Tuesday, January 19, 2010

Sector Blow-out

If you happen to have a desire to sit down and wade through more than 400 PowerPoint slides about the ten different S&P market sectors, then you would love our investment team “sector-blowouts.” I have found through long experience that in order to properly prepare for two days of blowout meetings, one needs to stoke up on a lot of caffeine (in any form…I prefer Coca-Cola), you need to get a lot of sleep the night before, and occasionally you need to have emergency medical personnel standing by in case any one of the team members actually loses consciousness during the presentations.

Sector Blowouts occur once each quarter. Our analysts cover each S&P sector on a daily basis as a part of their on-going due diligence and we discuss opportunities and issues with each sector at our routine team meetings during the week. These discussions occur in the broad context of our discussing the entire portfolio, including macro-economic issues, fixed income, international markets, geopolitical issues, etc. However, we have found that it is helpful to occasionally meet to strictly focus on U.S. stock sectors and history informs us that our successful ability to rotate sectors to take advantage of changes in the market cycle has added to returns in the past. So once each quarter we tackle all of the sectors at once, which the analysts have aptly described as the “sector blowout.”

If you want to know about sector valuation based on mean reversion, forward P/Es, relative P/Es, or price to sales, price to book, and dividend yield. If you are interested in how a sector performs before and after the beginning of an economic expansion, or before or after the Fed has their first rate hike following a recession, or the relative weight of the sector in the overall S&P 500 Index, investors’ passion for a sector based on their ownership of overall sector funds, or the sector’s earnings to total S&P earnings. If you want to know the pricing power of a sector, its sensitivity to moves in currency, and the amount of earnings that are generated overseas, you will be in the right place. You might be entertained by knowing what our independent research is saying about each sector, how much we own in each sector, and the relative performance of each sector. You get all of this and more in a Pinnacle sector blowout. I’m sure that our analysts will be writing about sectors on the blog in the coming weeks. It’s all part of “doing the work” around here. Unless you are going to make portfolio decisions on a purely quantitative basis, I’m afraid it’s unavoidable. Just be prepared with the proper medical attention…just in case.