November saw the FatAlpha Active portfolio cover October’s lost ground as it rose 2.6% versus 0.4% for the S&P 500. The position in Abercrombie & Fitch (ANF) rose 21% on an earnings beat while Stage Stores (SSI) dropped -20%. The loss on SSI was larger but news of insider buying activity and a monster 10% dividend yield brought in buyers that took the stock from $6 to $8 in 4 days! I’ve written an article on SSI for Seeking Alpha (http://goo.gl/N4WRFh) but I believe it is currently restricted to PRO subscribers only. Jabil (JBL) rose 11% month-on-month ahead of December earnings. Micron Technologies and Sanderson Farms also report so while December is usually a good month for stocks, these announcements are expect to affect the portfolio’s performance. FYI, the S&P 500 has been up 80% of the time during the last 25 years with an average again of 1.8%.
The new market neutral portfolio (launched in September) dropped -0.6% while its benchmark dropped -3%. The benchmark is the QuantShares US Market Neutral Value ETF (CHEP). This was chosen as its strategy is closest to the FatAlpha Market Neutral one. The ETF basically goes long the cheapest stocks and short the most expensive stocks. Unfortunately it’s not the most liquid ETF, but none of the market neutral ETFs are particularly liquid. The final decision on CHEP was made when I looked at the holdings which I believe reflect my market neutral approach. There was also the option of using a combo of ETFs and use, for example, the more liquid Vanguard Value ETF (VTV). However, the problem with VTV is that it’s top holdings are far from the value portfolio employed by FatAlpha. For example, MSFT, GE, and JNJ rank mid-table in the FatAlpha models and would never be considered but in VTV they are among the top 5 holdings.
As I mentioned in my previous letter, 2015 has been a difficult year for fund managers as even the Oracle of Omaha (Warren Buffett) is down -13% as of the end of the 3rd quarter. Perhaps Buffett should let FatAlpha manage some of its money. Besides the fewer opportunities and higher valuations investors have been facing, the larger issue is the lack of broader participation in the market rally. As Casey Research, Ned Davis Research and the Financial Times have noted, the FANG stocks (Facebook, Amazon, Netflix, Google) / Nifty Nine (add Priceline, Ebay, Starbucks, Microsoft, Salesforce) have been doing the heavy lifting. As the S&P 500 is market weighted these few large caps which have gained 60% this year have pushed up the index. If equal-weighted then the S&P 500 would have been down -1.6% (vs +1.5% as of December 3rd). Currently, the median S&P 500 stock is down -12% from its 52-week high, according to Business Insider. In a strong bull market a large percentage of stocks take part in the rally. I can only conclude that we could be near the end of this run which has lasted 30 months longer than the average bull market. As per the FT: “Hype and excitement around a few big companies, and eclipse for riskier small companies, are classic symptoms of the top of a bull market. For comparison, look at the “Nifty Fifty” companies of the early 1970s, or the first wave of web companies during the dotcom boom of the late 1990s — when it was fashionable to talk of a “new economic paradigm”.” The FT also pointed out the in the UK, the opposite is occurring with the FTSE 100 and the FTSE All Share both having a bad year. According to Casey Research the Nifty Nine trades at a 746% premium to the S&P 500. This again reflects last month’s letter where I showed how growth was outperforming value. But value beats growth the majority of the time, so value investors just need to hold on tight until this growth mania is over.
While the holidays are coming up and I wish you a happy one, I have decided to withdraw the free gift of listing the details of all my trades here as I have done in the past. Having said that individual investors feel free to contact me directly or via the Facebook group (https://goo.gl/mcQ32A) to discuss stocks or find out what think about the market. Institutional readers can also contact me but only if they are looking to do business.
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