EB Weekly Portfolio Report - April 5, 2020
Upcoming Earnings Report
The following companies will be reporting earnings this week and each is a component of one of our portfolios:
Monday, April 6: None
Tuesday, April 7: None
Wednesday, April 8: None
Thursday, April 9: None
Friday, April 10: None
PLEASE NOTE: The above companies were provided after scanning the Zacks Earnings Calendar. My research is limited to what Zacks provides and I also can make a mistake from time to time, so please check for earnings dates for all companies that you own. We do hold our portfolio stocks through one earnings report, but every EarningsBeats.com member must make their own investing/trading decisions about holding stocks into earnings reports as it's the most volatile (risky) time to own a stock.
Portfolio Rules and Objectives
Here are the common traits and objectives of each portfolio, some of these were just changed for our February 19th "draft" day last week (changes for the upcoming quarter are in bold italics):
- There are 10 leading stocks from up to 10 leading industries in each portfolio (at the time of selection) - the change here is to allow a second stock within the same industry group
- They are held for an entire 90 day period, with no stops in place - there will be NO stops. All stocks will be held for the entire period (members may choose to have stops, but we will not)
- Every stock will generally be held through ONE earnings report
- The expectation is that relative winners will carry the portfolio to outperformance
- They were all entered into as of close on February 19th
- We decided against having multiple entries for our purposes, but members were encouraged to enter based on whatever felt most comfortable
- Primary objective is to outperform the benchmark S&P 500
Here are several considerations for EB members:
- I would expect the CC (Character Change, formerly Value portfolio) and Aggressive portfolios to be the riskiest, followed by the Model portfolio, and then the Income portfolio
- The CC portfolio's strategy and composition was changed a bit in it second quarter, as we decided to include companies that have broken out of a consolidation range, not just those with breakaway gaps to end a downtrend
- The Income portfolio stocks will all pay dividends, with the expected average dividend yield to be at least 1.5%
- Drawdowns (losses) should be much milder on the Income portfolio, with more volatility expected on the other three; please review inception-to-date charts below to gain an idea of the volatility associated with each
- You should own or trade these stocks in whatever manner is most comfortable for you; while we will buy all 10 stocks in the manner identified above, feel free to trade certain stocks or wait for pullbacks if the stocks are overbought
- We have no idea what risk each member is willing or able to take. We are not registered investment advisors so be sure you understand the risk you take. Please consult your financial advisor.
- EarningsBeats.com shareholders/employees may own all or some of the portfolio stocks from time to time.
Snapshot
Here's a weekly recap:
The Model and CC portfolios held up fairly well, but the Aggressive and Income portfolios, as has been the case this quarter, struggled the most on a relative basis. The S&P 500 saw enough strength last week to nearly touch the 38.2% Fibonacci retracement level that I've discussed the past two weeks off that March 23rd low. But rather than look at the very short-term and that low being THE LOW, let's at least consider the possibility of further panic and another major stock market drop in the coming days and weeks. Using the extreme lows, starting with the 1970s, early-1980s and then March 2009, where might we fall to?
The blue-dotted lines highlight the channel that we've been in since the March 2009 low. We very temporarily broke below that bottom trendline and recovered, keeping that channel intact. But what happens if we see another low? Well, that would likely lead to another selloff. I'm not one to rush to doomsday-type scenarios and predictions, but it would be foolish to only consider one possibility - the current bullish channel remaining intact. If we see a definitive break below 2200 and a return to recent fear levels (VIX in the 70s or 80s), the darker circle on the chart above highlights much lower possibilities. I don't believe that's where we're heading, but I won't bury my head in the sand and not at least consider it as a possibility.
Weekly Summary
Benchmark S&P 500:
The S&P 500 lost 2.08%, which most any other week would be considered horrible. However, given the extreme volatility over the past 6 weeks, a 2% drop is considered stabilization after weekly moves from 10-15%. The stock market is the best leading economic indicator, in my opinion, so the sudden 35% drop in four weeks tells me that we'll see tremendous economic shocks in the weeks ahead and they have already begun. Last week's rather small 2% drop was notable when considering that the stock market had to weigh hugely disappointing economic reports. Initial jobless claims rose to more than 6 million, easily topping the 3 million + from the prior week. Currently, another 5 million is expected this Thursday. Friday's nonfarm payrolls tumbled 700,000 with the unemployment rate spiking to 4.4%. Most experts believe that surge in unemployment is just the beginning with the rate eventually reaching as high as 30%. That will obviously depend on a number of factors, but nearly everyone would agree that this is just starting.
Model Portfolio:
The Model portfolio fell 3.15%, failing to keep pace with the benchmark S&P 500. Here's the updated inception-to-date chart of the portfolio:
Here are how the Model portfolio component stocks performed last week:
Biotech stocks ($DJUSBT) have been a bright spot in the stock market, outperforming the benchmark S&P 500 by a mile since February, so VRTX gaining 9% helped to limit the damage inflicted by several other component stocks here.
Aggressive Portfolio:
The Aggressive portfolio dropped 5.27%, enduring another painful week. Here's the Aggressive portfolio chart since its inception on May 19, 2019:
Here are how the Aggressive portfolio component stocks performed last week:
Once again, we see a biotech stock (SGEN) having a calming influence on the overall portfolio, which was very weak. The other healthcare stock (DXCM) also performed well on a relative basis. However, the massive underperformance of small and mid cap stocks last week really took a toll on this portfolio. The bottom four performers last week were all small caps.
Income Portfolio:
The Income portfolio took yet another tumble, losing 7.45%. Here's a look at the inception-to-date chart:
Here are how the Income portfolio component stocks performed last week:
A few of the stocks held up well, but the same theme from the past several weeks emerged once again. Financials and real estate were pounded, while massive selling returned to home construction stocks ($DJUSHB, -16.88% last week).
Character Change Portfolio:
The CC portfolio %. Here is the inception-to-date chart since November 19, 2019:
Here are how the CC portfolio component stocks performed last week:
The CC portfolio did outperform last week, but there was a variety of big winners, big losers, and big surprises among its component stocks. HLI, a financial, soared 25% despite being part of an industry group ($DJUSSB, -0.78%) that fell slightly. CERN outperformed as part of the stronger healthcare sector. But then there was the homebuilder (CCS) that was annihilated, falling more than 28%. And to top things off, the portfolio's sole biotech stock (CRL) dropped nearly 6%, despite being part of a group that jumped more than 3% overall last week.
Summary
After a lot of outperformance in the prior week, the return to selling last week had a negative impact on our portfolios. Only the Character Change portfolio was able to outperform the benchmark S&P 500. While I could probably point to a few different reasons why these portfolios underperformed, I'd say clearly the biggest reason was the massive weekly underperformance once again by mid caps ($MID, -5.97%) and small caps ($SML, -7.10%). That took a toll, in particular, on the Aggressive portfolio. The Income portfolio, which quite honestly I would have argued was our best portfolio since inception prior to the past month, has experienced a very difficult quarter-to-date. Sector rotation has been extreme and the following one month performance chart illustrates this point:
Investing in anything equity-related hasn't been good since the February 19th top. However, from the above, it's easy to see that if your portfolio is more heavily concentrated in healthcare (XLV) and consumer staples (XLP), you're much more likely to outperform the key indices. If, on the other hand, your portfolio consists more of those sectors that have lost 20% or more over just the past month, the results clearly will not be very good. The Income portfolio has 5 such component stocks, with 3 in the particularly hard-hit financial and real estate areas.
I suspect that many of the worst performing stocks, industry groups, sectors, and asset classes will continue to underperform in the near-term. I can't imagine that Wall Street will do an "about face" during this pandemic. If we were to see a significant positive break in the news regarding the virus and its spread, then some of the beaten-down groups would very likely rally more furiously. Barring that, however, I would expect that the better relative performers will stretch their lead over the beaten-down stocks and it's that relative strength that will drive my decisions from a shorter-term trading perspective.
How stocks react this week could be extremely important in determining whether we're heading higher or lower. The news, both health-related and economics-related, is going to become absolutely horrific. Will there be enough buyers to sustain the recent bounce given all the upcoming bad news? It will be an interesting week for sure.
Please be sure to follow CDC guidelines and do all you can do to keep yourself, your family and your community safe!
Happy trading!
Tom Bowley, Chief Market Strategist
EarningsBeats.com
"Better timing. Better trades."