I was talking with a group of traders and investors the other night and one trader type snarkily mentioned that the deep value stuff f I was always preaching was not working very well right now. Had this been an in person conversation I may have given Captain Obvious the disdainful back of my hand with the patented Melvin reverse face slap. It is no secret that some well-known deep value types are getting hit pretty hard. Jereon Bos of the Church Street Deep Value fund is down about 17% over the past year. Aegis Value is down 22% over the past year. Our deep value portfolio is down a little over 4% in the past 12 months. I am doing a little better because I am ridiculously stubborn about position weighting and am carrying a ton of cash because of a lack of opportunities. It is nothing I haven’t seen before and truthfully I am not all that concerned. Periods of underperformance are followed by outperformance as surely as night follows day. One big market correction and deep value will be wildly profitable once again. It is a patience game.

Let’s talk about what is working right now. Our international portfolio is running neck and neck with the S&P 500 in spite of a huge cash position of more than 40%. Japan, shipping and Eurozone banks have been driving strong performance and over powering the drag of Brazil and mining stocks in the portfolio. I just wish we would get a shock to the system so I could load up on all those European and Asian holding company stocks that are almost cheap enough. These things are compounding machines and if you can buy them right they can build wealth at a very respectable pace over time. Maybe FIFA problems will depress traders so much they sink the markets for a few days.

Value income featuring companies with high yields trading below asset values and dividend growth stocks bought at low multiples of assets, EBIT or both are also doing well. In fact that portfolio of cheap dividend stocks is beating the market by more than 2 to 1 so far in 2015. The portfolio throws over a better that 7% income stream so you do get paid well to wait for these stocks to improve in price over time!

Of course bank stock are working well. Today we had our fourth takeover over the year with Naugatuck Valley Financial Corporation being taken over at a price that gives us about a 50% gain. Between our bonus pick ridiculously small bank stocks and the regular community bank portfolio we have had 4 takeovers with an average gain right around 50%. Year to date and over the past 12 months the bank stock portfolio is beating the market and the bonus picks are crushing it. Over the past year we have closed out a whopping six positions with an average gain of over 50%. Small bank stocks are working very well and I expect them to continue to do so.

As I have said on numerous occasions in the past there is no way of knowing what the economy and the stock market will do in the future. However if you look at our buy lists across the portfolios we are well positioned for whatever happens in the future. In Deep Value we own real estate related companies, energy concerns, net-net stocks and lots of cash. In the international portfolio we have some exposure to energy, European holding companies and shipping stocks along with again, lots of cash. The income portfolio is doing exactly what it was designed to do- throw off lots of income and grow a little. The little banks are on fire and we are pretty well fully invested in that portfolio. If markets keep going higher dep value will lag, Europe will outperform thanks to the wave if quantitative easing they are experiencing and banks will keep moving higher as the M&A wave continues to build.

If we get a correction it will be party time. Deep Value will hold up better than the market and will be able to buy some bargains once again. Banks will hold up well and we may even be able to put some higher quality banks with high return on equity to the mix and some of our highly illiquid stocks my see drops that trigger our long standing buy orders. Moving some of the income portfolio around to pick up accidently high yielders will improve the total return potential without sacrificing income. Thinking about markets in terms of years and not weeks or months and investing becomes much more of a win-win situation and that’s where we are now.

My final thought for the day is if you aren’t in community banks, why aren’t you? It is the hot spot right now and will continue to be so. Sign up here please. If you are already deep value subscriber contact me by email to add the bank letter to your value mix

Have a great weekend everyone

Tim

Song of the week: When it comes to community bank stocks I am

https://www.youtube.com/watch?v=7UAWVM5aMUw&list=PL8F6B0753B2CCA128&index=119