Capital Ideas: Expecting the rally to continue, here’s what we’re buying (BALT, ARMH, ACOM, MDY, SDY)

Author: Capital Ideas, a Texas-based RIA. CJ Brott and Karen Burns are the two founding principals.

Covestor models: ETF Only and Macro Plus Income

Disclosure: Capital Ideas is long BALT, ACOM, ARMH and MDY in the Macro Plus Income model

Capital Ideas January Monthly Investment Report

Here at the end of the year we must make our obligatory predictions for 2011.  Based on consensus earnings estimates we expect a continuation of the current rally.  We believe the consensus bottom up S&P 500 estimates to be $90 per share.  The top down number we believe is $100 per share.  Combined, the average of $95 seems to be a fair estimate.  We will use a slightly lower $93.  With earnings of $93 and a P/E of 15, the 1400 level on the S&P 500 looks attainable.  With the majority view of 3% GDP growth and 8% unemployment, this looks like a reasonable base case for 2011.

We can rationalize an even more positive case for the market which uses the same earnings ($93) but a higher P/E of 16.  Should that circumstance materialize, the S&P would reach 1490.  We believe the institutional flight from bonds back to stocks has begun.  Combine that with a reentry into equities by the retail investor, and a P/E expansion is probable.  Importantly, the first hints of public participation have begun.  Recently, we heard that for the first time in some months mutual funds are experiencing inflows, not outflows.  Considering the size of institutional funds and, then adding public money funds to the mix, the potential for massive influxes into equities in 2011 is enormous.  This is the type of movement that powers P/E expansion and creates momentum-driven markets.

We plan on taking advantage of this potential by adding to our current positions and repositioning some investments from overseas markets to domestic stocks.  We may add to Baltic Trading (BALT).  Combined with potential price appreciation BALT represents the type of income and growth investment that we look for.  We may also add to some of our earnings/price momentum plays such as (ACOM) and Arm Holdings (ARMH).  Both companies represent the type of investment that thrives in the frothy momentum markets we see ahead.

Finally we look to add to our Indexed US holdings with S&P Midcap ETF (MDY) and S&P Dividend Achievers (SDY).  Other ETFs will be added as we find them.  All in all, we want to participate fully in any market advance in 2011.