JULY MONTH END SUMMARY AND LOOKING AHEAD TO AUGUST
July Performance: +15.65% S&P 500 July Performance: +1.26%
YTD Performance: +43.48% S&P 500 YTD Performance: +9.68%
Portfolio highlights for July:
- AUTH was bought back on July 13th and subsequently added to on July 16th for an average price of 4.75. On July 27th Apple announced they would be purchasing AUTH for a 60% premium over the closing price, resulting in a substantial profit for the largest position in the portfolio before the announcement was made. A vast majority of the profits for the month were a result of this investment that achieved a gain of 120%+ since the research report was released on May 8th, 2012.
- SYNC was sold on July 10th in the mid-14 range for a 100% plus profit since initiating the position and releasing the research report on March 29th, 2012. SYNC closed the month at 9.73 after releasing a disappointing earnings report after the close July 25th.
- SPRT was sold on July 24th for a 15% profit since reinitiating the trade on June 16th. This was the second double digit percentage profitable round trip in the stock this year.
- A majority of the month saw the portfolio move between 50-75 percent invested. The efficiency of the capital invested was significant this month given the outsized gains. The month closed at 70% invested of capital with a 30% cash position.
- A new position was taken in restructured, post-bankruptcy shares of Washington Mutual Holdings. This is an extremely unique and potentially lucrative opportunity in the recovery vehicle for previous Washington Mutual shareholders. I have full details of the investment in the research report published on July 25th. WMIH is currently the portfolio's largest position.
Portfolio lowlights for July:
- GSIG was sold for a loss of 15% on July 24th. While the company presents compelling value at these levels given a combination of positive factors, I am reluctant to chase after it further given the sloppy nature of its trading. It has been in a terrible trading range for the entirety of 2012. There are better opportunities to pursue.
- SPNS finished the month down 2% from where it started July. While the near-term performance in the stock price has been disappointing, the long-term fundamentals of the company remain favorable, especially in light of the positive spending cycle taking place in the insurance IT sector. Any pickup in the financial services sector going forward benefits SPNS tremendously. All details are in the research report published June 19th, 2012.
- ATNY ended the month down 6% from where it started July. In listening to the conference call, following their earnings announcement earlier in the month, it seems that the restructuring costs associated with the division they are attempting to wind down are ballooning. They are also caught in a negative defense spending cycle given the current budget crisis. The attractiveness of the company lies in (1) management (2) activist investors involved (3) the leaner entity that emerges from restructuring.
Looking Ahead
I have learned to grow wary, over the years, of big up months. They typically come at the cost of increased volatility in the months to follow. The saving grace here is that nearly all the gains for the month were as a result of a buyout of a portfolio position that has now been liquidated. This leaves me with the dilemma of where to allocate the cash, in the face of my mechanical trend indicators that are very close to demanding a 100% invested position.
As to whether or not my trend indicators are correct in their quantitative assessment of the markets is not for me to judge. I simply follow their allocation recommendations for the sake of adjusting risk properly during both up and down markets.
I will make the prediction, due to familiarity with these indicators, that if the markets are to turn down it will not be long before the portfolios are in a 50% invested position, with equity exposure being fully hedged. Basically, market neutral in terms of net exposure.
In 2012, I have turned my back on the macro picture in favor of stock picking. I have found that the more I focus on stock picking, while allowing my mechanical trend indicators to make the allocation decisions for me, the more successful I have been. Given this track record of success so far in 2012, I have no reason to counter it as it seems to be working.
For reasons I outlined in my June summary, I believe that the remainder of 2012 will have a generally bullish bias. August, however, is a coin-flip proposition at this point.
My technical levels are presently Dow based. I am watching a substantial break of 13,250 on the upside for a bullish confirmation. And I am watching a substantial break of 12,880 on the downside for a bearish confirmation.
Regards,
Ali Meshkati
