(By Felix Tong) 2012 has been a positive year so far for the Covestor Long Term Core Holding portfolio. At the close of last year, the portfolio held 4 positions. As I wrote in my January 2012 report, at the start of the year I was positioned for the inevitable housing recovery that would take place from the fact that new home construction was lagging household formations.
The stock market began pricing in a housing recovery much sooner and with more enthusiasm than I expected. USG Corp. (USG), which constituted about 50% of the portfolio in January, now accounts for approximately 68%. Bank of America Capital Trust IV shares were repurchased by Bank of America (BAC) in a series of transactions ending March 9, 2012.
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The model is up 97.8% for the year, net of fees, through November. It is unlikely that the portfolio will have such robust gains in 2013. As a long term investor, I plan to keep my current positions. Generally, I try to limit my transactions to minimize transaction costs while keeping my portfolio tax conscious. I strive to only sell a position if one of the following criteria is met:
- The stock price significantly exceeds my calculated intrinsic value.
- I find better opportunities to deploy capital.
- My investment thesis has changed because of new information.
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The stocks I am most enamored with going forward are Wells Fargo (WFC) and Sun Bancorp (SNBC). WFC now has approximately a one third share of the US mortgage market, and has shown the ability to increase earnings power as the housing market improves. As the housing market improves regional banks should begin to recover.
Up to this point, the regional banks have not participated in the economic recovery nearly as much as the big banks. I consider SNBCone of the safer regional banks to invest in, with the strong financial backing of billionaire investor Wilbur Ross who controls 24.8 percent of the company.
Ironically, I sold SNBC in November because trading volume had dried up and it no longer qualified as a replicable position for Covestor mirroring accounts. Since the sale the stock price has continued its upward momentum to $3.38/share as of 12/7/2012.
For 2013 and beyond, my investment outlook is generally bullish. I anticipate that the US housing market will continue to improve. Housing starts continue to increase, but remain below historical levels. As the housing sector improves, so should the US economy. Although my portfolio is currently highly correlated with the US economy, I also keep an eye on global investing themes to look for opportunities.
The Eurozone economy which has been in the headlines the past couple of years continues to have problems producing GDP growth. The lack of much recent market reaction to Europe's shrinking GDP gives me confidence that European stocks may be near a bottom, and are poised for growth in the near future. I am not as confident about Asia, particularly China.
China appears to have engineered a soft landing for its economy, but I am still skeptical. China has grown so fast for so long that I believe it is inevitable that it will eventually experience a recession. A Chinese recession would have a tremendous impact on the surrounding economies such as South Korea and Australia along with the mining companies that provide the commodities that have fueled China's rapid growth.
In 2012 I had difficulty finding opportunities to deploy capital. Earlier in the year the few companies I uncovered with a durable competitive advantage selling at prices below my calculated intrinsic value quickly rose before I had completed my analysis.
Although the need to feel confident in my purchases may have cost me gains, I plan on continuing to be just as thorough in the future to avoid any permanent loss of capital. I hope 2013 presents more opportunities than 2012 to buy stocks, as my cash position has swelled to nearly a quarter of the portfolio.
Performance discussed is net of advisory fees, and includes reinvestment of dividends or other earnings. Past performance is no guarantee of future results.
The investments discussed are held in client accounts as of November 30, 2012. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.