Stock Portfolio Updates: Free Lunch Delivers a Modest Gain
By: Christopher Mistal
January 19, 2017
Just past the halfway point in January, the market has essentially gone nowhere in the New Year. We got off to a solid start with positive readings from our Santa Claus Rally and First Five Days indicators, but aside from NASDAQ, other major indices, DJIA, S&P 500 and Russell 2000 are flat or slightly down. Looking at the following charts, it’s apparent that the market has slipped into a holding pattern that extends back to about mid-December. DJIA cannot seem to break through 20,000; S&P 500 is struggling with 2280 and Russell 2000 has gone from knocking on 1400 to near its 50-day moving average today. NASDAQ was encouraging up to a few days ago when it also appears to have stalled out.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
[Russell 2000 Daily Bar Chart]
Even though new Presidential Administrations only come along once every eight years (the trend since 1992), the market’s recent behavior is not all that different from when a major Fed meeting is scheduled. Trades are made in advance to position portfolios for the most likely outcome. This appears to be precisely what is happening, only in slow(er) motion. The market sprinted higher following Election Day results in anticipation of numerous, potential earnings boosting actions by a new Republican President and a Republican controlled Congress. De-regulation, tax cuts, increased infrastructure spending and defense spending, the repeal (replace) of Obamacare—basically a major course change in D.C. is expected. Everyone is positioned for the myriad potential benefits, now we all wait to see what will actually unfold. 
In less than 24 hours Donald Trump will take office and we will finally begin to see if the right trades were made or not. Unfortunately, we will not be delivered a single statement at a specified date and time like a Fed meeting. It will take time for the new administration and Congress to work through its long list of want-to-do. The longer it takes the more volatile trading is likely to become.
Portfolio & Free Lunch Updates
Over the six weeks since last update, S&P 500 was up 1.4% while Russell 2000 was down 0.4% as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash and long positions resulted in a 0.06% overall loss over the same time period. Our Small-Cap portfolio, aided by a modest overall gain from the Free Lunch basket of stocks (shaded in grey in table below) performed best, up 0.9%. Our Large Caps were off 0.7% while Mid-Caps shed 2.5%. Mid-cap Free Lunch stocks were the main drag.
Overall, this year’s Free Lunch was a moderate success, especially when applying our tight 5% trailing stop loss. Entering the Free Lunch positions within a range of +/-2% of their respective closing prices did work well as the majority of the basket was added on the first day of trading. A 5% trailing stop however is open for debate as many positions, especially small-cap, were quickly stopped out after addition. Some, like OHRP, did just continue to fall apart while others like BIOS only dipped and then rallied higher. 
Overall the entire Free Lunch basket is averaging a 5.4% gain since the close on December 16 through yesterday’s close using a simple buy and hold approach. Following our suggested trading rules resulted in an average gain of 2.8% and only Hanesbrands (HBI) remains active. Either approach has outperformed the NYSE, AMEX and NASDAQ over the same time period. With the exception of HBI, Free Lunch has come to an end.
Per last month’s update, Corelogic Inc (CLGX) was closed out of the portfolio using its average price of $36.60 on December 9. This resulted in a loss of 7% on the position. As of today CLGX is lower and its technical indicators are negative confirming the likelihood of further weakness. Sucampo Pharma (SCMP) was also stopped out on January 17 when it closed below $12.20. SCMP has enjoyed positive press recently as analysts have bumped up 2017 estimates, but it has not been enough to overcome the potential drag of $260 million in recently sold convertible senior notes that are due in 2021.
Many of the remaining positions from our September Stock Basket have given back some of their gains. This is not much of a surprise as many of these positions were up 20%, 30% even 40% since last October/November. Arista Networks (ANET) is down for a different reason, they have been forced to use their U.S. supply chain instead of their Asian chain by the U.S. Customs and Border Protection. The workaround that was in place for patents ANET was ruled to be in violation of was revoked. The net result of this was a reduction in 2017 gross margin and earnings estimates. Earnings estimate fell by 4.4% while shares dropped 12% the day the news broke. Based upon these numbers, the selloff appears overblown. With ANET shares gaining ground since, others may have come to a similar conclusion. ANET is on HOLD. Its stop loss remains unchanged from last update at $83.19.  
Please refer to the updated portfolio table below for Current Advice about each specific position. Please note that many stop losses have been updated.
[Almanac Investor Stock Portfolio – January 18, 2017 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in ANET, BUSE, CCS, HLTH, IESC, MHO, PFBC, SBRA and SCMP.