One of the most valuable and yet humbling exercises that an equity strategist or portfolio manager can undertake is to review their recommendations and assess how they performed.
With this in mind, and as we are at the end of another year, it seems worthwhile to take a look at some of the stocks and market ideas I have proposed in this column over the past year. I have to say that this is something of a thankless task at a time of near-impossible market conditions, but nonetheless it should provide some amusement for readers, so here goes.
In January, I suggested that gold mining stocks might be worthy of consideration as their market valuation had lagged behind a run-up in the gold price. I singled out Newmont Mining as a possible investment idea.
Unfortunately, Newmont is down by 40 per cent year-to-date while the global equity market has fallen by 38 per cent. Gold itself has outperformed in a relative sense over this timeframe, declining by 10 per cent. In the current market, even stocks and themes that appear attractive on a fundamental basis have been hit hard by the correction as pretty much everything has been sold off. At the same time, mining stocks have been hit hard because of concerns over their ability to finance exploration and production.
March was a more successful month, with Wal-Mart being identified as a potential beneficiary of the Bush administration tax stimulus package. As the US economy has slid into recession Wal-Mart has benefited from consumers trading down and the stock is up 16 per cent since I wrote about it compared with the market down 31 per cent. As we begin to see data from holiday season spending, it seems likely that Wal-Mart will continue to be one of the winners in a recessionary environment.
April proved to be more challenging, with the focus of the column on alternative energy. The sector has been hit hard this year as oil prices have fallen, making solar and wind power alternatives less cost-effective. The stock that I singled out, First Solar Inc., has fallen by 46 per cent since April versus a market decline of 31 per cent. While the short-term fundamentals for the alternative energy space look less attractive in an environment of depressed oil prices, the longer-term dynamics remain in place, suggesting that names from the group should continue to form part of a well-diversified investment portfolio.
The two stocks that I recommended in May, Goldman Sachs and JP Morgan Chase, have been through a torrid time in an environment where the traditional investment banking model has been called into doubt. Goldman has fallen by 62 per cent since then while JP Morgan has declined by 25 per cent against a backdrop of a market decline of 35 per cent. The only crumb of comfort is that both banks appear to have survived the worst of the market turmoil and remain independent. The negative is that their business models will likely have to change, with greater regulatory oversight and more conservative investment practices having an impact on profitability.
In June I focused on video games, and specifically on Nintendo. The stock has fallen by 34 per cent, exactly in line with the decline in the broader market. While the gaming theme still looks attractive, what has hurt the stock most has been the strengthening of the Japanese Yen versus the US Dollar. This has caused some pain for Nintendo as foreign earnings are translated back into local currency. At the same time, while the video game industry does appear to be recession-proof to some degree, a sharp slowdown will inevitably have some impact on unit sales.
July was a tricky month, with a return to the alternative energy theme. Needless to say, the three stocks highlighted in the column have performed poorly: Sunpower Corp -45 per cent, Vestas Wind Systems -62 per cent and Areva SA -60 per cent, compared with an equity market decline of -28 per cent. August sounded a note of caution on activity in mergers and acquisitions, recommending avoidance of those companies involved in investment banking and private equity. This proved to be a wise decision, with a strategy of shorting an investment banking index yielding a return of 54 per cent while short private equity returned 57 per cent (compared with a market decline of 28 per cent).
Rounding out the year, the October column focused on sector strategy, suggesting that more defensive sectors were likely to perform better in a slowing economy. The article specifically highlighted Utilities as an attractively valued defensive sector with a decent dividend yield. Since then, the sector has declined by11%, outperforming a market decline of 18%.
Overall, an investment strategy of buying each of these picks at the time when the article was published would have resulted in a loss of -20 per cent, compared with a market decline of -30 per cent. Hardly a stellar performance but creditable given the tough market conditions we have experienced. It goes without saying of course that many of these themes are intended for the longer-term. We can only hope that 2009 provides a little more cause for optimism for equity investors!
Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.