Published September 11, 2012
Covestor model: Long Only Sector Rotation
Disclosure: RL, PHM, LEN, BAC
In August, we closed some positions in defensive stocks. We sold Monster Beverage (MNST) and Lorillard. In our top-down stock rating model, both stocks have lost some ground in attractiveness. In August we bought Ralph Lauren (RL), PulteGroup (PHM), Lennar (LEN) and Bank of America (BAC).
Despite the recent fears that China’s economy is cooling, we maintain our optimism that China is unlikely to have a hard-landing scenario and demand for luxury brands will remain relatively resilient. Ralph Lauren looked like an attractive buy according to our stock-ranking model.
Moving out of defensive stocks, we believe that it might be a good time to get in the stocks that benefit from the revival of the housing market. Given the positive signals in the housing market, such as the rising home prices and the increase in existing home sales, we believe that the stocks such as Pulte and Lennar promise good upside.
Furthermore, the U.S. Federal Reserve seems to have pledged no interest rate increases for the next year or so, which is likely to stimulate the demand for housing.
We also bought Bank of America as this stock ranks highly according to the parameters of our stock-ranking model. We believe that this stock has been cheap for quite some time, and is no longer a value-trap-stock. Bank of America trades at deep discounts to book value.
Moreover, BAC has been improving its balance sheet by aggressively cutting costs, and eliminating underperforming assets. In the banking system, profitability has been rising and capital levels have increased. There are other encouraging signs for the sector as loan default and delinquency rates have been on the decline since peaking after the sub-prime crisis. We believe that the current climate is encouraging for US banking stocks, which have cut their exposure to European debt.
Fed chairman Bernanke’s speech from the 31st of August signaled willingness to embark on a third phase of money creation to boost the U.S. economy, possibly after the election in November. Inflation may become a concern if the Fed goes ahead with a financial stimulus programme, which is why precious metals such as gold and silver have been recently outperforming equities.
In our portfolio, our gold and silver stocks -- Eldorado and Silver Wheaton -- have started to perform better, after a disappointing spring. We will hold on to these stocks till we find out how the financial stimulus story will play out.
We also remain bullish with regard to the performance of our energy stocks. In our sector strategy, we believe that, energy stocks will lead the recovery.
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