Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Monday, October 23, 2006

Sector Rotation Essentials, Value In Portfolio Insurance (VIX) & The UK Market

By Yaser Anwar, CSC of Equity Investment Ideas

This week I'd like to address the possible sector rotations among industries, finding value in portfolio insurance and a REIT that has been knocked down, and for our global take; looking at the UK market.

Sector Rotations

As you know- My approach is a bottom-up view with a top-down macro perspective. It would be prudent to remain in large-cap stocks, as they have been outperforming. I believe the Materials, Capital Goods, and Transportation groups should be avoided in this stage of the business cycle, possibly even shorted.

The market is preparing itself for an economic slowdown. This is evident by the laggards being cyclical stocks, partly from the slowdown in GDP & partly from the housing sector. The group that benefits from weakness in cyclical stocks is consumer staples.

Even with the slowdown, I'm looking for earnings increase momentum (GOOG, AAPL), valuation factors (RYN), investor sentiment, and fundamentals, to develop a view that can then be integrated in my broader view.

To obtain the right 'Growth alongside Defense' allocation, investors would consider Google and Apple Computer for the growth end, and AT&T and Bank of America for their defense.

While investors keep overweight positions in somewhat defensive areas like Pharmaceuticals (J&J), Financials (IYF), and Telecommunications Services (T), my relative strength queries determine stength over the more aggressive areas like Technology Hardware & Equipment, Software & Services.
Special Coverage- Rayoneir (RYN)

I'd like to bring to your attention Rayoneir REIT (RYN). Rayonier owns 1.6 million acres of timberland in the southeastern US worth approximately $6 billion. Rayonier also owns roughly 4K acres in the Pacific Northwest, which at $2,000 an acre would be worth $800 million.

Yet the stock market value of Rayonier is only about $3 billion. The stock market is valuing Rayonier at roughly $2,000 per US acre, assuming all its other operations, Australia, New Zealand etc are worthless.

Harvard & Yale last year bought copious amounts of timberland, but due to the maintainence costs of timber, it is not feasible for individual investors (unless you have extremely deep pockets) to own and nurture timberland grounds.

Timberland in Northeast Florida is worth $3,864 per acre, according to the University of Florida’s Food and Resource Economics Department, which issues the annual land-value survey.
Please look into it when you have time. Disclosure: I own RYN

Portfolio Insurance

When determining the appropriate sector allocation, it's prudent to have an insurance policy strategy. With the market strength in the past two months, the VIX has fallen to 06 lows & is near 5 year lows.

With the geopolitical scenario & rising market, if you ever wanted to buy insurance but didn't, now is the time to do so, before this opportunity evades you.
Whether you buy little or a lot of VIX futures, we owe ourselves, and for some of us our client base, to have all ends covered.

Historical Insight

“You have to go back a very long way to find a negative” performance during a midterm election year, said Sam Stovall, chief investment strategist at Standard & Poor’s equity research. “On average, you have a positive year 90 percent of the time.” By his calculation, the average gain for the S.& P. 500 in the fourth quarter of midterm election years since 1945 is 7.6 percent.
Global Outlook- This week we fly to the UK market.

The return on UK equities has been greater vs Gilts or Cash, the valuations still look reasonable to me at a 06 PE multiple of 13-14.

Analysts have raised 06 earnings growth forecasts to 15% from 8%, and dividends to about 11% from 9. For 07, analysts are forecasting earnings to grow by 6%, and dividends by 8%, indicating double digit returns from UK equities over the next 12 month by sector, as M&A should remain a key theme.

Powered by Blogger