Turn the Page

Part of the value of a Real Money Pro subscription is getting a real-time view into the activity of professional traders and portfolio managers (PMs), and today will be no exception with me. I run two strategies: a large-cap earnings momentum at a reasonable price (similar to GARP...should I call it EMRP?) and the dividend capture strategy for which I am well known here on the site. The dividend strategy did fine in 2014, generating about 9% of income, but my EMRP fell a bit short, underperforming my principal benchmark (the S&P 500) by a few percentage points. My individual investor partners are generally happy with absolute returns, but like most PMs, I hold myself to a higher standard of delivering absolute return and outperformance. Fortunately, the strategy has a great long-term record, beating the S&P 500 by 300 bps annually over the past 15 years, but last year is best quickly forgotten. Often, when I have a stinker of a portfolio, I do a massive turnover to freshen it up, and that is what I am doing to start the year. The key lesson for your own trading is this: your portfolio should always reflect your best ideas, the ones you would own if you were starting from scratch with 100% cash. Often, our portfolios get cluttered with sub-optimal names that we hold on to because they were winners, or were losers, or seem OK since we are already in them. Any of these reasons would fail, if you were starting from scratch, so they should not be OK, once your portfolio is up and running. I have heard of some PMs that would sell everything when they have an underperforming portfolio, in order to remove the bias to hold on to what they already own. By selling everything, you start from scratch and can build a better portfolio. Many investment committees will chafe at the idea, but I think it is a sophisticated and insightful way to eliminate destructive emotions from the decision-making process. In my portfolio, I eliminated all but four names today. This is in a 30+ name portfolio. The four names I held onto were Broadcom (BRCM), Tesoro (TSO), Celanese (CE), and Intercontinental Exchange (ICE). I am holding them because they are solidly among my best ideas, and I would buy them if I were starting from scratch. Each of them has earnings momentum justified by fundamental trends, and are reasonably valued. In addition, they fit an additional spin I am putting on my analysis: the earnings momentum trend is actually accelerating. Very few names demonstrate this, but some are improving within my ranking system. The value is recency: to capture names with accelerating earnings and a heightened potential for upside surprise. My new names fit both my old basic parameters, as well as this prioritization of recency. My new portfolio is shown in the table below. Note that I have always run the strategy sector-neutral, in order to concentrate on stock selection as the source of alpha. Obviously, you might have a strong view on particular sectors and want to overweight or underweight them. Among the multitude of names I bought, a few stood out: Cintas (CTAS), Carnival (CCL), General Growth Properties (GGP), Carmax (KMX), Rite-Aid (RAD), Red Hat (RHT), and United Continental (UAL). As an example, five weeks ago, Carmax had a decile rank of six for earnings momentum, meaning nothing much was happening, and it certainly wouldn't have shown up on a buy list. During December, KMX reported blow-out results, with revenue up 16%, net income up 28%, and EPS of $0.60 ahead of the $0.54 consensus. In fact, analysts expectations for KMX have been rising all year. The company could be entering an accelerated phase of growth, as it opens more stores and sees more appraisal traffic, a sign of a weakening economy. All the names I added today have similar strong fundamental trends. Here is a summary of my portfolio to start 2015. I will report back regularly on how we are doing. Portfolio Holdings Source: Author View Chart » View in New Window »

Turn the Page

A new portfolio for the new year.

Columnist Conversation

Semiconductor Sector Dynamics

Updating the DIA

Pondering These Pot Stocks

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.