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Tobias J. Moskowitz and Mark Grinblatt documented the “strong and prevalent momentum effect in industry components of stock returns which accounts for much of the individual stock momentum anomaly” in their scholarly article published in the Journal of Finance, ‘Do Industries Explain Momentum’ (download here; stable link here; updated by Fraulo and Nguyen here). Moskowitz and Grinblatt also concluded that “industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, appear highly profitable.”
Such findings are consistent with the ‘Case for the Valuentum Style of Investing,’ and we seek to highlight the relevant sector outperformers thus far in 2013, offering a starting point to dig into the underlying industries (and constituents) for idea generation.
Source: Valuentum, returns year-to-date through July 29 (excludes dividends)
As Valuentum members are starting to grow accustomed to, the Valuentum Team identified the top performing sector ETF—the Health Care Select SPDR (XLV) and two out of the top three performing sector ETFs—the Health Care Select SPDR and Financials Select SPDR (XLF)—so far in 2013 to include in its Best Ideas Newsletter portfolio. We added the Health Care Select SPDR and the Financials Select SPDR in May 2012 and January 2012, respectively (view the Best Ideas transaction log of email alerts here). Though we didn’t include the Consumer Discretionary Select SPDR (XLY), the #2 sector performer, in our Best Ideas portfolio, we did one better and hold one of its top-10 and best-performing constituents Ford (F), which has advanced over 30% this year.
The worst-performing sector so far this year, Basic Materials, is trailing the broad market by over 10 percentage points, and the Valuentum Best Ideas portfolio has but a meager 2% exposure to the sector via Rio Tinto (RIO). Interestingly, we hold zero exposure to two of the other lagging industry groups, Energy and Utilities. We do have exposure to these two sectors in our Dividend Growth Newsletter portfolio, however, as it is largely unavoidable given their higher-yielding individual components relative to the market.
Shown below, please find our exposure to outperforming sectors as a percentage of equity exposure in our Best Ideas portfolio and our exposure to underperforming sectors as a percentage of equity exposure, including and excluding technology. Google (GOOG) has been an outperformer this year, and we don’t think it’s necessarily fair to ding us entirely for our technology exposure since we highlighted one of the best-performing stocks within that weak sector. In any case, the findings are absolutely remarkable and are even more staggering than our impressive transaction alert track record. This is nearly a masterpiece of a portfolio (1)!
Source: Valuentum
Source: Valuentum
Not interested in applying technical/momentum analysis to augment returns? Stay focused on our in-depth valuation process.
As we continue into the back-half of 2013, we’re paying close attention to both underlying fundamental and technical/momentum market dynamics. Pasted below, please find the year-to-date performance, relative performance versus the broad market benchmark, and top holdings of each sector representative ETF. Of particular note from a technical standpoint, the SPDR S&P 500 (SPY) has gapped higher, revealing strength, led primarily by breakouts in the ‘Consumer Discretionary’ and ‘Industrials’ sectors. We think ‘Technology’ may be poised for a large move higher on Apple (AAPL) strength, while the ‘Utilities’ and ‘Materials’ groups still face material overhead resistance.
All benchmark and sector returns data exclude dividends, as of July 29.
Broad Market Benchmark: SPDR S&P 500 (SPY)
Year-to-Date Return: 17.4%
Sector Representative ETFs Top Holdings
Apple (AAPL)
Exxon Mobil (XOM)
Johnson & Johnson (JNJ)
General Electric (GE)
Chevron (CVX)
Google (GOOG)
Microsoft (MSFT)
Procter & Gamble (PG)
Wells Fargo (WFC)
Berkshire Hathaway (BRK.A)
Consumer Discretionary: Consumer Discretionary Select Sector SPDR (XLY)
Year-to-Date Return: 25.4%
Performance Relative to SPY: +8%
Sector Representative ETFs Top Holdings
Comcast (CMCSA)
Walt Disney (DIS)
Home Depot (HD)
Amazon.com (AMZN)
McDonald’s Corp (MCD)
Ford Motor (F)
Twenty-First Century Fox (FOXA)
Time Warner (TWX)
Starbucks (SBUX)
Lowe’s (LOW)
Consumer Staples: Consumer Staples Select Sector SPDR (XLP)
Year-to-Date Return: 17.9%
Performance Relative to SPY: +0.5%
Sector Representative ETFs Top Holdings
Procter & Gamble (PG)
Coca-Cola (KO)
Philip Morris (PM)
Wal-Mart (WMT)
CVS Caremark (CVS)
PepsiCo (PEP)
Altria Group (MO)
Colgate-Palmolive (CL)
Costco (COST)
Mondelez (MDLZ)
Energy: Energy Select SPDR (XLE)
Year-to-Date Return: 14.1%
Performance Relative to SPY: -3.3%
Sector Representative ETFs Top Holdings
Exxon Mobil (XOM)
Chevron (CVX)
Schlumberger (SLB)
Occidental Petroleum (OXY)
ConocoPhillips (COP)
Pioneer Natural (PXD)
Anadarko Petroleum (APC)
Halliburton (HAL)
EOG Resources (EOG)
National Oilwell Varco (NOV)
Financials: Financials Select Sector SPDR (XLF)
Year-to-Date Return: 23%
Performance Relative to SPY: +5.6%
Sector Representative ETFs Top Holdings
Wells Fargo (WFC)
Berkshire Hathaway (BRK.A)
JPMorgan Chase (JPM)
Bank of America (BAC)
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