As the markets were hitting new highs last week, poker player
and investor Amy Calistri was contemplating the odds and plotting
her course of action.
Her main questions were: "What are the chances thesegains will
reverse course anytime soon? And how can I position myStock of
the Month portfolio accordingly?"
Last question first...
In addressing the matter of her portfolio in her most
recentissue , Amy invoked the "Kelly criterion," a strategy
devised by the physicist John Kelly Jr. in 1956. The Kelly
criterion is a mathematical system of betting whereby players
increase the size of their bets when the odds are in their favor.
When the odds of winning are lower, bets are decreased -- after
all, or so the reasoning goes, as an investor (or a blackjack
player), you don't want to be scrambling forcash when the odds
turn back in your favor.
That's the strategy that that was famously employed byhedge
fund manager (and blackjack player) Edward Thorp, a mathematics
professor and founder of Princeton/Newport Partners. After
themarket dropped 23% on "Black Monday " (Oct. 19, 1987),
mosthedge funds were paralyzed, but Princeton/Newport had enough
available cash to go on a bargain-buying spree in the days that
followed. Atyear 's end, Princeton/Newport was up 27%, compared
with a 5%gain in the S&P 500.
Amy's not suggesting that anything remotely like a replay of
Black Monday is in the works. But when she studies the odds, Amy
sees them shifting.
Each month in
Stock of the Month
, Amy looks tocapitalize on trends the market is ignoring.
She was among the first to link a surge in business spending
in late 2009 and early 2010 to the fortunes of a certain
diversified tech company best known by itsstock symbol : IBM.
When Amy sold her holding in
International Business Machines (
in January 2012, she pocketed a gain of 49.6% in less than two
In late 2010 Amy tooknote of two trends: a disproportionate
rise in the after-tax income of the wealthiest Americans and a
surprising spike in jewelrysales the day after Thanksgiving. By
the timeWall Street made the connection, Amy was well on her way
to a 28.7% gain in
Tiffany & Co. (
This month's insight?
"For the first time since launching my newsletter in April
2009, I believe the market is underestimating the risks of the
global slowdown," Amy wrote last week.
More than a fifth of the companies that make up the S&P
500 have already "warned" about the results they've started
releasing this week, while only 23 have raisedguidance . That's
the highest ratio of negative warnings to positive guidance since
"If the market finally starts to recognize the weak trend in
the globaleconomy and the impact that it is having on U.S.
companies, I believe the odds will quickly improve for
investors," Amy said.
Put another way: When a pullback occurs -- with either the
overall market or on a company-specificbasis -- have enough cash
on hand to pick up some bargains.
To assist in that pursuit, I asked the StreetAuthority stock
market strategists, including Amy, to name the first one of their
portfolio holdings they would buy more of if prices suddenly
"corrected" by 10%.
We'll start with Amy's take in this article. In subsequent
parts to this series, we'lloffer the perspectives of our top
income specialists, aggressive growth investors -- even our top
But first, more from Amy...
As you noted above, I launched my
Stock of the Month
newsletter in February 2009. To most people, it seemed like an
insane time to discuss a newinvestment advisory. In the prior six
months, the S&P 500index had dropped roughly 40%, and
investors were leaving the market faster than the speed of light.
But where they saw fear, I saw better investment odds. Securities
were priced for worst-case scenarios. And I saw so many companies
where the worst was never going to happen.
In the past three months, however, the market has started to
price securities for perfection. When I look at global economic
conditions, I see alot of companies that could have trouble
Theunemployment rate in the eurozone was 12% in March, a
record high. Industrial production is continuing to contract in
Europe. Japan's economy has been flatlining for the better part
of a year, and the Bank of Japan has just taken drastic measures
to try to jump start it. Many global economies and currencies are
weakening, and I think that is going to be a bigger issue for
U.S. multinational companies than the market realizes. As a
result, I've been starting to keep more cash in my portfolio. I
want dry powder to invest when my investment odds are better.
I'd love the chance to buy moreshares of warehouse retailer
Costco (Nasdaq: COST)
on a pullback. Costco is in the retailing sweetspot . In
challenging economic times, it attracts new consumers looking to
savemoney . But as the economy improves, its new consumers become
loyal customers who have come to value Costco's ability to
deliver high-quality products at a discount price.
I also like Costco's regional concentration right now. More
than 90% of Costco's 618 locations are in North America, with the
vast majority in the United States. This reduces the company's
exposure to foreigncurrency risk and weaker international
The company has been performing well -- in fiscal 2012, the
company grewnet income per share by 17.9% over 2011.Revenues grew
11.5% during the same period.
Costco also offers a variety of services to its members, and
those offerings are expanding. The retailer has partnered with
thehealth insurance provider
to sell health insurance for individuals. Costco-Aetna health
plans offer medical benefits and dental options.
You can even refinance yourmortgage through Costco. After
running a successful pilot program, Costco is rolling out its
full-service mortgage services to members. So far, 11 banks and
lending institutions have partnered with Costco on this
Costco spends time and money to make sure its members are
getting high quality for a good price. The trust it has built
with its customer base will be a nice tailwind for Costco's new
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