Based on a review of data for sectors, industry groups and stocks, we are constructing a model portfolio which provides more detail beyond the list shown in the blog post entitled “Current Stock Picks 1-28-20.”
First, the goal of the portfolio is to outperform the S&P 500, so it is important to note that the largest few stocks in the S&P 500 account for almost 20% of the index. This list of trillion dollar capitalization stocks includes:
Stock Weight
AAPL 4.7%
MSFT 4.7%
AMZN 3.7%
GOOGL (Class A) 3.4%
GOOG (Class C) 2.4%
First, simply because of the sheer size of these companies and their importance in the S&P 500 index, we are including them in the portfolio in equal proportion to their weight in the index. This will neutralize the risk of underperforming the index based on the behavior of these giant stocks.
Second, we are moving to an equal weight in some of the smaller sectors that have recently come to life, namely real estate and utilities.
In addition we are moving to an equal weight in energy, not because it is acting well, but because it is so oversold that any move up from the bottom could cause a relatively large percentage gain (similar to a stock that has dropped from $50 to $10, then rises to $15, creating a 50% gain from its lows).
Similarly we are moving to a roughly equal weight in the consumer staples sector, because the overall market has been rising for almost five months, and therefore is overbought and overdue for a pullback. If a pullback occurs, the consumer staples sector, as a “safe haven” is likely to outperform. To neutralize this risk we are including the consumer staples ETF (ticker symbol XLP) in the portfolio.
The remainder of the portfolio is constructed with a variety of individual stocks, chosen because they have the following characteristics:
Fundamentals: Bullish ratings from a proven quantitative stock selection model, based on fundamental factors such as earnings growth and earnings estimate revisions.
Technical positions: Good chart patterns based on the proven principles developed by Investor’s Business Daily. This means these stocks have characteristics such as good money flow, good relative strength, a recent breakout to a new high after a consolidation period, are finding support at the 50-day moving average, etc.
Industry Groups: Many of these stocks are in selected industry groups, chosen because most stocks in the group show bullish characteristics.
By holding 40 stocks (actually more than 40, because some are ETFs), the portfolio mitigates the risk of being overly influenced by any single stock with poor performance.
However the portfolio is very overweighted in selected industry groups that are strong both fundamentally and technically, including the following:
Residential Construction
Information Technology Services
Semiconductor Equipment
Software – Application
As far as broad market sectors are concerned, the portfolio is overweighted in the technology sector, while roughly equal weighted or slightly underweighted in all the other broad sectors.
We will continue to monitor this portfolio and make changes as market developments unfold.
The following spreadsheet shows the composition of this portfolio.
