Epiphany Investing

Searching Out the Optimal Portfolio of “Revelation” Stocks

Hunting Down Some Alpha - 398 Basis Points This Week

Posted on | October 31, 2008 Time: 11:49 pm |

The Secular Trends Portfolio is finally gathering up some alpha (nearly 4 full percentage points this week), and I couldn’t be more thankful after some early knife-diving purchases into names like Alcoa (AA), Peabody (BTU), and Petrobras (BTU). Volatility has been more extreme than I ever could have imagined, and sectors like industrials and basic materials saw heavy sell-offs in early October.

On my performance update from two weeks ago, I noted that these sectors would still be cheap even after the huge guidance cuts that we’d hear during earnings season:

“At this point, it looks like I’ll have to wait about two more weeks before sell-side analysts get their heads around the fact that valuations (current and PEG) are better in materials than anywhere else.”

Two weeks later, and these two sectors have massively outperformed the S&P 500:

Negative Trends For the Week

Epiphany Investing is all about welcoming transparency and open thoughts. My links above to earlier posts that discuss adding Alcoa at $19 and Petrobras at $44 should attest to my willingness to be utterly humble. While most of the portfolio’s 22 holdings closed out the month tremendously well, a few stocks have given me cause for concern, or at least further review of the existing thesis.

  • Goldman Sachs - shares were down 10% on the week, as lingering fears and rumors still swirl around the big derivatives players. I see the stock as a perfect barometer for the tail risks in the economy, and our willingness to continue discounting…well, systemic failures. So far, the verdict is mixed; there is still an overwhelming amount of trepidation, if not outright fear.
  • NYSE - The exchange operator reported earnings down over 30%, as higher U.S. equity & derivative volumes were offset by lower European derivatives trading in the 3rd quarter. Not so bad considering how frozen everything was in late August and September. What I don’t like is the severe loss in market share for total NYSE-listed stocks, down from 59.5 to 42.5 year-over-year. That’s a big dent from recent democratization of the electronic exchanges. I chose this company for its still-favorable secular trends, high dividend and exposure to growth in ETF trading. Our NYSE/Euronext position is already up 27%, but I may be looking to sell if the share losses appear to be a real trend.

Finally, a special Tip O’ the Hat to Las Vegas Sands (LVS), which rallied….get this…124% this week. It appears that Adelson will be able to finance his mega-resorts after all, and investors are realizing that the value of the properties in an equity-safe world is still well above the current market cap. I owe a lot of my alpha for the week to Adelson and company.

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