Sunday, February 04, 2007

January Update

For the month of January the Model Portfolio’s return was 2.5% versus S&P 500’s total return of 1.5%.

January was a quiet month for the portfolio. However, we did take the opportunity to significantly add to our position in Mueller Water Products (NYSE: MWA-B) at an attractive price.

Earnings have begun trickling in. Mueller, for one, held margins firm in the face of challenging business conditions by successfully driving its synergy plans and boosting prices. Budweiser (NYSE: BUD) and Comcast (Nasdaq: CMCSA) came in with strong quarters. The latter also announced a 3 for 2 split. After its earnings announcement, Mr. Market seemed to be warming up to Electronic Art’s (Nasdaq: ERTS) potential as a new growth cycle kicks in and new consoles gain traction. Western Union (NYSE: WU) affirmed guidance and exhibited stellar growth in India and China. But the company continued to see some weakness in its Mexican business as the U.S. immigration debate remains an overhang. We will use any weakness in shares to add to our position.

Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD) continued to battle. As we had predicted, Intel continued with its price war strategy to regain market share and it appears the company is regaining its footing. The stock has held steady while AMD’s shares have been decimated over the past month. The big question is when will the price war end? Intel has unleashed a barrage of new products commanding higher selling prices. And the company is at least a year ahead of AMD technologically. Still, Intel did not boost its gross margin guidance year over year putting a cap on the stock – for now. We will add to our position on any weakness.

Speaking of price wars, Corning (NYSE: GLW) pleased by announcing they will hold LCD glass prices steady through the seasonally weak first quarter. The stock has bounced nicely from its recent lows.

Steel continued to perform well. Elimination of Posco (NYSE: PKX) from the portfolio may have been premature. Still Chaparral (Nasdaq: CHAP) and Mittal (NYSE: MT) are trading at all time highs after Nucor (NYSE: NUE) and U.S. Steel (NYSE: X) announced stronger than expected results and signs of recovery in the steel sector began to emerge.

Homebuilders continued to be volatile but have not provided us with the weakness we had hoped for in order to add to our positions. Centex (NYSE: CTX) and Pulte Homes (NYSE: PHM) announced abysmal earnings as order cancellations, land option write offs and inventory adjustments continued. But Pulte’s CEO did give some hope, noting, "[W]e witnessed some promising signs of stabilization at the conclusion of the quarter, and into the first month of 2007, although it's too early to tell how strong and sustainable this may prove to be in the months ahead.” USG (NYSE: USG) also sounded a cautious tone for 2007.

Meanwhile, Home Depot (NYSE:
HD) finally departed with its embattled CEO, Bob Nardelli, leading to a minor relief rally. In January, a Forbes article estimated Home Depot’s sum of the parts valuation at $56.

Mr. Lampert’s Sears Holdings Corp. (NYSE:
SHLD) provided solid guidance for its fiscal fourth quarter and forecast an eye popping cash balance of $3.5 billion.

In the coming weeks, more of our companies will announce their quarterly results.
Of particular interest will be updates from Cisco (Nasdaq: CSCO), Expeditors International of Washington (Nasdaq: EXPD), Morningstar (Nasdaq: MORN) and Tyco (NYSE: TYC). The latter appears poised to complete its split up by early Q2 and has asked shareholders for approval of a 1 for 4 reverse stock split in preparation for the event.

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