What follows is a review of the performances of Value Line’s four Model Portfolios for the month of August. The effects of recent market action and any changes to the Model Portfolios’ respective holdings are found in each week’s Selection & Opinion (free sample here). Portfolios I, II, and III share a common benchmark, the S&P 500 Index (adjusted for dividends), which advanced 2.3% in August. Of these three, only Portfolio I gained more than the S&P 500 Index. Meanwhile, Portfolio IV was also unable to keep pace with its benchmark, the Mergent Dividend Achievers (U.S. Broad), which moved up 0.3%. (Read the description of each portfolio’s general investment strategy.)
Portfolio I reported a gain of 3.2% for August, nicely ahead of its S&P 500 benchmark. Except for a rumor circulating that our position in the Industrial Services industry was looking to be acquired by a private equity group, thus giving the stock a boost, the month of August was rather uneventful. That is, until the last couple of days of the month when our holding in the Shoe business and one of our positions in the Apparel group released earnings for their second fiscal quarters (ended July 31st). The reports and accompanying forecasts were well received, and both stocks moved nicely higher. Indeed, these issues ended up being our top performers for the month. Meanwhile, of our 20 holdings, we had only three stocks retreat in August, namely our positions in the Aerospace/Defense, Electronics, and Railroad businesses. There was one change in the month, wherein we traded out of Teva Pharmaceuticals (TEVA) at a modest loss and into another holding hailing from the Apparel industry.
After good performances in June and July, the going turned somewhat challenging for Portfolio II, and it recorded a modest loss of 0.5% in August. Although the high-quality issues that largely comprise the portfolio tend to provide a fair degree of stability, 11 of its 20 holdings fell back in August. Our sense is some investors took the opportunity to take profits in shares that had appreciated nicely through the first seven months of 2012. Indeed, our positions in the Telecom Services and Beverage industries, which had been strong contributors to Portfolio II through July, moved against the positive trend set by the market in August. Meanwhile, our stake in the Air Transport business also took a notable step back, after the company reduced its earnings forecast, citing the slowdown in global economic expansion. Still, there were some success stories, with our holdings in the Food Processing and Petroleum (Producing) sectors being the most noteworthy. We made one change to Portfolio II in August, selling our position in fast-food restaurant McDonald’s (MCD - Free McDonald's Stock Report) at a very handsome profit and purchasing shares in a company hailing from the Maritime industry.
Portfolio III posted an advance of 1.4% in the month August, an improvement over the loss recorded in July but still short of its S&P 500 benchmark. There were a number of the portfolio’s holdings that made positive contributions to its return in August, including our stakes in the Restaurant, Computer/Peripherials, Internet, and Basic Chemical industries. Nonetheless, it was the sharp declines in our positions in the Educational Services, Telecom Services, and Apparel groups that held sway over the final tally. Despite having made no trades in August, we remain on watch for quality companies whose shares are trading at favorable valuations relative to their long-term prospects.
Finally, Portfolio IV registered a decline of 0.7% in August, short of the very modest gain posted by its benchmark. As is also the case with Portfolio II, Portfolio IV’s August loss marks only the second recorded in the eight months so far completed this year, with the other being logged in the month of May when the stock market, as a whole, took a dive. That said, the performance of the portfolio’s holdings was more mixed than usual, with nine gainers versus 11 losers. Of note, it was two of our positions in the Electric Utility industry and our holding in the R.E.I.T. sector that held the portfolio’s performance in check in August. In keeping with our desire to keep turnover low, there were no trades in August. We note the portfolio continues to provide a healthy dividend stream, and so remains of interest to those focused on current income.
Through the first eight months of 2012, the market value of each of the four Model Portfolios has advanced. However, the last few months have tested each of the portfolio’s investment objectives, with Portfolios II and IV coming out better in terms of wear. That is not to say that Portfolios I and III may not put together strong finishes to 2012. Indeed, the recent expansion of the Federal Reserve’s bond buying policy has been a positive for the financial markets, and Portfolios I and III may well benefit more from the enthusiasm than Portfolios II and IV. Setting the recent challenges aside, we note the Model Portfolios, taken as a group, have a good historical track record. Moreover, each has a unique performance objective, so they should continue to appeal to a range of investors with varying appetites for risk and return desiring exposure to the equity markets. Alternatively, the Model Portfolios can serve as a source of some of our best investment ideas.
As of this article’s writing, the author did not have positions in any of the companies mentioned.