Guru Investor / John Reese2/25/2008 12:01 AM ET
Investors look again to value stocks
I'm re-balancing my portfolio by selling more than half my holdings and replacing them with stocks that now score higher using my models.
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Sell all shares of the following stocks at the open: Bright Horizons Family Solutions (BFAM, news, msgs), Dick's Sporting Goods (DKS, news, msgs), Flowers Foods (FLO, news, msgs), Forward Air (FWRD, news, msgs), Humana (HUM, news, msgs), ING Groep (ING, news, msgs), National Oilwell Varco (NOV, news, msgs), SEI Investments (SEIC, news, msgs), Siliconware Precision Industries (SPIL, news, msgs), Steven Madden (SHOO, news, msgs) and T. Rowe Price Group (TROW, news, msgs).
Using the proceeds from the sale of the 11 stocks listed above, buy equal amounts of each of the following 11 stocks at the open: Baldor Electric (BEZ, news, msgs), Bed Bath & Beyond (BBBY, news, msgs), Canadian Imperial Bank of Commerce (CM, news, msgs), CBIZ (CBZ, news, msgs), ExxonMobil (XOM, news, msgs), Factset Research Systems (FDS, news, msgs), Jakks Pacific (JAKK, news, msgs), Mueller Industries (MLI, news, msgs), NewMarket (NEU, news, msgs), Portugal Telecom (PT, news, msgs) and Precision Drilling Trust (PDS, news, msgs).
Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game and the contenders, click here.
The first month of this round of Strategy Lab is in the books, and a pretty clear theme has emerged: value, value and more value. Though growth stocks enjoyed a sizable advantage over value stocks last year, the trend has reversed as we move deeper into 2008. There's nothing like a little recession fear to drive investors back to good old, solid, lower-risk value picks.
This shift is apparent when you look at how my Guru Strategies have performed during the first month of this contest. Of the five models I'm using (each of which I used to select four stocks), three are fairly deep value approaches, and all three have performed well.
As of Friday afternoon, the four stocks -- all retailers -- chosen by my Benjamin Graham-based Value Investor strategy were up a total of about 6.5% for this first month. Women's clothing chain Chico's FAS (CHS, news, msgs) led the way, up more than 14% since the start of the contest, with shoe and clothing seller Steven Madden (SHOO, news, msgs) not far behind, having gained more than 11%. Men's Wearhouse (MW, news, msgs), which bounced back nicely after tanking on a recent earnings warning, was also up about 7.5%.
Jos. A. Bank Clothiers (JOSB, news, msgs) was the lone Graham-based pick to be in the red, losing about 7%.
Another value strategy that's looking good is the Contrarian Investor approach I base on the writings of David Dreman. This model was up about 4.5% as of Friday afternoon, led by a gain of about 11% from the tech firm Siliconware Precision Industries (SPIL, news, msgs). In addition, my Warren Buffett-based Patient Investor approach had gained about 2.6%, led by Forward Air (FWRD, news, msgs) and World Acceptance (WRLD, news, msgs), both of which were up in the 9% to 10% range.
My two growth-oriented strategies, conversely, haven't fared as well. The Conservative Growth Investor model I base on the writings of Martin Zweig has been pretty flat, with nice gains from the Peruvian financial Credicorp (BAP, news, msgs) and information-technology company Infosys Technologies (INFY, news, msgs) canceling out a loss of more than 8% by T. Rowe Price Group (TROW, news, msgs).
The Cornerstone Growth Investor strategy that I base on the writings of James O'Shaughnessy has been my worst performer, with its four holdings having fallen by about 3.5% as of Friday afternoon. Health insurer Humana (HUM, news, msgs) really weighed down that strategy, losing about 15% in the past four weeks.
Time to shake things up
Since we're now four weeks into the competition, it's time to re-balance my portfolio for the first time. You might be asking why am I trading so soon, but as I explain my strategy outline, I'll be re-balance every 28 days so that only the four top-rated stocks from each of the five guru-based models I'm using are in the portfolio. This ensures that my holdings include only the most fundamentally sound stocks in the market. If a stock in the portfolio is no longer among those top-rated stocks, it is sold and replaced by another stock that is among the highest scorers. I won't deviate from this re-balancing frequency, and I think it's important to explain to you why a 28-day cycle is utilized.
Over the past five years I have been running model portfolios on Validea.com that are similar to the portfolio I am using for Strategy Lab. The portfolios I run are re-balanced monthly, quarterly and annually, and though most have generated very strong performance, what I have discovered is that, on average, the monthly re-balanced portfolios have produced the best raw returns and also the best risk-adjusted performance.
One of the reasons I think the monthly re-balanced portfolios are superior has to do with opportunity cost -- meaning that the long periods allow too much time for stocks with falling fundamentals to remain in the portfolio. So the decision to reshuffle the portfolio every 28 days has less to do with what I think will work and more to do with what the data show works best over the long run. This may sound somewhat surprising to you, but you can see the results for yourself on Validea.com's model portfolio page.
This re-balancing, I'll be selling more than half of my holdings and replacing them with other stocks that now score higher using my models. The departing include both winners and losers. My O'Shaughnessy-based model, for example, is cutting its losses with Humana -- in fact, it's replacing all four of its picks -- while my Graham-based approach is taking the nice profits it's earned on Steven Madden.
Here's the new breakdown of which strategies have picked which stocks within the updated portfolio:
Value Investor based on Graham's method: Men's Wearhouse, Precision Drilling Trust (PDS, news, msgs), Jos. A. Bank Clothiers and Mueller Industries (MLI, news, msgs).
Patient Investor based on Buffett's method: American Eagle Outfitters (AEO, news, msgs), Chico's FAS, World Acceptance (WRLD, news, msgs) and Bed Bath & Beyond (BBBY, news, msgs).
Contrarian Investor based on Dreman's method: Eni (E, news, msgs), Citizens Communications (CZN, news, msgs), Canadian Imperial Bank (CM, news, msgs) and Portugal Telecom (PT, news, msgs).
Growth Investor based on Zweig's method: Baldor Electric (BEZ, news, msgs), Factset Research Systems (FDS, news, msgs), Credicorp and Infosys Technologies.
Growth/Value Investor based on O'Shaughnessy's method: CBIZ (CBZ, news, msgs), ExxonMobil (XOM, news, msgs), Jakks Pacific (JAKK, news, msgs) and NewMarket (NEU, news, msgs).
Given the market's recent value push, you might be wondering why I'm staying with this four-stock-per-strategy breakdown. Why not cut back on my O'Shaughnessy- and Zweig-based stock picks, and add some more Graham-, Buffett- and Dreman-type stocks?
The reason is that the market can stop on a dime and switch directions, leaving you holding the bag if you've made outsized bets on a particular style. (Consider this most recent shift from growth to value, which has occurred in a matter of weeks.) By using a broad mix of strategies -- each of which has proven to beat the market over time -- it helps ensure that the portfolio doesn't get slammed when one particular style goes out of favor.
This approach is one reason that I've been able to outperform the market by a wide margin over the long run. If you're thinking long-term -- and, in my opinion, every investor should be thinking long-term -- you might want to consider a similar type of style diversification within your portfolio. |
