The trends that were in place in Q1 are still raging on into Q2. Large cap tech stocks continue their ascendancy and value lags. In comparison, I am not doing well at all.
Inside My Portfolio
The laggards in the portfolio are the same from the first quarter. My retail stocks (CATO, AEO, GME, DDS) continue to get hammered. Dillard’s seems to be holding up as the best of the bunch. This makes sense because it is the least scary looking and highest quality of the retail names that I own.
Dillard’s is usually a mall anchor and focuses on higher end clothes. There are also stand-alone stores. American Eagle is actually in the mall (where fewer people are going these days) and targets teenagers. Teenagers, in sharp contrast to the teenage world I grew up in, don’t care about what clothes they wear. This is good for civilization but not for my portfolio! Cato is one of the few names I own that actually produced a quarterly loss in Q1, making that one a bit terrifying. It will be interesting to see how this plays out. I suspect the scarier looking names (AEO, CATO) will actually outperform the less scary DDS, but we’ll see.
Topbuild (BLD) continues its momentum. If it tops 50% in gains, I may pare back the position. Sanderson Farms (SAFM) is benefitting from rising chicken prices.
IDT is a very volatile stock. After their terrible quarter in March, it fell from $20.29 to $12.38. It then rebounded up to $17.58, falling again after another bad quarterly result down to $13.75. The loss occurred because of a $10 MM legal settlement with the FCC. The good news is that there was hardly any drop off in the core operating business of IDT and the settlement appears to be temporary (I hope!). IDT is also paying a healthy dividend.
The overall market continues its momentum, with most of the performance soaked up by big cap glamor companies. Amazon is up 29% year to date, Telsa is up 69%, Facebook is up 31%, Netflix is up 21%. This occurs against the backdrop of a strong economy with serious headwinds. There is significant political uncertainty around the Trump administration, and the Fed continues raising rates.
I don’t think the current environment will last. The present frenzy over sexy stocks like Facebook, Amazon, and Tesla has ‘late ’90s’ and ‘nifty 50’ written all over it. There is no telling when the momentum will stop, but I think it will end eventually. The question is when it will stop, which is a question that no one can answer. Is this 1997 or 2000? Is this 1967 or 1972? No one knows, but I’m not going to jump on the bandwagon and embrace the current mood.
Value strategies continue to lag. This has been going on for a decade. A strategy I like to compare myself to is Validea’s Benjamin Graham Portfolio. Year to date their 20-stock Ben Graham portfolio (based on their own interpretation of a Ben Graham stock screen) is down 9.2%. This gives me some comfort, as I know that I’m in good company. Since 2003, Validea’s version of the Ben Graham strategy delivered an annualized return of 8.6%, compared to the S&P 500’s average of 6.5%.
I see similar comparisons with AAII’s value stock screens. AAII’s best performing stock screens over the long run are their value screens. Most of these stock screens are also having a tough time year to date. Again, this gives me comfort. I know I’m in good company!
As they say: misery loves company!
The big question is how all of this plays out. Back in 2008, value stocks declined before the broader market. It was a canary in the coal mine, predicting the broad-based decline in stocks that year. In contrast, value stocks registered similar poor performance in 1998 and 1999. When the broader market was decimated in 2000-2003, value stocks actually had a bull market! Hopefully, the current situation is more like 1999 than 2008, but we’ll just have to wait and see.
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