These two sectors are hitting new highs... but not for long...
Two areas of the market have soared recently... In today's Digest Premium, Porter explains why only one will be able to continue its hot streak...
To subscribe to Digest Premium and access today's analysis, click here.
The idea behind the S&A 16 is simple...
It's a quarterly, diversified portfolio of investments (usually 16 in all) chosen from among our coverage universe, which we believe will outperform the market over the next 12 months.
We first started producing the S&A 16 in October 2004. And we've produced one every quarter since then...
This week, we published our 36th S&A 16 Model Portfolio...
Many of you have never heard of the S&A 16. That's because we only make this portfolio available to our highest-level subscribers, the S&A Alliance. These are folks who have signed up to receive everything we publish (minus Phase 1 Investor) – and everything we ever will publish – for life.
The S&A 16 portfolio is always broken into four components: Value, Growth, Income, and Macro.
Let's take a moment to briefly explain what we look for in each of the four portfolio components.
In Value, we look for high-quality companies trading at attractive prices. These equities provide stable returns and often pay healthy dividends. As you'd expect, this section of the portfolio is dominated by Extreme Value and The 12% Letter editor Dan Ferris. You'll often find companies like software giant Microsoft, networking behemoth Cisco, and Warren Buffett's Berkshire Hathaway in our Value portfolio.
In Growth – as the name implies – we're looking for companies with huge growth potential. We look for stocks that can provide outsized returns over the next year – either because their shares have gotten crushed or because their sector is booming (for example, natural-gas producers in the U.S. shale regions).
In Income, we look for securities that will provide you with the highest possible level of income... These can be stocks, bonds, or even preferred shares. We regularly feature mortgage REITs and master limited partnerships in our income portfolio.
In Macro, we look for securities that will profit from what we believe are the most important macroeconomic trends at the time. For example, today, we're worried about rising interest rates and the mounting debt loads in countries like Japan.
Building a real, diversified portfolio each quarter allows us to have a benchmark to measure against the world's investment managers and index funds, demonstrating the value of our research. It also allows us to expose the absurdity of the high fees most asset managers charge for mediocre performance.
Earlier this week, we updated Alliance readers on the S&A 16 portfolio we opened in July 2012. Here's how we did...
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The guiding principle for that portfolio was the "Bernanke Asset Bubble." That's Steve Sjuggerud's nickname for the broad surge in asset prices we'd experience after Federal Reserve Chairman Ben Bernanke pushed interest rates to zero and pumped trillions of dollars into the economy. He started writing about this idea in late 2010.
From the beginning, we knew Bernanke's efforts to stimulate our debt-laden economy would end poorly... But these things can take years to play out. And since Steve started writing about the Bernanke Asset Bubble, the S&P 500 has risen more than 50%.
The hedged approach we took in last July's S&A 16 was a big success. Our equity positions soared, while our gold hedge declined. It worked out to produce a safe 26% return over the past year, beating the S&P 500's 24% return over the same time frame.
Here's what S&A Editor in Chief Brian Hunt had to say about the performance...
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It's important to consider that beating the S&P 500 during a big bull market move is very difficult when you're handicapping yourself by shorting and by holding cash and precious metals.
Using this hedged approach, we focused on protecting our capital during a downturn. That's what makes this year's performance so outstanding... It shows that combined, our team of analysts can produce better results than some of the highest-paid hedge-fund managers in the world.
Keep in mind... we produce these portfolios from S&A research. That's the same research we provide our subscribers every week. So every one of you can achieve these results by heeding our advice.
This quarter, we positioned the portfolio conservatively. We loaded up on high-quality blue-chip stocks (like some of Dan's Extreme Value World Dominators). We also shorted two companies. One is an oil producer whose share price is especially vulnerable if the price of oil falls, as Porter predicts. The other is a software developer that Porter believes could be "worth less than zero." And we gained exposure to a huge energy trend and took advantage of the coming breakdown in the Japanese yen.
If you'd like to begin receiving our S&A 16 model portfolios, you're welcome to call our head of sales, Michael Cottet (888-863-9356), to find out when we'll next open the S&A Alliance to new members.
New 52-week highs (as of 7/18/13): Fission Uranium (FCU.V), Fidelity Select Medical Equipment & Systems Fund (FSMEX), Home Federal Bancorp (HOME), Integrated Device Technologies (IDTI), Ligand Pharmaceuticals (LGND), and Sequoia Fund (SEQUX).
In today's mailbag, one reader argues the merits of calculating annualized returns. Send your e-mails to feedback@stansberryresearch.com.
"What is the logic behind using annualized ROR? This month, I bought a call at 22 on LINE, and made 41.9% in 2 weeks after commissions which annualizes to ~1092%. It's absurd to think I could continue that. Your computation on selling puts is based on your 20% margin requirement. In reality, if called, you need to come up with 100%.
"For my purposes, they give me $X, and how much of that I keep is my % profit or loss by buying to close or letting it expire. I have a few positions where selling a long term put (say 7 =9 mo) gets me more than 50% of the payment in 2-3 months or less. If I buy to close, my annualized profit is > 100%. Annualized % profit seems like an inflated number to make the analyst look good and depends on how you calculate it for puts and calls." – Paid-up subscriber Mike Forman
Goldsmith comment: Using an annualized return is simply a way to standardize returns so you can better evaluate your opportunities and performance. It allows you to compare trades that cover different time frames on an "apples to apples" basis. It also allows you to calculate an average performance over several years.
For example, a return of 5% in six months is better than a return of 9% in 12 months. Because you can perform the six-month trade twice in one year, you could return 10% over a 12-month period.
Regards,
These two sectors are hitting new highs... but not for long...
Two areas of the market have soared recently... In today's Digest Premium, Porter explains why only one will be able to continue its hot streak...
To continue reading, scroll down or click here.
These two sectors are hitting new highs... but not for long...
The S&P 500 and the Dow Jones Industrial Average both hit all-time highs yesterday. Two of the sectors that are showing particular strength are insurance stocks and consumer-products stocks.
In the July issue of my Investment Advisory, I (Porter) put our insurance companies on hold because they own tons of fixed-income securities. That may surprise you, since I've called insurance "the greatest business in the world." (Plus, it's been the backbone of my Investment Advisory portfolio this year.)
But I'm proceeding with caution on these stocks because I believe we're entering a period of weakness in the global fixed-income markets.
Insurance stocks have had a great run, and they're probably due for some kind of a pullback...
Going forward, I expect we'll see higher interest rates... and weakness in bonds. That is, of course, challenging for insurance stocks.
Meanwhile, we've also seen tons of consumer-driven businesses hitting new highs... And these are "middle-class" consumer businesses, like Target, Best Buy, Macy's, Cheesecake Factory, etc...
The strength here is coming primarily from two places: employment is up, and so is consumer credit.
If you look at mortgage lending and other forms of private credit, you'll see that the markets for private credit bottomed halfway through 2010... But people now have access to credit again, so they're refinancing their mortgages and lowering their debt-service payments. That's giving them more disposable income.
But manipulating these rates lower and giving people more disposable income today is actually leading to higher debt burdens. So we're right back in the same cycle as we were in back in 2006 and 2007, where people are going out and spending money. Except instead of buying flat-screen TVs, now they're eating at Cheesecake Factory.
– Porter Stansberry with Sean Goldsmith