What follows is a review of the performances of Value Line’s four Model Portfolios for the month of February. The effects of recent market action and any changes to the Model Portfolios’ respective holdings are found in each week’s Selection & Opinion (free sample here). Portfolios I, II, and III share a common benchmark, the S&P 500 Index (adjusted for dividends), which rose 4.3% in February. Although each of the three portfolios continued benefiting from the market’s upward move that began in December of last year, only Portfolio I ended the month outperforming the S&P 500 Index. Meanwhile, Portfolio IV recorded its fifth consecutive monthly gain in February, with the advance besting its benchmark, the Mergent Dividend Achievers (U.S. Broad), which rose 2.6%. (Read the description of each portfolio’s general investment strategy.)

Portfolio I reported a 5.5% gain for February, well ahead of its S&P 500 benchmark. Although investor support for the portfolio’s holdings varied widely, the enthusiasm expressed for our positions in the Computers/Peripherals, Industrial Services, and Auto Parts industries was an important factor in the group’s performance for the month. Meanwhile, earnings reports for the December quarter and the associated forecasts for the March period and 2012 largely made for good reading, giving Portfolio I a leg up on a respectable earnings season. In the end, though, our holding in the Railroad industry tended to be a drag on the portfolio’s return, reflecting some softness in coal volumes. There were two trades in February. We sold Brightpoint (CELL) at a moderate loss and Ryder System (R) at a moderate gain. The open positions were taken by stocks from the Recreation and Retail (Softlines) industries. 

Portfolio II recorded a return of 2.0% for the month of February, short of its market benchmark. Nonetheless, the February performance made it five gains in a row for the growth and income portfolio. As we have noted previously, the overall quality of the group’s holdings and the resulting lower risk profile tend to set the tone for this portfolio. Nevertheless, the performances of our holdings in the Integrated Petroleum and Aerospace/Defense, and Drug industries were notable, and worked to keep our group moving forward. On the other hand, our positions in the Electrical Equipment, Retail Store, and Railroad industries had the opposite effect, with each recording modest losses for the month. There were two trades in February. Telefonica SA (TEF) was sold at a deep loss and replaced by a stock from the Machinery business. In addition, Sysco (SYY) was sold after being added in late January, and replaced by a holding hailing from the Telecom Services industry.    

Portfolio III posted a gain of 3.5% in February. Although the advance was short of that recorded by the S&P 500 Index, the portfolio’s performance remained nicely ahead of its benchmark through the first two months of 2012.  Like Portfolio I, Portfolio III benefited from its position in the Auto Parts industry in February.  Indeed, investors have been quite supportive of this sector, of late. Elsewhere, the portfolio saw strong showings from its holdings in the Apparel, Oilfield Services, and Pharmacy Services industries. On the other hand, the group’s holding in the Steel business was a notable underperformer for the month. In keeping with the portfolio’s historically low turnover rate, there were no trades in February. Nevertheless, we remain on watch for quality companies whose stocks are selling at favorable prices relative to their underlying long-term growth prospects.

Finally, Portfolio IV registered a gain of 3.0% in February, ahead of its Mergent Dividend Achievers benchmark. Although the portfolio remains behind its performance yardstick for the first two months of 2012, its February showing brings it within 0.4% of its benchmark.  Unlike the month of January, the portfolio’s positions in the Electric Utility industry were not nearly as much of a drag on its performance. Meanwhile, Portfolio IV registered strong contributions from its positions in the Paper/Forest Products, Telecom Utility, and Property Management sectors.  On the other hand, the portfolio’s holding in the Coal business was a disappointment. There were two trades in February, wherein Darden Restaurants (DRI) and Portland General (POR) were exchanged for positions in the Integrated Petroleum and Recreation businesses.  Both trades were made at a profit. As it stands now, Portfolio IV should remain of interest to investors focused on dividend income. Its yield on cost basis remains quite favorable. 

Although it is still early in the year, the Model Portfolios are each moving forward reasonably well, in our view. True, Portfolio II has gotten off to a slow start, but its conservative composition tends to keep it from fully participating in markets that are moving rapidly upward, putting it at somewhat of a disadvantage.  At this writing in mid-March, the stock market seems to be taking a breather, with the major indexes showing little in the way of direction. Still, the prospects for economic expansion in the United States seem respectable when cast against the greater uncertainties found around the globe. Whether this backdrop underpins favorable returns from investments in common stocks in 2012 is, of course, an open question. That said, the portfolios should continue to appeal to a range of investors with varying appetites for risk and return desiring exposure to the equity markets. Alternatively, the Model Portfolios can serve as a source of some of our best investment ideas.

As of this article’s writing, the author did not have positions in any of the companies mentioned.