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Performance of the Model Portfolios: May, 2012
What follows is a review of the performances of Value Line’s four Model Portfolios for the month of May. 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 declined 6.0% in May. Of these three, only Portfolio II lost less than the S&P 500 Index. Meanwhile, Portfolio IV was also unable to outperform its benchmark, the Mergent Dividend Achievers (U.S. Broad), which declined 3.5%. (Read the description of each portfolio’s general investment strategy.)
Portfolio I reported a loss of 9.2% for May, well behind its S&P 500 benchmark. Market support for the group’s holdings was clearly one-sided during the month, with 17 of our 20 positions declining in value. Indeed, only our holdings in the Retail (Softlines), Drug, and Trucking industries showed modest gains. Our losses were punctuated by a disappointing earnings report from a member of the Retail Automotive sector and the clear lack of enthusiasm for our range of selections from economically sensitive industries. The latter would include the Maritime, Metal Fabricating, and the Heavy Truck & Equipment sectors, where we sustained the deepest losses. Despite the challenging market conditions, we tried to keep trading to a minimum, making only two changes in May. Advance Auto Parts (AAP) and Millicom Int’l Cellular (MIICF) were exchanged for positions in the Trucking and Drug businesses. Advance was sold at a handsome profit, while we recorded a modest loss from holding Millicom.
Portfolio II declined 4.0% in the month of May. A stock-by-stock review of the portfolio’s holdings shows that the damage done by the market was wide-spread. Still, this group’s more conservative composition worked to cushion the losses, with only one of our holdings, a member of the Drug industry, suffering a double-digit price decline. Meanwhile, there was one bright spot in all the gloom, in that our selection from the Retail Store arena posted a strong gain, more than offsetting the aforementioned loss. There were two trades in May. The first involved the sale of the stock received from the spinoff of the downstream assets from one of our positions in the Integrated Petroleum business, with the proceeds being plowed back into the original holding. In the second, we exchanged Emerson Electric (EMR) for a stock hailing from the IT Services sector. A moderate loss was taken on the Emerson sale. We note the income received in May offset about 50% of the realized losses in the month, demonstrating the importance of the income stream in this group’s growth and income objective.
Portfolio III posted a loss of 7.8% in May, indicating that it was not spared any of the pain meted out by the market. Nonetheless, there were two positions that were particularly culpable in the group’s May performance, namely our holdings in the Restaurant (lackluster sector and disappointing earnings report) and Steel (very weak price action) industries. Still, there were some modest gains posted in the month, with our positions in the Entertainment and Food Processing businesses being the more notable. There were two trades in May. We sold our holdings in Halliburton (HAL) and Johnson & Johnson (JNJ - Free Johnson and Johnson Stock Report) shares, replacing them with positions in the Computer/Peripherals and Telecom Equipment industries. The JNJ trade resulted in a handsome profit, while a moderate loss was taken on the sale of HAL stock.
Finally, Portfolio IV registered a decline of 4.0% in May. Although this portfolio’s results were slightly more mixed that the other three, with six of its 20 holdings either posting gains or holding their own, our positions in the Paper/Forest Products and Integrated Petroleum arenas tended to weigh more heavily than the other decliners, and were the primary culprits in the portfolio coming up short of its Mergent Dividend Achievers benchmark. Meanwhile, on the positive side, our holdings in the Telecom Services and Tobacco industries headed our list of gainers. In keeping with our goal of minimizing turnover, there were no trades in Portfolio IV in May.
Through the first five months of 2012, only Portfolio I was ahead of its S&P 500 benchmark. However, that may of little comfort, given the unease that remains in the stock market. Indeed, at this writing in early June, investors continue to fret over the problems in the euro zone and the slowing growth in China. We note the market often assigns the highest probability to the worse possible outcome in situations like these, and stock prices fall more than is warranted. Accordingly, although counterintuitive to human nature, market declines can present investors with good opportunities. That said, the Model Portfolios each have a unique performance objective, so they 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.