Stock Portfolio Updates: Trimming Large-Cap Defensive Positions By: Christopher Mistal | December 09, 2021 | Email | Print

Even though recent market action makes it feels like 2021 has been a challenging year, it certainly has not been. In fact looking at the S&P 500 performance in 2021 compared to various 1-year seasonal patterns since 1949, this year has been great. Even after today’s setback S&P 500 is still up more than double its average performance over the last 72 years. When compared to average post-election year performance the outsized gains of 2021 thus far are even more impressive. 

 

 

Omicron spoiled typical late-November bullishness and sparked the recent pullback, but as new data becomes available each day, the omicron variant is likely less of a concern for the market than the Fed. Persistent inflation is testing the Fed’s credibility and based upon recent comments its patience as well. Where the market goes from here may be decided by the Fed at its next regularly scheduled meeting on December 14 and 15. If they can manage to strike a perfect balance, then the market is likely to continue its typical Q4 rally through year-end. However, should the Fed choose to move too aggressively toward a tightening policy stance it could trigger more pain for the market in the near-term.

 

 

Over the last three weeks since last update through yesterday’s close, S&P 500 advanced a modest 0.3% while Russell 2000 declined 4.4%. Over the same time period the entire portfolio slipped 0.3% lower, excluding dividends and any fees. Small-cap positions were responsible for the overall decline, off 1.0%. Large-cap positions were up 0.3% on average while Mid-cap names collectively rose 2.4%.

 

Small-cap weakness was primarily the result of USA Truck Inc (USAK). Last update we elected to raise its buy limit and promptly add it to the portfolio following USAK’s respectable Q3 earnings report released in late-October. The timing of the adjustment proved to be less than opportune as a little over a week later the Omicron variant hit triggering a broad market retreat in late-November that spilled over into early-December. As a result, USAK was stopped out on December 1 when it closed below its stop loss of $17.13. Shares of USAK have since rebounded with the broad market but remain well below recent highs. There is no new recommendation for USAK at this time.

 

On a positive note, MGP Ingredients (MGPI), successfully bucked the broad market trend on December 1. As major indices declined on the day, MGPI jumped higher to close up 7.8%. It was during this day that MGPI first reached double its original price. Per standard trading guidelines (located at the bottom of the portfolio table below), half the original position was sold that day. MGPI is on Hold.

 

Entravision Communications (EVC) is another position that made a noticeable move since last update–in the wrong direction. Taking a closer look at EVC revealed no meaningful change in its current condition or near-term outlook. Prior to its recent retreat shares had logged massive year-to-date gains and the recent market selloff appears to have been used to take some of the profits off the table. EVC is on Hold.

 

Overall our Mid-cap positions held up well during the recent market pullback. Standouts in the portfolio include Valmont Industries (VMI), Green Brick Partners (GRBK) and Pacira BioSciences (PCRX). All three positions logged gains over the last three weeks while major indexes were flat to lower. Per last month’s update, AAON Inc (AAON) was added to the portfolio using its average price on November 19. At yesterday’s close, AAON was up 8.7%. VMI, GRBK, PCRX and AAON are on Hold. 

 

Large-cap positions also held up well over the last three weeks through yesterday’s close. Many positions actually managed to climb modestly higher and at the depths of the market’s selloff no position was stopped out. Per last update, Verizon (VZ) was stopped out on the close on November 18. The original position has been closed out for a modest 6.4% loss excluding dividends and trading fees while a new position has been added using VZ’s average price on November 19. The reasoning behind adding to VZ and T were covered in November’s Portfolio Update. VZ and T could experience further weakness through yearend as a result of their competition’s perceived advantage in 5G and possibly due to tax-loss selling. VZ and T are on Hold.

 

With the possibility of the Fed accelerating the end of QE and potentially hiking interest rates sooner and quicker, we are going to trim our holdings in defensive utilities holdings. Traditionally these positions have benefited when interest rates were declining and have tended to languish when rates are rising. Sell Half of each position in Ameren Corp (AEE), DTE Energy (DTE), Duke Energy (DUK), Exelon (EXC), Southern Company (SO) and in the Mid-cap portfolio; Black Hills Corp (BKH). For tracking purposes half of each position will be sold using its respective average daily price on December 10.

 

Please see table below for updated stop losses and current advice for positions not covered above.