Eric Steiman is on a roll in 2013. He manages the Undervalued Opportunities portfolio on Covestor and the strategy has delivered a year-to-date gain of about 137% after fees through December 4.
In an interview this week, the portfolio manager shared his thoughts on some of his current holdings, his investment process, what he looks for when choosing investments and how he's positioning for 2014.
"My process really starts with looking for growing brands in growing markets," Steiman said. "On the overall market, I tend to focus on sentiment and where we are in the cycle. For example, during a 10-year cycle you might get two years of bear markets. In bull markets you can be more speculative, and that's how 2013 started. In those years you can even see companies that don't have earnings see their stocks accelerate."
However, the manager said he's taking a bit more defensive posture heading into the new year with the S&P 500 up more than 25% so far in 2013.
"Later in the year, I did some rotation in terms of overall asset allocation. I trimmed, or sold outright, some of the high-flyers that had big rallies," Steiman said. "For example, I trimmed Tesla (TSLA) and dropped Zillow (Z). In late 2013, I started favoring companies with lower forward price-to-earnings (P/E) ratios."
In fact, when hunting for companies in which to invest, his favorite financial metrics are forward P/E ratios, gross margins and free cash flow.
"Most of my largest portfolio holdings now tilt more toward the value spectrum than growth," he added. "I'm not going to chase stocks at the end of a big year. I really try to avoid chasing."
Steiman said his approach is a mix of fundamental and technical analysis.
"The first thing I do is look at the fundamentals — the business and where it's going. After I gain conviction on a company, I might time my stock purchase based on the technicals. I'm looking for a good entry point, and again, I don't want to chase," the manager said. "I'm more inclined to buy on a down move in a stock. Almost all of my trades have defined technical buy and sell points. I don't want to buy a great business when the stock is potentially making a top. I look to buy on dips. I love to take advantage of near-term negatives that don't really affect the business over the long haul."
Steiman also commented on some of his portfolio positions that have been in the news lately:
Apple (AAPL): "I have actually shorted Apple in the past. Now I own it. One big driver is that the company is starting to buy back shares. Any share repurchases will accelerate earnings-per-share (EPS) growth and I love that. Do I expect Apple to grow excessively? Not necessarily. But I think it is a good value with the buyback plan and dividend as well. My price target is between $600 and $700 for Apple."
SodaStream International (SODA): "This is a stock I've owned for some time. I think it's trading cheap and the business has a wide economic moat, but is misunderstood. The majority of the company's revenues are overseas, and net income is growing at a high rate. Not a lot of Wall Street analyst coverage of SODA, and a good fourth-quarter earnings report could trigger a short squeeze because short interest remains at near 40% levels."
Facebook (FB): "I've pared back a bit on Facebook but I still like the stock. They haven't really gotten into video much yet although it's something they talk about doing more. With over 1 billion monthly active users at the end of September, the amount of people that Facebook touches is unbelievable. And remember this company is only about 10 years old, and younger in terms of monetizing. Facebook is still in the early stages of monetization. Mobile is accelerating and I expect them to ramp that up. And the more people are engaged, the more expensive that Facebook ads become."
Yahoo! (YHOO): "This is another stock I've been holding for some time. My initial theme was Yahoo!'s ownership stakes in Alibaba and Yahoo! JAPAN. This is a stock that goes back to some of my main themes — a strong brand in a growing market. Admittedly, Yahoo! had a strong brand but lacked innovation and change. Some of the website platforms hadn't changed in several years. Things have gotten much better under CEO Marissa Mayer. I started to get excited when I saw change accelerating this year. In general, I think Yahoo! has turned around the business in 2013 from a popular portal, to a go-to destination for content. 2013 was a great product-development year. 2014 will be the year for Yahoo! to start selling more ads, and I see a great year ahead for the company. Also, many seem to be overlooking the acquisition of blogging site Tumblr. There are lots of ways to advertise on Tumblr and Yahoo! could see material revenue there."
SPDR Gold Shares ETF (GLD): "I'm shorting this gold ETF and it's mostly a technical trade. If you look at the price of gold from 2000 to the record nominal high in 2011, it was just an unbelievable up move. I think it's now unwinding. As the global economy recovers after the financial crisis, I think the price of gold will continue to decelerate. I agree with Warren Buffett; there's not much use for gold other than jewellry. A lot of buyers who rode gold are getting out, and GLD is looking worse and worse."
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 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. Performance should never be the sole consideration when making an investment decision. Past performance is no guarantee of future results.
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