Q1 Review – Still Minimal Appetite For Risk


We recently reviewed how the Industrials and Basic Materials Sectors fared in Q1 2013.  As is always the case, there is a mixed bag of results – some sectors did better than others and some stocks did better than others.  See our published research.

  • But was there an overall theme?
  • Was there a strategy that we could have played and made money by doing so?
  • Could we have developed a sophisticated methodology for the quarter and outperformed the broader market through its implementation?

Yes! We could have read the news and reacted as soon as there was positive or negative company specific information!

This was a revision driven – in most cases news driven – quarter.    If you had good news your stock went up; bad news and it went down – regardless of how cheap or expensive the stock might have been at the time the news broke.

Investors in the Industrials and Basic Material sectors, while clearly participating in a market rally are doing so in a nervous way – they are buying what has worked and selling anything that has missed expectations or looks even a little risky.   If we look at the top ten performers in the sectors for the quarter and the bottom ten and we plot these on a revisions versus value basis, we get the picture below.   There is a very even spread across the valuation spectrum, but a clear positive revisions bias to the outperformers and negative revision bias for the underperformers.     The second chart shows the same analysis for the larger cap names – a similar, but slightly less compelling picture.


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As indicated in our recent research we have expensive stocks that are getting more expensive and cheap stocks that remain cheap.   Given the revision bias to the market, there is likely some very quick and meaningful upside to the cheaper names should there be any better earnings news over the next few months.   We have written recently on the aluminum market, and AA is a good example of a very beaten down stock at an extreme low valuation that could appreciate dramatically if the revisions trend turns.



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