If You Build It, (He) It Will Come

Written by GSCR Staff   
Monday, 22 July 2013 23:06

We went with the apropos baseball theme for this week’s The Goldman Guide, as baseball is past the All-Star break and the race for the post-season heats up in the height of the summer months.  Coincidentally, 2Q earnings season gets some motion as well into the otherwise slow summer market.  The announcements create great short-term trading opportunities for the satellite portion of any portfolio.

For those of you who don’t know, the title of today’s Market Monitor is a well known line from the baseball movie Field of Dreams, starring Kevin Costner.  It is a great story in which the overall plot focuses on father and son relationships combined with a supernatural entry into a nostalgic era of baseball from the 1910’s, 20’s, and 30’s. It is a must rent if you have not seen it.  This is easily my favorite baseball movie of all time, even though there have been many great ones over the years from Pride of the Yankees, to comedies like Bull Durham (also starring Costner) and Major League.

So why do I bring this up?  Yesterday, McDonald’s (NYSE – MCD) missed on earnings and lowered its forecast for the rest of 2013 from a revenue and earnings perspective.  The stock got hammered.  Many of us, including myself, have at least a memorable story or emotional ties that center around a meal at the iconic food chain.  I can think of 2 or 3 from my own life.  Just like many people have emotional ties to baseball or baseball movies, they have similar emotional connections and familiarity to companies like McDonalds, General Motors (NYSE - GM), or Apple (NASDAQ – AAPL).

Too many times retail investors will use these ties when buying stocks.  They have a high degree of familiarity and a soft spot for the company so it must be a good stock, right?  The old axiom that a good company does not always equal a good stock is definitely in play for some of the major large cap stocks.

In the past we have mentioned the core/satellite approach to investing.  This approach is for us Harry Markowitz disciples, who believe that over the long term the market cannot be beat.  In simplest terms, one builds a portfolio with two sides, depending on your appetite for risk, in a core or and satellite design. In equity terms, the core can be built with passive mutual funds or ETF-based indexes like the Dow or S&P, and the satellite represents shorter term, high risk and high reward stocks, like small caps.

One of the advantages of this approach versus building a portfolio of large cap stocks, like McDonalds for instance is that it can take the emotion out of investing and trading.  The core portion is just the market, and more than likely the satellite portion are companies you have never heard of before.  If you build the portfolio correctly you can realize the market return plus any alpha you get with home run satellite stocks.

Since our premise is about maximizing returns, and the Guide highlighted baseball, we thought we should refer to The 30-30 Report results again.  We celebrated the one year anniversary of the 30-30 in May.  Over that time we picked 34 stocks, and 22 reached our 30% gain benchmark.  That’s a batting average of 0.647, twice as good as any of the all time greats like Cobb, Williams, or Rose.  Additionally, the overall return for all 34 picks was nearly 42% versus the just over 28% return of the Russell 2000 Index over the same time, something to think about when building your portfolio.

Have a great day.

Aaron Schweitzer, Vice-President

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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