Can we choose just one stock?

We recently received a request from a website (whose interest is focused on the stock market) to provide them with our latest ideas as to what would be the one stock we would buy if we had to be in that all-or-nothing category.  However, we are simply not willing to do that.  We are strictly and obsessively a top-down portfolio manager.  We love our stocks when we choose them, but in general, we are very well diversified, and our stock selection is based on a quantitative process that selects the best stocks according to their ability to outperform their peers in earnings quality and momentum over the past few years, while at the same time, performing with a better trend of realtive strength.  It is a very complicated and detailed procedure.

So from the hundreds of candidates, when we finally choose that one stock for purchase, WE LOVE THAT STOCK!  But we only LOVE it enough to buy a 2-3% position in our portfolios.  And if that stock appreciates 50% more than the market, and also moves up to a 4% postion in our portfolio, we prune 20% of that position.  This is an outstanding discipline that keeps us (and you) from being too dependent on just one over-weighted position.  So, you can see why we are big believers in our DISCIPLINES and not just any one stock.

But if we had a portfolio that was not large enough to hold 30 stocks, we would most definitely choose one ETF, and that would be MDY, which is the SPDR S&P MidCap 400 ETF.  You can see why we would choose this ETF in the comparative chart below.

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The S&P 400 held its own (with the hot S&P 500) during those 1999-2001 HOT and COLD markets, and in the subsequent period, it has certainly proven to be the "market" of choice.   However, you can see how the S&P 400 has been performing in the last few months in the following chart.

Click to view larger image.

While the long-term view looks impressive, the S&P 400 has seen very little progress since it's prior high in February of this year.  But thankfully, we don't have to choose just one stock or one index. 

To view today's complete Market Comment, click here.

Don Hays

Please see important disclosures at the bottom of this page.