Stock Portfolio Updates: Free Lunch Spoiled, But Banks & Defense Shine
By: Christopher Mistal
January 20, 2022
Today’s market reversal further diminishes the prospects for a rebound and positive reading from our January Barometer. There have been some recent and brisk rallies but with seven trading days remaining in the month and S&P 500 needing a gain of at least 6.32% to get back to break even for the year the likelihood of such a rally is shrinking by the minute and the odds of a more typical (and challenging) midterm year are increasing.
[S&P 500 Midterm Seasonal Pattern Chart]
Looking at the familiar chart above of various midterm year scenarios that are all in play this year compared to All Years, we can see it is not unusual for January to be a tough month in midterm years. The magnitude of the decline this year is greater than the historical average, but the S&P 500 appears to be following the historical pattern rather closely. If this is the case, then weakness could persist into February before the market finds footing and possibly rallies through the remainder of the first quarter into early Q2. If you missed yesterday’s webinar, this pattern was covered as well as the buying opportunities that have historically occurred in midterm years. You can access the slides and recording here.
Free Lunch Update
Recent market weakness was not kind to the Free Lunch stocks selected in December. Typical small-cap outperformance frequently seen from around mid-December through January and often into February did not materialize this year. Instead the Russell 2000 is the worst performing index year-to-date. As result, only four of the 26 stocks selected are still active in the Almanac Investor Portfolio, below. All 26 were added to the portfolio using their respective average daily prices on December 20. All suggested guidelines in the Free Lunch Alert were applied to the basket. The 8% trailing stop loss proved effective in limiting losses with numerous positions closed out at better levels than now.
As a reminder, Free Lunch stocks are not intended to be held for long. As witnessed this year, many of these stocks were down for good reasons and can easily go much lower especially when the market is also in decline. We will continue to hold the four remaining positions with the 8% trailing stop loss based on closing prices.
Stock Portfolio Updates
Over the last six weeks since last update through yesterday’s close, S&P 500 declined 3.6% while Russell 2000 dropped 9.2%. Over the same time period the entire portfolio gained 0.9%, excluding dividends and any fees. Our Small- and Large-cap positions were responsible for the portfolio’s gain. In the Small-cap portfolio, the steepening yield curve lifted Atlantic Union Bankshares (AUB), WSFS Financial (WSFS) and Customers (CUBI). In the Large-cap portfolio, utilities and energy-related stocks were the leaders.
On the other end of the performance spectrum, three positions outside of the Free Lunch stocks, were stopped out since last update. Entravision Communications (EVC) closed below its stop on January 5 and has been closed out. Aaon Inc (AAON) and Green Brick (GRBK) were also stopped out this month in the Mid-cap portfolio.
As per our last Stock Portfolio update, half of existing positions in BKH, AEE, DTE, DUK, EXC and SO were sold on December 10. It was anticipated that rising interest rates would put pressure on these positions, but due to their defensive nature they have held up well with respectable gains over the last six weeks even as rates have moved higher. The remaining positions in BKH, AEE, DTE, DUK, EXC and SO are on Hold.
Another area of the portfolio that has enjoyed success recently in the face of a challenging market has been AT&T (T) and Verizon (VZ). Both T and VZ are now positive in the portfolio and on Hold. Their dividend was the main draw when they were originally presented and that is still true now.
Shortly after the last update, Kansan City Southern (KSU) and Canadian Pacific Railway (CP) completed their merger. For each share of KSU held, $90 and 2.884 shares of CP were received. KSU has been removed from the portfolio and the new shares of CP have been added. CP is on Hold.
Please see the table below for updated stop losses and current advice for positions not covered above.
Almanac Investor Stock Portfolio