Author: Mark Holder, Stone Fox Capital
This model lost a disappointing 6.6% in July versus a 1.3% gain for the benchmark S&P 500. The Opportunistic Arbitrage portfolio typical outpaces the major indices by a large margin in up periods so the last month was a major exception.
Since the end of 2011, this model has been running on the theme that the majority of stocks would retrace the losses experienced since the July 2011 levels. In essence, our theory all along has been any losses since that time period were from irrational fear of a second financial collapse that the Europeans were unlikely to allow. Naturally this fluctuates on a case by case basis where any individual stock could move a lot higher or lower depending on circumstances since then.
Unfortunately this theory took a major hit as investors piled into dividend paying stocks sending most major indices back close to 2012 highs while at the same time selling the higher risk, global growth stocks. In some cases, stocks actually hit new 52 week lows recently.
Trading for the month was mostly limited to minor adjustments with the key being adding to the position in mobile advertising firm Velti (VELT). As of writing this report, this stock has actually become the largest position thanks to solid gains following a good Q2 earnings report.
The model is positioned with numerous very undervalued stocks such as SodaStream (SODA), OCZ Technology (OCZ), and C&J Energy Services (CJES). Along with Velti, all of these stocks have growth rates significantly higher than the earnings multiples.
Most of the stocks that benefit from strong growth in China have hit multi-year lows. In some cases, these stocks are lower than back in 2009. The model will slowly inch back into coal stocks like Alpha Natural Resources (ANR) that will benefit from global growth.
The model still remains a big fan of some financial stocks trading below book value such as Aercap Holdings (AER), Hartford Financial (HIG), and Lincoln Financial (LNC). All of these companies are very profitable so it seems almost inevitable that these stocks will eventually be worth more than book value.
The model has struggled as investors have dumped global growth stocks. In some cases, the selloff was somewhat justified due to macro issues, but other stocks have bucked the cyclical macro issues warranting much higher valuations.
August is off to a great start suggesting that the pressure on global growth stocks has started to fade, but no guarantee can exist that another selloff won’t occur in September or October. Europe has started fading from the investment thesis, but a blowup in Spain could cause a downward shift in the markets.
Disclosure: Long VELT, SODA, OCZ, CJES, ANR, AER, HIG, LNC
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