Q1 2013 – A Revisions Driven Quarter – Not Good For Our January Picks

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

graham@/lipinski@sector-sovereign.com

April 2nd, 2013

Q1 2013 – A Revisions Driven Quarter – Not Good For Our January Picks

 

  • We present some quarter-end data to summarize performance and identify drivers of performances. On average, the Industrials and Materials sectors out-performed the S&P 500; Metals, Chemicals, Capital Goods and Electrical Equipment underperformed while the rest outperformed – Exhibit 1.
  • Revisions drove performance as “value” was largely ignored. Our Skepticism framework was marginally more effective than “value”, but not a lot. This perhaps highlights the uncertainty and nervousness in the market.
  • Metals saw the most significant decline relative to the market, but even the aggregate for metals was up in absolute terms. Transports and Packaging were the most significant out-performers, with Trucking driving the transport sector.
  • Only 26 of 134 companies in our coverage universe saw absolute value declines in Q1 2013, while 23 saw more than twice the market increase – greater than 20%.
  • This broad group has had a good couple of years and today only 7 companies screen as more than one standard deviation below our normal relative value measure: AA, CLF, DD, ETN, GTI, ITW and OLN. By contrast, 26 companies screen more than 2 standard deviations above normal relative value.

Exhibit 1

Source: Capital IQ and SSR Analysis

Overview

We include some simple charts to review the first quarter. These need limited explanation, and we make the following observations:

  • Meaningful underperformance in Q1 was confined to the Metals sector and a few select names in the Chemical, and Capital Goods sectors.
  • Continued price weakness in base metals, particularly steel, resulted in further negative revisions – interestingly none of the steel producers screen as excessively cheap today (except CLF).
  • We continued to see strength from the Paper and Packaging sectors, but this mirrors more positive near term and longer-term revisions. The Paper sector looks more expensive than the Packaging sector today.
  • Revisions appear to have been the only effective screen for the quarter. Our valuation framework showed no correlation with performance in Q1, if anything the correlation was inverse, in that more expensive stocks outperformed than cheap stocks and more cheap stocks underperformed than expensive stocks. Only 5 stocks that screened as attractively valued on January 1st, made our list of top performers for the quarter – ACM, ENS, ROC, TRN, and URS. None of the expensive stocks on January 1st made the underperform list.
  • Our Skepticism framework was marginally less poor than our value framework, but not so much that you would really notice. Investors are sticking with stories that have done well and that are seen as “safe”.
  • The obvious consequence is that we have a large number of stocks in our coverage that screen as very expensive today.
  • Most of the names that we highlighted as attractive in our 13 for 13 piece in January were there because of attractive value and consequently we have not done well with this group relative to the group that we thought looked expensive – Exhibit 2.
    • On a cap weighted basis our top picks underperformed our bottom picks by around 5%.
    • We would not change our views at this time, although following the work we published recently on R&D we might be more cautious on 3M.
    • We feel better on Aluminum – see the piece we published this week.
  • The group of expensive stocks is dominated by Paper, Chemical (specialty, coatings and focused exposure to US natural gas) and Trucking.

Exhibit 2 – 13 for 13 Q1 Results

Source: Capital IQ and SSR Analysis

Exhibit 3 – Performance Outliers

Source: Capital IQ and SSR Analysis

Exhibit 4 – Revisions tell much of the story

Source: Capital IQ and SSR Analysis

Exhibit 5 – Value was the wrong way to go in Q1 – both on a sector basis…

Source: Capital IQ and SSR Analysis

Exhibit 6 – …and on a stock basis…

Source: Capital IQ and SSR Analysis

Exhibit 7 – …and our Skepticism screen was poor also,

but at least the best fit line slopes the right way!

Source: Capital IQ and SSR Analysis

Exhibit 8 – Current Valuation Summary

Source: Capital IQ and SSR Analysis

©2013, SSR LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.

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