Going Back to a More Cautious Stance - Culling Some Laggards

The market has been relentless in its strength; I have to give it major kudos. But at some point there must be some (minor) pullback that lasts more than 3 hours. I guess Apple (AAPL) can go to $200, Google (GOOG) to $700, Research in Motion (RIMM) to $150, VMWare (VMW) to $100 (oops, already there!!), Baidu.com (BIDU)to $400 (wait, I thought that was a 1 year target, not 2 week target). But doesn't valuation come into play at some point? Or can the same 40 stocks lead us each day for 3 more months. Everyone says "we are cool until end of year". When everyone says that it makes me wary. Bears seem to have thrown in the towel; if not intellectually, at least 'stock' wise. Basically right now it is too easy being a bull. Doesn't mean it cannot continue being too easy for weeks more or heck months more. But going into an earnings season where I see (most) domestic based companies warning of slowdowns (versus international companies having the times of their lives) - I wonder if perceptions will at all change. Will lowered guidance by domestic companies matter? If not, then I guess we just plow forward. It's quite a fight, on one hand you have a slowing economy with potential for lower earnings in 2008 and on the other you have the Fed drowning the system in money, along with cash rich companies who can buy back stock hand over fist (basic economics of supply and demand).

In light of this, I reviewed the fund's positions and I decided to winnow out some of the stocks that have underperformed as we enter the heart of earnings season. While feeling some angst about a market that never goes down, you are supposed to let your winners run, so while I have cut back here and there I am trying to keep that credo. I want to keep my long positions around 50 names and am currently at 57. Some of that 'extra' is due to basket trades (i.e. the fund holds 6 infrastructure stocks, instead of holding a larger position in just 2 for example). But if stocks are not performing well in this environment I have to question what is going on. So here are the stocks getting the boot this AM.

1. Western Refining (WNR) - I am exiting this position with a 4% loss. Refiners are not my favorite stocks but they are generally good for a few trades a year as they are very cyclical. My last major buy was recently on September 28th as I built up a position after the stock fell from $55 to $41, or a 25% drop. After my buy the stock continued down to $38 before bouncing back a bit in the past few days as crude prices fell a bit. As I mentioned when I bought the stock I didn't expect an immediate turnaround but at the time I had a much larger cash position than I do now, so I could have more patience. Since then the market as a whole has just continued up, in unabated fashion making the risks of pullback higher, and my cash position has dropped dramatically. So while I think downside is relatively limited, the stock won't see serious improvement until we see a meaningful improvement in the refining margin (click to see chart). Technically the stock is back around its 200 day moving average so a decent spot to get back out right around where I added to the position a few weeks ago.
2. Under Armour (UA) - I am exiting this position for essentially 0% return; it has been a smallish stake at 0.7% of the fund. With same stores sales number coming for retailers tomorrow and my view that except for a handful of names, this is the beginning of a major slowdown, I don't want to be locked into a 'retail' stock with such a high valuation. Under Armour is rarely cheap, and with whispers of a potential in line number due to warmer weather, I don't want to be in a stock priced for perfection in case of an in line number. Again, I did buy this stock recently but I stated I would start slow in the name, and re-assess. Since I have bought, the stock has broken down below its 50 day moving average and not really recovered. This could change in an instant as the stock is hovering right below the 50 day moving average around $60.40, but at this valuation this type of stock needs to hit a home run every quarter. I do think operationally Under Armour (UA) is doing everything right, this is more of a valuation/technical call along with my low cash reserves.
3. Sandisk (SNDK) - I am exiting this position with a 4% loss. Sandisk has surprised me; with the move to flash memory in gadget after gadget I thought Sandisk would really benefit. But with the market making new highs daily, the technical picture for this stock is mediocre at best. This is a stock that has been hovering a bit below and a bit above its 50 day moving average - certainly not outperforming like some of its tech peers. While I could wait for a bounce and probably get an extra $1 in price, the position is not massive as I had been cutting back exposure earlier.
   
4. Shaw Group (SGR) - this is one of my infrastructure stocks. I didn't even realize it had earnings today, but they look like blow out earnings judging from the stock's spike here this AM, up 10%. The position is pretty small and not material enough; I overweighted into McDermott (MDR) and Foster Wheeler (FWLT) and am a lot more familiar with those companies than Shaw Group, so I never bought a huge position; it was simply part of my global infrastructure basket. Looking back, I've never even written a blog entry on this name. So with that said, I am going to cull this position out and learn more and perhaps add into the future if the price retreats. I bought this position in early to mid August in the $50-$51 range. I sold some back at $57, and am selling the rest today at $67. This last sell represents a 33% gain.
5. CME Group (CME) - this is an exchange I really liked, but got impatient with in September and cut back severely. It was down to 0.40% of the fund and now has put on a sizeable run (+14%) which I missed. I am basically exiting with a minor gain; I don't want to chase this name at these prices, and again the position is not pertinent enough to the fund's performance with this small of a stake, so I am just going to exit (and watch it run to $700!)
6. Homex Development (HMX) - I am exiting this position for a 2% gain. Again, not a major piece of the portfolio at 0.6% of the fund, but this Mexican home builder which caters to the lower and middle end has not run with the emerging market bulls. Instead the stock has been flirting with the 50 day moving average, and worse, stuck below the 200 day moving average. Again, the technical picture can change overnight or a positive earnings report can change the complexion instantly but thus far it has not telegraphed strength via the stock performance since my purchase so I am cutting the name, and will look for some direction from the chart in the future (along with earnings). I am unsure if its weak due to US housing or weak due to the fact that Mexico is so tied in with the US economy or if its company specific; whatever the reason the stock is a laggard when emerging markets are booming.

The other candidate I considered cutting was Pride International (PDE); the deep sea drillers have been asleep lately and Pride's chart is looking pretty weak. That said, once the Transocean (RIG) & GlobalSantaFe (GSF) merger completes, this could be a catalyst for the group. I really like Pride's moves of late (ridding of land based drilling in South America and focusing on deep sea) and its potential to be acquired, but the stock has not responded.

With the exit of these 6 stocks, the portfolio is down to 51 long names, and 54 total. Certainly selling anything in this market has seemed to be a losing proposition, but I'd rather mark time for the next 3-4 weeks and re-assess where we stand in early November. With a 5% lead on the indexes I track this fund against, I don't have to performance chase quite so much as most people out there.... so I will be trying to get back to a 10% cash position for most of October, and hope to see some bargains pop up.

Long Pride International, GlobalSantaFe in fund; no personal positions