“This, for us, is a critical requirement for investors, because there are dozens of garbage models that purport to measure stock market valuation, but have little (and sometimes zero or negative) correlation with subsequent market performance.”
The fund’s stated goal is to “achieve long term capital appreciation, with added emphasis on the protection of capital during unfavorable market conditions”. Their strategy in equity selection lies in favorable valuations and market action. Like most value investors, Hussman utilizes a “bottoms up” approach to security selection, utilizing measurable metrics such as discounted cash flow, P/E and P/S ratios to value companies. To minimize risk, the most favorable equities in the firm typically comprises no more then 2%, with most equities ranging between .5 to 1% of the composite portfolio. In addition, the fund analyzes the behavior of equities and stock indices in terms of trading prices and volume to confirm or reject their valuation findings. As reflected in the background of Dr.Hussman, the fund utilizes options and futures to hedge their risk in deteriorating economic condition, and to magnify their gains in expansionary conditions.
As a result of their investment philosophies, Hussman Econometrics reported a cumulative return of 74.1% vs. the benchmark S&P 500’s 16.4% for the last 10 years. On an annualized basis, the fund has an average return of 6.56% vs. the S&P’s .94%. However, Hussman’s funds unperformed the S&P by 18.7% and 21.9% respectively in 2010 and 2009. In addition, 6 of their years since inception underperformed the benchmark.
“We are close to the point where investors can ensure themselves maximum damage by shifting away from a defensive stance and buying the market, in hopes of reaching for return in an already richly valued and overextended advance.”
Looking forward, Dr. Hussman stated that “Overall, we view the stock market as strenuously overvalued, with the likelihood of poor long-term returns in the area of about 3.5-4% over the coming decade.” As a result, Dr. Hussman stated that they will maintain their holding of index put options to hedge against what they feel is an impending correction. Dr.Hussman argues that though there is great potential for upside, they will maintain their safety nets to preserve their capital.
Hussman’s portfolio composition can be seen in the following tables. As demonstrated by the data, most of the portfolio is concentrated into the technologies, consumer services, and health care sectors. Technology saw a modest gain of 1.90%, whole consumer services and health care fell by 6.20% and 3.10% respectively. Holdings in the financials, basic material, and the oil & gas sectors saw modest increases, with the largest in basic materials at 3.20%.
Overall Portfolio Composition
Oil & Gas
Hussman Econometric Advisors has $5.9 billion in assets under management in 190 equities. As seen in the following tables, 12.53% of their portfolio is concentrated into the following five equities. 3 of the following equities, HUM / PNRA / LIFE, operate in the health care industry, the largest sector concentration of the fund.
Top Five Holdings for Q1
Total Value of Portfolio
Humana Inc (NYSE:HUM)
Humana is a health and supplemental benefits company providing services through two primary segments: Government and Commercial. Their shares currently trade at $78.97, with a market capitalization of $13.32 billion. Hussman paid an average of $34.86 per share, representing a potential capital gain of 133%. Humana is the largest holding of Hussman Econometrics, comprising 2.92% of the composite portfolio. Humana’s overall position was reduced by 16.67% from Q4 of 2010 to Q1 2011.
Humana has a P/E ratio of 11.59, a P/B ratio of 1.91, and a P/S ratio of .39. Their current dividend yield is 1.27%, with earnings at $6.81 for their fiscal year ending in 2010. Their revenues for the year were $33 billion, with a bottom line profit at $1.099 billion, a margin of 3.25%. Humana’s overall growth over the last 10 years has been largely positive, growing revenues and earnings annually by 15.6% and 29.3% respectively.
Humana received positive coverage from analysts at Oppenheimer, Jefferies, and Barclay’s capital, with price targets at $83, $90, and $85 respectively. In addition, Humana issued guidance of $6.70-$6.90 per share for the fiscal year of 2011.
GuruFocus rated HUM with the business predictability rank of 4 stars.
AstraZeneca PLC. (NYSE:AZN)
AstraZeneca is an international biopharmaceutical company providing medicines and services through six areas of human physiology: cardiovascular, gastrointestinal, infection, neuroscience, oncology, respiratory and inflammation. Their shares currently trade at $51.95, with a market capitalization of $71.91 billion. Hussman Econometrics paid an average of $42.13 per share, a potential capital gain of 23.3%. AstraZeneca is the second largest holding of Hussman, comprising 2.89% of the overall portfolio.
AstraZeneca has a P/E ratio of 9.31, a P/B ratio of 3.16, and a P/S ratio of 2.17. Their current dividend yield is 5.79% with reported earnings at $5.56 for the year. Their profit margin was 24.29% on revenues totaling $33.26 billion. For the last 10 years, AstraZeneca has grown its revenues and earnings annually by 12% and 21.3%.
AstraZeneca recently terminated the development of a diabetes drug in conjunction with the British BTG group. In terms of operations, AstraZeneca issued earning guidance between $6.95-$7.25 per share for the fiscal year of 2011.
GuruFocus rated AZN with the business predictability rank of 4.5 stars.
The Panera Bread Company (NASDAQ:PNRA)
The Panera Bread Company is a national bakery operating through their bakery, franchise and product operations. Panera currently trades at $123.31, with a market capitalization of $3.74 billion. Panera’s average cost in the portfolio is $48 per share, a potential capital gain of 158%. PNRA is the third largest holding of Hussman Econometrics, making up 2.65% of the overall portfolio.
PNRA has a P/E ratio of 31.88, a P/B ratio of 6.31, and a P/S ratio of 2.44. Their most recent earnings for the year were $3.85. Panera reported a net income of $111 million, on sales of $1.5 billion, yielding a margin of 7.23%. Historically, the Panera Bread Company has grown its revenues and earnings annually by 25% and 21.7%.
Panera Bread recently reported same-store sales increasing by 3.3%, with franchise-owned stores increasing sales by 3.4%. In the same quarter, Panera opened and franchised 18 cafes, increasing the total number of storefronts in operation to 1,467. They projected earnings in the range of 4.40-4.47 for the fiscal year of 2011.
GuruFocus rated PNRA with the business predictability rank of 4 stars.
Aeropostale markets and sells casual apparel and accessories through their storefront properties, with their target segment on young adults. Aeropostale trades at $21.30 with a market capitalization of $1.74 billion. The average cost of Aeropostale is $17.39 per share, representing a potential capital gain of 22.4%. Aeropostale’s holdings were reduced by 1.45% quarter to quarter.
Aeropostale has a P/E ratio of 8.5, a P/B ratio of 4.25, and a P/S ratio of .73. Aeropostale reported earnings of $2.51 for their most recent fiscal year. Their revenues totaled in at $2.4 billion, with a profit margin of 9.64%. On an annual basis, over the last 10 years, Aeropostale has grown its revenue and earnings by 25% and 31.7%.
Aeropostale reported a 7% decline in same store sales for Q1 of 2011, compared to the 8% growth in Q1 2010. Nomura securities placed a “neutral” rating on Aeropostale, with a price target at $22, a capital gain of 26.5%.
Life Technologies Corporation (NASDAQ:LIFE)
Life Technologies is a global life sciences company that develops systems, reagents, instruments, and software for their clients. Other services include sample preparation, genomics research and next generation sequencing. Their shares currently trade at $55.71 with a market capitalization of $9.94 billion. Life Technologies holdings were reduced by 25.64% from Q4 to Q1 of 2011.
Life Technologies has a P/E ratio of 27.66, a P/B ratio of 2.32, and a P/S ratio of 2.81. Their revenues for the year were reported at $3.58 billion, with the bottom line income at $377 million, yielding a 10.53% margin. Life Technologies has grown its revenues by 15.2% annually for the last 10 years.
Life Technologies recently entered into a contract with Epigenomics to supply them with buffers and Dynabeads for their proColon 2.0 products. JPM Morgan chase recently placed an “overweight” rating on LIFE, with a target of $65, a potential capital gain of 16.6% from the current trading price.
GuruFocus rated LIFE with the business predictability rank of 3 stars.
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