Wednesday, October 31, 2007

Arch Coal leads local index higher


The Scout Partners Index of Western Colorado stocks rose along with the market in October, +4.30% versus a +1.59% monthly increase for the widely followed broad market S&P 500 stock index (total return including dividends). The 25 stock index focuses on large companies whose operations have a significant impact in Western Colorado. It includes major Mesa County employers such as Wal-Mart, Halliburton, Kroger (City Market), Exxon Mobil, StarTek, CRH (United Companies), and the Union Pacific Railroad.

Leading the index higher, rising 21.5% in the month, Arch Coal (ACI) ended the month at $41.00. The stock is up +36.5% since the beginning of the year, putting it well ahead of the S&P 500 benchmark index, though it has been a particularly volatile year for the stock.

Doug May, President of Scout Partners, a Grand Junction-based registered investment advisor, noted that, "Arch Coal announced a weaker than expected quarter, only 19 cents per share instead of the 27 cents that Wall Street was expecting, but they tempered that news with a positive outlook for the rest of the year and for 2008, and more importantly with the price of crude oil gaining more than 10% on the month, the outlook for pricing in 2008 looks solid, which should lead to upward estimate revisions."

Qwest (Q) was the worst performer in the index, falling -21.6% in October and the stock is now -14.4% for the year, closing the month at $7.16. The stock is now down more than 30% from its recent high of $10.45 last May.

"It looks like Richard Notebaert got out just in time," May observed, refering to Qwest's former CEO who retired in mid-August. "Revenues were lower, they had to cut the earnings forecast, and any talk of restoring some sort of dividend payout to investors has been set aside until they can get a handle on things," May said.

Scout Partners equal weighted index of Western Colorado Stocks is comprised of 25 stocks that hope to reflect, to some degree, business conditions in Western Colorado. Reflecting the local economy, the index has a large (over 30%) concentration in the energy sector, which tends to drive index performance. The next largest sector concentration is in Industrial stocks, which comprise over 20% of the portfolio. Local stocks are up 13.9% for the year while the overall market has returned +10.9% over the same time period.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.



Tuesday, October 2, 2007

Strange Quarter

Who knew, on the 1st hot day of July, that the mortgage market was on the verge of collapse, highly leveraged hedge funds were going to be forced to dump assets at fire sale prices in a desperate attempt to de-lever, that rumors of a rebound in residential construction would die such a swift death, that thousands of mortgage lenders would soon be out of a job, that Citibank would be writing off over a billion dollars of sub-prime loan exposure at quarter-end, or that Swiss banking giant UBS would be writing off more than $3 billion, or that nearly a half dozen announced and ostensibly already financed leveraged-buyout deals would be cancelled because liquidity in the junk bond market would evaporate in a heartbeat?

And if you had known these events would transpire, who would have guessed that the S&P 500 would rise 1.5% during the quarter?

Had we known these events were on deck, we certainly would not have guessed that our ETF portfolio would be up +4.3% during the tumultuous 3-month period to follow. Had we perfect foresight and known that the Fed’s response would be to cut interest rates, causing the dollar to implode, we might have surmised that our heavy international exposure and commodity oriented investments would benefit from that particular consequence. At least that part makes sense. But how do you explain an up market when the fundamentals are being battered and bruised on a daily basis?

One day in August, the market fell 285 points, only to rebound by 250 points the day after that. It’s a tough way to lose 35 points! To be sure, this year has been rough, but also rewarding. The ETF Scout portfolio is closing in a gain of almost double the market. In spite of such performance, this market has been unnerving to us as it has been to many of you.

Headline news aside, the market continues to climb the proverbial “wall of worry.” Perhaps we ought to be rejoicing each calamity as it unfolds. We are not. Neither, however, are we full of panic. Instead, humbled once again by our inability to precisely predict the future, we are trusting our instruments and letting our investment disciplines guide us.

A limber mindset and a flexible portfolio remain critical elements of investment success.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.




Monday, October 1, 2007

Mesa Labs replaces LaFarge in Index

The Scout Partners Index of Western Colorado Stocks rose along with the market in September, +3.63% versus a +3.74% monthly increase for the widely followed S&P 500 stock index (total return including dividends). The 25 stock index focuses on large companies whose operations have a significant impact in Western Colorado. It includes major Mesa County employers such as Wal-Mart, Halliburton, Kroger (City Markets), Exxon Mobil, StarTek, CRH (United Companies), and the Union Pacific Railroad.


Leading the index higher, rising 14.4% in the month, Arch Coal (ACI) ended the month at $33.74. The stock is up +12.4% since the beginning of the year, putting it slightly ahead of the S&P 500 benchmark index, though it has been a particularly volatile year for the stock. Mesa Air Group (MESA) was again the worst performer in the index, falling -21.3% in September and the stock is now down -48.2% for the year.

“Mesa is experiencing both internal and external problems,” observed Doug May, a Grand Junction-based registered investment advisor, “there are increasing signs that we're heading into a recession, or at least very close to one, and fuel prices are rising, which will boost Mesa's cost structure. In addition to that," May added, "they are in the middle of a lawsuit as a result of a Hawaiian Airlines lawsuit which alleges that Mesa conducted some due diligence on Hawaiian Air in 2006, and then turned around and used that confidential information to go start up their own interisland carrier." Mesa Air Group received an unfavorable ruling in September as the judge determined that evidence that Mesa intentionally destroyed can be used in trial.

Mesa Labs (MLAB) replaced LaFarge in the index. LaFarge applied for a delisting from the New York Stock Exchange but retains its Euronext listing, where 99% of its stock trading takes place. Lakewood, Colorado-based Mesa Labs manufactures and markets electronic instruments and systems for industrial applications and hemodialysis therapy. "Adding Mesa Labs to the index helps bolster representation of the health care sector in the index," May notes, "which is an important contributor to the local economy and one that was under-represented in the index."

Scout Partners equal weighted Index of Western Colorado Stocks is comprised of 25 stocks that hope to reflect, to some degree, business conditions in Western Colorado. Reflecting the local economy, the index has a large (over 30%) concentration in the energy sector, which tends to drive index performance. The next largest sector concentration is in industrial stocks, which comprise over 20% of the portfolio. Local stocks are up +9.16% for the year while the overall market has returned +9.13% over the same time period.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.