray into health care, a sector that has been performing exceptionally well as of late, as reflected in the XLV ETF, among other barometers.

NTY has been the one laggard in this portfolio, despite the recent run-up associated with possible buyout rumors. Generally, the discretionary trader in me looks to sell long positions on buyout rumors, but in this case Portfolio A1’s stock ranking algorithm dropped NTY due to poor performance relative to the other holdings and to WCG. A close look at the WCG chart shows that the stock’s price action strongly resembles that of a airplane taking off, as the stock as steadily gained altitude in the course of tripling from November 2005 to the present.

Apart from dropping NTY and adding WCG, there are no changes to the portfolio for the coming week.

A snapshot of the portfolio, which now has a solid 5% advantage over the benchmark S&P 500 index, is as follows:

(In other portfolio news, I have slipped to #3846 in the CNBC Million Dollar Portfolio Challenge. This is still in the top 1%, but below my ranking from last Wednesday and still some $700,000 out of the top 20. The good news is that earnings season is beginning this coming week – and with it some opportunities to take some big chances and make some big moves. Hey, if Zach Johnson can win the Masters, anything is possible!)