October 02, 2004
Northlake's ETF Plus Model Portfolio performed well in September, gaining 1.95% vs. 0.94% for the S&P 500. Northlake's special situation stocks powered the returns with CETV gaining 3.6%, MOT gaining 12.0%, MBFI gaining 5.5%, and NTLI gaining 14.3%....
NTLI benefited from the company's first ever analyst meeting, attended by over 300 institutional investors. We listened to the all day meeting via webcast and everything we heard reinforced our belief that NTLI shares are headed into the $80s. Management's presentation closely mirrored the research we have done on NTLI, which can be found by clicking the Research Samples link on the right side of this page. The key incremental information was that NTL is moving ahead with a formal auction of its tower business that is expected to bring in about $2 billion. Given the company's solid balance sheet and growing free cash flow, we believe a portion of the proceeds could be passed through to shareholders in the form of a one-time dividend. In any event, the sale unlocks significant value in the shares.
Motorola was also a big winner in September. Wall Street showed renewed confidence in the entire wireless handset sector as Nokia shares also rebounded. MOT management spoke confidently about the company's near-term prospects which appeared to catch a still skeptical Wall Street by surprise. Northlake generally does not own super large cap stocks because they are too widely followed and information is efficiently priced into the shares. MOT represents the type of large cap stock we use on occassion, as our bullish viewpoint is at odds with the conventional wisdom, despite new management and more than six months of improved results suggesting MOT's turnaround is for real. We will be looking to sell our MOT shares when all of Wall Street is recommending the shares.
The model signals for September were Large Cap and Value. Large Cap, as represented by the S&P 500 ETF (SPY), gained 1.0%, worse than the Mid Cap ETF (MDY), which gained 2.5%, and the Small Cap ETF (IWM), which gained 5.3%. So for September, the model signal was not accurate. The average holding period for the Large Cap model hs been over 5 months since the beginning of the testing period in 1981, so one month with an inaccurate signal is not unusual.
The Style Model signal has favored Value all year, which continued to be a good call in September. Northlake is using the Russell 3000 Value ETF (IWW) as its Value proxy. During September, IWW gained 2.1%, better than the 1.9% gain produced by its growth counterpart, IWZ. For the entire third quarter, Value outperformed growth with IWW gaining 1.1% against a loss of 5.8% for growth. The average holding period for the Style Model has been about 7 months since 1980.
The returns just described are for investments held only in Northlake's Aggressive portfolios. Northlake's model portfolio also includes Core Investments in major U.S. and International indicies. Presently, the Model holds a position in the Russell 3000 and Japan. During September, the Russell 3000 (IWV) gained 1.5%, getting a slight lift relative to the large cap only S&P 500 from its exposure to small and mid cap stocks. Japan (EWJ) had a poor month, falling 2.8%, as economic statistics revealed slower than expected GDP growth and the renewed rise in oil prices undercut investor confidence.
In conclusion, September was a good month for Northlake's model portfolio as the Style Model and the special situation stocks produced very good returns. The Market Cap model produced a positive return but sent an inaccurate signal. Core Investments produced mixed results with the Russell 3000 being a good choice, while Japan struggled.
Looking back to June 1, when Northlake's model portfolio was inaugurated, including the Core Investments, the model portfolio is up 0.59% vs a negative return of -0.54% for the S&P 500.
Another post will be up shortly reviewing October model signals.
Posted by Steve Birenberg at October 2, 2004 10:21 AM