Strategy Update – January 2012Submitted by Stonebrook Capital Management on January 28th, 2012
“You can either have cheap stocks or you can have good news, but you can't have both.”- Jim Grant, Grant's Interest Rate Observer
Marked by a steady flow of dismal news and record volatility, 2011 was a difficult year for investors. While the S&P500 was the best stock index (of a bad lot) it still finished the year with a fractional loss. Global markets dropped sharply with the MCSI EAFE index down 14.8%. The Lipper Flexible fund benchmark which consists of mutual funds investing in stocks and bonds both domestically and internationally dropped by 4.7%. Despite the difficult year, the portfolio posted solid profits in the 4th quarter.
Meanwhile, companies continued to grow profits while their valuations became cheaper. Because of this we have been presented with the opportunity to purchase some of the world's best companies at or near their lowest PE ratios. Historically, investors have been rewarded for looking through the bad news and seizing such an opportunity. Over the past quarter, we have bought or added to positions in: Chevron Texaco, Walmart, and IBM, among others. All of these purchases were made close to the lowest PE ratio of the last 5 years. These companies all pay high dividends and we think they will be great additions to the portfolios.
Emerging market equities were punished particularly hard last year, with the MCSI Emerging markets index down 18.4%. We cut our holdings in emerging markets earlier in the year but retained a core allocation. We believe, despite the recent weakness, they provide an outstanding opportunity for investors. According to BCA Research, the annual total return from EM stocks between1970-2009 is 9.9%, much higher than the 3.8% from developed markets. We believe that the high growth EM stocks have become attractive again due to their low valuations and their out of favor status with investors. We are looking to accumulate EM shares.