Portfolio Meets Test of Mr. Market

 | Jul 01, 2013 | 12:00 PM EDT  | Comments
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Stock quotes in this article:

mpaa

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tecua

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bac

,

gm

,

gs

,

gs

,

dva

The second quarter of 2013 crystallized the importancef the Federal Reserve had on the short-term movement in stocks. Heading into the end of May, the S&P was up over 5% in the second quarter and up over 17% for the first half of 2012.

Then came the Fed's comment about slowing down the money spigot. Because of that, the S&P 500 ended the quarter down 3%, but still up a healthy 10% for the year.

The Gad Winning Value Portfolio, my annual portfolio of 10 stocks, was finally tested, albeit very little during the second quarter. I've always said that performance during down markets is what counts. Thanks to Mr. "Bernanke" Market, the last several weeks of the quarter were volatile with equity markets clearly favoring a bearish direction. For the first half of 2013, ended June 30, 2013, the Gad Value Portfolio is delivering returns that would be the envy of any professionally-managed money fund.

During the first half of 2013, the Gad Value portfolio was up 27.4% compared with a 9.9% advance for the S&P 500. I like to compare the S&P 500 with dividends reinvested, which likely brings the S&P return somewhat closer to 10.2 percent.

Here's how the individual names contributed thus far:

The biggest takeaway during the quarter was how the combination of patience added with a depressed stock price can create a big payoff. For the first quarter, the only negative return was from micro-cap Motor Car Parts of America (MPAA). Thanks to an announcement from MPAA that it was shedding its money-losing divisions, the shares shot up and are now significantly outperforming the market, up almost 40% year to date.

To be sure, most of large-cap names in the portfolio experienced a comparable pullback to the market after the Fed's May 2013 comments. Two small-caps, MPAA and Tecumseh (TECUA) stepped up. And if the market resumes its climb, holdings like Bank of America (BAC), General Motors, (GM), Goldman Sachs (GS) and DaVita HealthCare Partners (DVA) will likely follow suit.

I noted in the past that the strongest attribute of the value portfolio is that it is built to weather the storms. If the S&P were to give back all of its gains by yearend, I think most of our individual securities would hold up rather well, given the very favorable microeconomic conditions that exist for most of those businesses today.

An outperformance of 17-percentage points can't be expected in future quarters, or years, unless Mr. Market continues to send prices lower -- in which case more opportunities will present themselves.

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