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Secular Trends Portfolio Update - July 15th - Strong Outperformance Continues

Posted on | July 15, 2009 Time: 11:27 am |

As I’ve contended from the beginning of the Secular Trends Model, this has probably been the most challenging time in history to invest based on long term trends. Hardly a day goes by that I don’t hear a new media outlet ask the question (or state outright) that “buy and hold investing is dead”.

Well, 9 months into its inception, the Secular Trends Portfolio has outperformed the benchmark S&P 500 by 25 percentage points. That’s a nice chunk of alpha, and I’m even more optimistic about the future prospects of the Secular Trends Portfolio. Many of the largest holdings have been under-loved by investors thus far, but as the structure of an economic recovery becomes visible to a larger audience, I feel that stocks like Caterpillar (CAT), Costco (COST), Potash Corp. (POT) and Alcoa (AA) will see more bids. I owe the alpha thus far to well-time purchases of Goldman Sachs (GS), NVIDIA (NVDA), Schering Plough (SGP), and Freeport- McMoRan (FCX), as well as several holdings that have outperformed simply by staying flat thanks to their superior fundamentals.

As always, you can view the portfolio thesis & real-time positions via the main Portfolio Page, the link here on the main page (right below the RSS icon), or for the instant-gratification types, right here. I believe in maintaining the lowest turnover rate possible, but if a change occurs to a broad thesis, holdings will be removed expediently. So far the model has an annualized turnover ratio of less than 30%. It’s also been an essential goal of mine to have everything be as transparent as possible; far too many newsletter types and sites throw out statistics based on little more than cherry-picking. I keep a live ledger posted on Google at all times (also visible on the main page or here), and each buy and sell transaction has been posted on Epiphany Investing before it was added anywhere else. For easy access to all my commentary on a particular stock, simply click on the company name from the Portfolio Page, or just run a search.

For now, all is free. I can’t, however, promise that this will always be the case.

RECENT SALES

In the past month I’ve sold out of the Freeport position at $59 and change, which turned out to be a great timing effort as the commodity space saw a steep dropoff in the subsequent weeks. I’ve also blown out most of the Big Pharma exposure with the sales of Pfizer (PFE) and Schering Plough (SGP), the latter following a nearly 100% gain on the acquisition by Merck (MRK).

Pfizer was held mostly as a valuation/dividend play, so if the strategy change away from branded pharma wasn’t enough, the slicing of the dividend (and the galactically stupid Wyeth purchase) were more than enough to have me running for the hills. As my posting on the Pfizer sale hopefully proves, I have no problem freely admitting my mistakes. If we don’t hold those up to the light most of all, we risk the ultimate sin of repeating our errors.

NEW ADDITIONS, INCREASED STAKES

Cash proceeds have been put to work via the addition of Beckman Coulter (BEC), a diagnostics company with a great blended exposure to both “mainline” and life sciences applications. Also added was Check Point Software (CHKP), a security software/hardware firm with a layered architecture that could make them a valuable buyout candidate but stands quite strong on its own valuation & merits.

Existing stakes were increased in Big Blue (IBM), Corning (GLW) to allow their weightings to match the strength of my conviction in both companies. And finally, St. Jude Medical was added this week as a 4% position in the model. Cash is finally down to a respectable level (6%), and there might be just enough room to ramp up one more existing holding. Past that, I will be sitting tight and anxiously awaiting the most crucial earnings period I can ever remember.

Ryan Barnes

disclosure: author does not hold personal stakes in the companies mentioned. The Secular Trends Portfolio is a model that aims to reflect a 100% equities allocation.

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