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June 22, 2008

Fundamental Portfolio Holds Its Own
by Bill Rempel

Fundamental is a moderately low-beta, moderately low-turnover trading plan for stocks traded on major U.S. exchanges. It focuses on providing above-market returns over the longer term while keeping a variability of returns that is similar to the market's risk profile.

Information is as of the close on June 20, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current weights and holdings. The initial target was a buy of 5% weights per position. See my previous post on this system. Sort is alpha order by ticker and weights are rounded to the tenth of a percent.

America Movil, S.A.B (AMX) 3.7% weight
Boeing Co. (BA) 4.4% weight
CF Industries Holdin (CF) 6.5% weight
Coach (COH) 4.5% weight
Graco Inc (GGG) 5.1% weight
Gilead Sciences, Inc (GILD) 5% weight
Graftech Internation (GTI) 5.1% weight
Herbalife Ltd. (HLF) 4.5% weight
International Busine (IBM) 4.9% weight
Kellogg Co (K) 5.0% weight
Royal Kpn Nv S/Adr (KKPNY) 4.5% weight
Landstar System, Inc (LSTR) 5.5% weight
Magellan Midstream Holdin (MGG) 4.6% weight
Netease.Com, Inc. (NTES) 5.1% weight
Southern Copper Corp (PCU) 5.0% weight
Polaris Industries I (PII) 5.0% weight
Partner Communications (PTNR) 6.2% weight
Terra Nitr Co Com Ut (TNH) 5.2% weight
Terra Inds Inc (TRA) 5.4% weight
Waters Corp. (WAT) 4.9% weight
Cash 0.1% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $100,784.62
Gain, Past 4 Weeks: 0.99%
Gain, Year to Date: -4.55%
Gain, Since Inception on 11/12/2007: 0.78%

The drawdown (reduction in equity from peak to trough, when a system or strategy is losing money) discussed in previous entries is back to the mid-single-digit level. Equity had gotten to within 4% of its highs from Dec 2007, but has fallen back to a 5.8% drawdown, similar to the 6.8% drawdown at the last update four weeks ago.

I am still concerned with the prior level of turnover in positions, which was higher than I expected, but may be due to the nature of this recent market correction. With the prior update, I have made some changes to the timeframes used to filter the earnings quality items in the screen, and I believe these will lead to lower turnover in the future. It has lead to lower turnover THIS week, as only four positions are changing over. It'll be interesting to see if this continues.

The following stock in the Fundamental portfolio went ex-dividend in the past four weeks: K.

Total dividends = $30.38 on the tracking portfolio. This amount has already been added to the returns shown above. Dividends paid will remain in cash until needed for a new purchase. Note, commissions are expensed at $10.00 per trade when accounting for returns.

Changes To Model Allocation

Fundamental screens for stocks that meet basic criteria, such as earnings and revenue growth, earnings quality, and debt-to-capital rations, then ranks them by ROE to hold the top 20. As a result of this regular four-week evaluation, the portfolio is making the following changes.

Remove the following stocks from the list:

America Movil, S.A.B (AMX) 3.7% weight
Coach (COH) 4.5% weight
Graftech Internation (GTI) 5.1% weight
Netease.Com, Inc. (NTES) 5.1% weight

Including the cash percentage of 0.1%, this allows approximately 18.5% of the portfolio to be allocated equally to the new purchases, with a target of 4.6% of equity each.

Add the following stocks to the list:

Accenture Ltd. (ACN)
Aeropostale Inc (ARO)
Dell Inc. (DELL)
J Crew Group Inc (JCG)

If this system were to be initiated today, the target allocation would be a buy for 5% weight holdings of the twenty stocks listed in Model Allocation, with the substitutions listed above.

Tracking

Shares of the stocks listed above will be sold, market at open on Monday. Based on portfolio total value and closing prices on June 20, 2008, enough shares of the replacements to comprise a 4.6% each allocation to the portfolio will be bought, market at open on Monday. Since the portfolio has little room for full allocations, I will round any fractional shares down in the share calculation for buys.

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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