By David Nelson, CFA
After markets ended January in the red, February put on one of the best performances since early last year. The 4% move in the S&P is even more impressive when you consider right out of the gate we took a 300 point plunge in the Dow on the heels of weak ISM number. After struggling early last week to break to new highs, investors had just enough ammo to end the month “Back in Black.”
The battle this month has been to gauge the true health of the economy and just how much weather has played a role.
It’s hard not to imagine the severe weather across many parts of the country hasn’t disrupted our economy but the question remains; by just how much? While I’m certain weather has been a factor, I doubt it’s the whole story. We’ve probably hit a speed bump and the Fed’s continued exit from quantitative easing at the very least creates uncertainty.
S&P 500 2 Year Chart
Even the Fed Isn’t Sure
Economists have been trying to quantify the damage and adjust estimates but the truth is, at this point it is little more than a guess. Chairwoman Yellen spoke before the Senate last week after bad weather in our nation’s capital postponed the event. She had this to say:
“Since my appearance before the House committee, a number of data releases have pointed to softer spending than many analysts have expected. Part of that softness may reflect adverse weather conditions, but at this point it’s difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.”
There it is. Even the Fed with all its tools and access is unable to quantify just how large the weather impact has been. For now, the market has clearly given the economy and stocks the benefit of the doubt. As I said in my post earlier this month we have the Weather Put. Economists, CEO’s have something to blame and investors have an insurance policy.
Asset Class & Sector Performance
Gold, Utilities and Healthcare have been the stand-out winners Year to Date. It remains to be seen whether gold’s run has legs. The yellow metal has broken the significant downtrend established in late 2012. The current crisis in the Ukraine will certainly give gold another lift higher but I still believe the Fed’s continued exit from QE creates a significant headwind.
As for utilities I think the move is nothing more than a knee jerk reaction to the recent fall in rates and its under performance last year. I expect interest rates to remain range bound and unlikely to provide much ammo for the sector.
Healthcare has out performed largely on the backs of biotechnology stocks. Our biggest winner in this sector is of course Gilead (GILD), up 40% since its purchase last August.
Consumer Staples continue to underperform with several earnings disappointments reported this quarter. In recent years some of the largest names have made a significant push into the emerging markets reaching for growth. With emerging markets one of the worst performing asset classes in the last few years it’s understandable why these stocks just haven’t delivered. Staples continue to be our biggest underweight but we have high confidence in our two holdings; SCI Corp (SCI) and Constellation Brands (STZ).
Growth vs. Value
While Alpha Select leans toward growth, it’s important to note that we focus on Growth At the Right Price; No Any Price. As you can see in the performance chart growth stocks started to significantly outperform value by the 4th quarter last year. I suspect over the coming months we will see some give back as the spread reverts to the mean.
The Good the Bad & the Ugly
Realized Gain/Loss
Our two biggest realized gains come from full sales of Northrop Grumman (NOC) and Johnson & Johnson (JNJ) +44% each. The other realized gain came from Micron (MU) with a partial sale +11%. We still like the Micron story, especially given its valuation but we’ve started to see some weakening in DRAM pricing so we’ve taken some off the table.
On the losing side we were stopped out on Invesco (IVZ) registering a (-7.6%) loss while Bank of America (BAC) was sold with a loss of (2.9%). After registering a huge gain last year in Facebook (FB) we took a (1.2%) loss this month on my highly publicized sale following their $19 Billion purchase of WhatsApp. Remember what I said above. It’s about Growth At the Right Price; Not Any Price.
Unrealized
It was a great month for the rest of the Alpha Select portfolio with only 2 stocks coming in with negative returns. Valero (VLO) and Comcast (CMCSA) were down (6.1%) and (-5.1%) respectively.
There were a lot of contenders for the winners circle this month but the crown goes to Trinity Industries (TRN) adding 22%. The honorable mentions go to Avago (AVGO), Helmerich & Payne (HP) and Disney (DIS) up 13%, 12% & 11% respectively.
Click Here for a full list of all closed Alpha Select trades for the last year. (Includes Profit & Loss)
Looking Ahead
The call on the year still hasn’t changed. My base case is for S&P returns to track earnings growth which would put us at about 1992 in the SPX. I like round numbers. Let’s call it an even 2000.
As we head into round 3 for 2014 let’s hope that just like the band markets can give us an encore.
News Flash – Russian Troops Invade the Ukraine
Obviously the events unfolding in the Ukraine will force a market reaction. While the situation is fluid I’ve attempted to handicap what this means for investors in the weeks and months ahead. Click Here for More.
