Wednesday, May 02, 2007

April Update

For the month of April the Model Portfolio’s return was 3.5% versus S&P 500’s total return of 4.4%.

Maintaining our exposure to the steel sector through Chaparral (Nasdaq: CHAP) has proven a to be a profitable one. A month after reporting earnings and less than two years after becoming an independent company, Chaparral announced in April that it has retained Goldman Sachs to explore strategic alternatives causing the stock to rally to yet another high. We have trimmed our position into this rally and deployed the cash into holdings with, in our opinion, a superior price/value proposition.

Earnings began to roll in throughout the month and into early May. No major surprises. Intel's (Nasdaq: INTC) earnings were received well. The price war with rival Advance Micro Devices (NYSE: AMD) may be over and margins should improve. Moreover, by waking a sleeping giant, AMD has managed to dig itself into a mighty big hole. Intel has regained the technological lead and is introducing new products at a ferocious pace. AMD is struggling and there are rumors the company may be a buyout candidate. Our thesis appears to be playing out nicely. We added to our position in April.

The majority of our companies continued to progress nicely. Comcast's (Nasdaq: CMCSA) triple play is on a roll. Corning (NYSE: GLW) had a good quarter and is reopening a fiber manufacturing plant to meet demand. Diamond Offshore Drilling (NYSE: DO) blew away Wall Street's estimates. We built up our position in this company which we believe remains attractively valued. A substantial dividend payment should be coming our way.

Morningstar (Nasdaq: MORN) and Mueller Water (NYSE: MWA) held their own and continued to execute their strategy. Morningstar hit an all-time high in April and the company is methodically growing its business. Mueller's results appeared to breathe some life into the stock. The company continued to demonstrate pricing power while containing costs and paying down its debt. Our thesis has not changed on either of these companies and we would use any weakness in shares to add to our position.

Our holdings with exposure to the housing sector continue to struggle. Centex (NYSE: CTX) and Pulte (NYSE: PHM) had nothing kind to say about the outlook for homebuilders. USG (NYSE: USG) reiterated the tough business conditions for its products. The shares of all three companies have retreated from the levels hit in late 2006 but seem to have found a floor near the lows hit last summer. USG meanwhile completed a share offering at $48 and used the proceeds for an acquisition and to further pay down its debt. In early May, we added to our position in USG and we will look for opportunities to further build our position in these companies.

During the first part of May, Expeditors International (Nasdaq: EXPD) reported earnings and Sears (Nasdaq: SHLD) held its annual shareholders meeting. Expeditors announced good results despite recently weaker demand. We have quoted him before, we will quote him again. Peter Rose, Chairman and CEO, had this to say, "We do measure our internal progress by how well we do at achieving our own expectations. Regardless of what might, or might not, be going on in the global economy, we always expect to do a little better this year than we did last year. Our first quarter results, on a net earnings basis, were very close to what was reflected in our 2007 budget. Taken in a net earnings context, we've nearly doubled our first quarter profitability since 2005 and we think that we've managed that growth pretty well. Finally, we'd be remiss in closing without publicly thanking our employees for their outstanding efforts and our customers, our vendor/partners, and our shareholders for their support. Thank you one and all!" As for Sears, the stock was punished for a weak Q1 outlook. But we are unphased by Mr. Market's reaction and leave you with this quote from Eddie Lampert at the annual meeting, "The opportunities for us to allocate capital are very significant, and we have a lot of choices." Indeed, he has transformed Sears into a cash generator and is sitting on more than $2B in cash. He is on the prowl. Stay tuned.

Finally, as May rolls on, we await earnings reports from Tyco (NYSE: TYC), Cisco (Nasdaq: CSCO) and Electronic Arts (Nasdaq: ERTS).