Author: Tyler Kocon, Split Rock Private Trading
Covestor model: Equity Rotation
Split Rock Private Trading has always held a strong preference for traditional fundamental investing. We’ve therefore consistently maintained our portfolios in line with current economic and geo-political events as they unfold.
Within our current portfolios, we hold significant weight in the energy and consumer staples sectors. Compared to the S&P 500, we are overweight in both of these categories. We have decided to place a heavier concentration on shale-related energy stocks (e.g. EOG Resources, Kodiac Oil & Gas) in our Equity Rotation Model portfolio because we believe that there is solid growth potential tied to those equities if oil continues to trade north of $86 a barrel for 2012, as we think it will for the majority of the year. Additionally, we try to balance out our high-growth energy holdings with established, high-yield defensive energy positions (e.g. ConocoPhillips, Kinder Morgan, Entergy Corporation). These positions also have significant participation in the Bakken shale, which presents a decent amount of growth potential as well.
Similarly, we are underweighted in the cyclical sector, which includes basic materials, consumer cyclical, financial services, and real estate industries. We are also underweight in the health care sector. We have avoided these sectors simply due to the fact that they show high correlation, in the short-term, to volatility and uncertainty. The current economic climate in the United States is unclear. We have chosen to avoid the cyclical sector as we simply do not know how the economic and political future of the country will play out. Until we have seen proven numbers that support continued economic expansion, job growth, and an increase in GDP, we will most likely continue to avoid cyclical stocks.
In addition, we at Split Rock feel that the uncertainty of the current political climate, especially in regard to pending legislation surrounding “Obamacare” and related healthcare reform, puts a large amount of strain and pressure on the health care industry as whole. Because of this, Split Rock has elected to avoid volatile positions like these and prefers more defensive and consistent equities.
Because of our positive outlook on the energy sector, Split Rock has taken a particular interest in several high growth potential exploration and production companies involved in the hot-button Bakken shale deposit. One company in particular, Kodiak Oil and Gas Corp. (NYSE:KOG) passed through our fundamental screening and was selected based on their strong growth potential and high quality Bakken Shale acreage.
Moving forward, we believe our portfolio is well-positioned to handle 2012. Our most confident position remains our significant holding in Apple, Inc. (NYSE:AAPL), especially in the short term. AAPL sports an average price target of $508 per share (according to Yahoo! Finance). We agree with this high price target, as combined with an upcoming January earnings announcement and the highly anticipated release of the iPad 3 in Q2 or early Q3, it reaffirms our positive outlook on Apple. Additionally, their upcoming earnings announcement will likely include numbers boosts from holiday sales, and will also be the first inclusive earnings report following the release of the iPhone 4S.
The most difficult aspect of managing our portfolio over the past year has been dealing with the governmental gridlocks and European debt crises that spawned a terrible summer of 2011 for investors. These political and economic events wreaked havoc across the world’s marketplaces. However, in light of these events, we feel that we are fully prepared to battle these trying times. As such, we do not anticipate largely overhauling our portfolio to match the tribulations. By principle, we have already assembled an especially defensive portfolio. We had established these defenses before the crises struck, and therefore held up adamantly during this time. We understand that these crises, while improving, are not solved and because of this knowledge we will not be leaving our defensive post in the near future.
While the world recoils from economic uncertainty, Split Rock, maintaining our defensive mindset, has found that gold can serve as a genuine hedge in uncertain markets. We have chosen to hold roughly 4% of our portfolio in a gold interest ETF that is directly correlated to gold prices. Gold has been the financial “insurance policy” for a lengthy part of history. We believe that these gyrations in market strength and gold prices will continue to exist well into the future.
As Europe continues with its struggles, there are some world markets that harbor growth potential. As of late, we have been managing our exposure to international markets by investing in large-scale multinational corporations (e.g. General Mills, Apple, and Wal-Mart). We select these positions because they are bolstered by international growth, but also have a significant stake in domestic business to hedge the vulnerability of international revenue and earnings streams.
This year marks a significant year for the financial markets. An impending presidential election in the United States has brought many parts of the market under close scrutiny as the new year begins. Since 1833, 29 out of the past 44 presidential election years have proven to be positive (per the 2012 StockTrader’s Almanac). While 66% represents the majority, these numbers are not compelling enough to indicate which way the markets will lean in the coming year.
Despite the results of the upcoming election, we do not believe the U.S. economy will slip into recession. Based on current economic positioning, we believe the economy is poised for slow growth. We expect any governmental embracing of oil and natural gas “fracking” or the approval of the Keystone Pipeline to provide positive attributes to the American economy. Continuing to support fracking and allowing for the Keystone Pipeline will simultaneously produce jobs in states across the nation and lower the American investment in foreign oil and fossil fuels, while hopefully translating to lower prices at the pump. Lower prices at the pump means more money in consumers’ pockets, which equals more money for consumers to spend and further try to stimulate our economy organically without the help of government stimulus dollars.
As the political season heats up, if we feel Obama has a significant chance of re-election in 2012 we will re-evaluate and possibly favor holdings in construction and infrastructure related stocks. Inversely, if the Republican candidate is showing favorable polling over the incumbent then we will continue to lean to the energy sector and look to evaluate positions in the financial, defense and healthcare sectors.