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Steering clear of market euphoria and staying conservative

By Libardo Lambrano

The return of the S&P 500 Index (SPX) in 2013 was about 32%. This is something we haven't seen in the stock market since 1997 when the S&P 500 delivered 31%. This is good news for investors, but a reminder that we all should be cautious because we are still far from being out of the woods.

In my opinion, financial problems continue at all levels - in banks, the private sector, and the government. In the past, when the stock market reached new heights, the following year was a disappointment. We saw this in 1980 when the stock market delivered 25.77% only to drop -9.73% in 1981. It was the same story in 1989 when it returned 27.25% only to drop to -6.56% in 1990.

Although there is a kind of euphoria in the market right now, this is due mostly to the monetary policies of the U.S. Federal Reserve, which is keeping interest rates at near-zero levels. The minute that interest rates begin to rise however, the stock market may start to shake – especially in this still fragile global economy.

My goal for 2014 is not to get carried away by the euphoria, and instead to stick to my conservative allocation strategy. Things could go south at any point in 2014, as there is a lot more that has to improve before we see real economic prosperity.

The Dividend Paying Large Caps portfolio was up 3% in December as compared with a 3.3% gain for the benchmark S&P 500 Index (SXP).

Sprint (S)

I'm planning to sell this stock in January and cash out on these gains. In my opinion, when stocks have a great run than sometimes reverse course quickly. Since this stock doesn't pay dividends and it is the smallest position in my portfolio, I've decided to close it.

Intel (INTC)

While the dominance of Intel in the tech world is being questioned, I still believe that Intel is a great company. Intel is one of the few technology companies truly committed to their investors, which I appreciate.

The company has one of the biggest dividend payouts ratios in the industry at about 47%. This means that Intel is basically distributing half of its earnings back to investors, which is truly remarkable. The dividend yield was 3.53% as of Jan. 10.

On top of that, Intel continues to buy back its stock at a healthy rate. In 2014 I don't expect the stock to fly, but don't expect it to sink either. As long as the company continues showing a healthy respect for investors, I'm perfectly comfortable continuing with my position. After all, Intel is the kind of company that could come up with a breakout product or a great acquisition at any point.

Oracle (ORCL)

Oracle is my favorite stock for 2014. The company is buying its stock back at a healthy rate–always a good trend for investors. In June 2013, the company doubled its quarterly cash dividend to 12 cents a share per quarter and said its board approved an additional $12 billion in buybacks.

In my opinion, the stock is fairly priced with a price-to-earnings ratio of about 16 as of Jan. 10. (Oracle's average PE ratio over the past 10 years has been about 30.)

Oracle, much like Microsoft (MSFT), IBM and Adobe (ADBE), will benefit immensely from the emerging "cloud computing" model. I have no way of knowing this for sure, but in my opinion cloud services increase user loyalty and at the same time decrease piracy. I believe that once the economy begins to recover, these tech companies will bloom.

DuPont (DD)

DuPont offers a wide range of innovative products and services for markets including agriculture, nutrition, electronics, communications, safety and protection, home and construction, transportation, and apparel. The reason

I purchased the stock in the first place was because I knew that the housing recovery would create greater demand for DuPont's construction and materials line of business. This turned out to be true and actually created some momentum for the stock.

The materials and construction divisions of the company are only responsible for about 30% of their earnings. The rest comes mainly from agro-science products (31%), and performance chemicals (23.7%). Since I don't understand these areas as clearly as I would want to in order to be a long-term investor, I'm closing this position for 2014.

Ecopetrol (EC)

In December, the only stock that went down significantly in my portfolio was Ecopetrol (EC). It fell 5.83% and that in addition to the -13.79% drop the stock experienced in November. The stock continues to suffer due to the upcoming presidential elections in Colombia (the government controls 88.5% of Ecopetrol), and widespread industry pessimism.

In 2013 global oil companies had a bad year, and as of this past October, only a handful have started to recover, including Exxon Mobil (XOM) and BP (BP). Obivously, I don't have a crystal ball, but I'm optimistic that Ecopetrol and other oil companies may recover in 2014.

In 2013, my portfolio was up 25.7% for the year, as compared to the S&P 500, which was up about 32%. The reason I underperformed against the market in 2013 was because I stuck with Apple (AAPL) for too long even as the stock was going down at the beginning of the year. Since Apple was the largest position in my portfolio, the performance of the entire portfolio suffered. This was a mistake I hope not to repeat moving forward.

My goal for 2014, as I mentioned in my previous update, is to concentrate on 12 value stocks. The reason for this approach is that I can track them closely and make quicker and more informed decisions. In 2014, I hope to outperform the market and add greater value to my investors.

DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Libardo Lambrano

Libardo Lambrano

I am a value investor, an investment philosophy that boils down to investing in undervalued, under-researched and unpopular companies. Reasons

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