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John Hussman Top Holdings: Netflix Inc., Aeropostale Inc., Kohl's Corp., Best Buy Co., Bed Bath & Beyond Inc., Cisco Systems Inc.

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(GuruFocus, March 2, 2010) At the end of 2008, when S&P 500 was down 37% for the year, the Hussman Strategic Growth Fund (HSGFX) was down only 9.02%. For a time, Hussman was celebrated as a hero.

Now that 2009 is behind us; for the year, HSFGC was up 4.63%, dwarfed by the S&P 500’s 26.46% recovery. People who poured money into the fund may be having a second thought.

Despite his stated objectives of outperforming the major indices over a complete market cycle (bull and bear markets combined), and despite the fact he indeed outperformed the S&P 500 during the past two years, people who chase after the latest hot fund may never find internal peace.

Truth been told, Hussman’s long/short strategy Mutual Fund works. Since July 24, 2000, HSFGX returned an annual average of 8.19%, beating S&P 500 easily. $10,000 invested in the fund would become $21,000, while the same amount invested in S&P 500 would become $9,000. According to a chart in the newly published Hussman Funds Semi-Annual Report .

2009 In Hindsight

The pale comparison with the market index was caused by the fact that John Hussman maintained fully hedged against market down turn for the year. If you take the hedge away and consider the Stocks Only portfolio, his portfolio would have returned 38.12%.

If only he has not been so persistent in fully hedging his positions most of the time…

Hussman expressed a little bit of regret in the Semi-Annual Report (emphasis mine):
We entered 2009 well aware that historical credit crises have generally included sharp but temporary market recoveries after the initial crash (which are typically followed by fresh losses). In hindsight, I underestimated the extent to which Wall Street would respond to the ebb-and-flow in the economic data – particularly the predictable and temporary lull in the adjustable rate mortgage reset schedule between March and November 2009 – and drive stocks to the point where they are now not only overvalued again, but strikingly dependent on a sustained economic recovery and the achievement and maintenance of record profit margins in the years ahead. Because our primary concern is to achieve long-term returns consistent with prudent risk management, there is no likelihood, even in hindsight, that I would have responded to purely speculative factors with more than a moderate exposure to market fluctuations last year. Still, there was clearly more room to speculate than I had expected, and our defensiveness during the later months of the year proved to be unnecessary, or at least too early.


Such a little regret came after a resolution that, “there is no likelihood, even in hindsight, that I would have responded to purely speculative factors with more than a moderate exposure to market fluctuations last year.” If Hussman changes his approach, he will not be Hussman we ar so used to.

Investment Outlook

And one should not don’t expect Hussman to change his stands much for the new year. He continues to see the U.S. stock market fully valued and he continues to see credit risks.

On the valuation level, while he acknowledges that market is not as expensive as it was at the market peak of 2000, it is as expensive as when it was during the market peaks of years such as 1972 and 1987. Under even generous assumptions that S&P 500 will remain intact despite deleveraging pressure and a continuing collapse in bank lending, Hussman estimate the index is currently priced to deliver annual total returns averaging just 6.1% over the coming decade.

On the credit risk, Hussman observes that the U.S. currently faces a predictable wave of resets on Alt-A and Option-ARM mortgages, of approximately the same size as the the wave of sub-prime rests that ended in early 2009.

Hussman sees inflation risks over the coming decade. There are no signs of serious inflation for now, there are even no inflation in the next couple of years as “fresh credit concerns are likely to create additional “safe haven” demand for default-free government liabilities. But looking beyond, Hussman believes that inflation will be a major event in the latter part of the coming decade, with the consumer price index roughly doubling over the next ten years.

Stock Selections

Hedge as he might, Hussman still has to buy stocks. As of December 31, 2009, he has $5.04 billion worth of stocks dispersed in 113 stocks. This is what he has to say about how he select his stocks:
From a stock-selection perspective, Strategic Growth Fund continues to emphasize companies and industries that exhibit strong stable revenue growth and profit margins, balance sheets generally having low levels of debt, and valuations that we view as favorable based on the long-term stream of cash flows that investors can expect to receive over time. The Fund’s primary sector holdings remain in consumer-related goods, technology, and health care, with a continued avoidance of sectors that rely on credit expansion, such asfinancials and homebuilders.
Well said, Professor! This is exactly what I will do.

Here are the top holdings of his portfolio at the end of 2009:

No. 1: Netflix Inc. (NFLX), Weightings: 3.06% - 2,800,000 Shares

Netflix Inc. is the largest online movie rental subscription service in the United States providing subscribers access to a comprehensive library of more than 18,000 movie, television and other filmed entertainment titles. Netflix Inc. has a market cap of $3.81 billion; its shares were traded at around $69.7 with a P/E ratio of 35 and P/S ratio of 2.3. Netflix Inc. had an annual average earning growth of 81.9% over the past 5 years.

Hussman reduced from 3 million shares to 2.8 million in 4Q09. It is a rebalance action as the stock climbed from $46 to $55 a share during the quarter.

No. 2: Aeropostale Inc. (ARO), Weightings: 3.04% - 4,500,000 Shares

Aeropostale, Inc. is a mall-based, specialty retailer of casual apparel and accessories, principally targeting fourteen to seventeen year-old young women and men. Aeropostale Inc. has a market cap of $2.29 billion; its shares were traded at around $34.6 with a P/E ratio of 11.6 and P/S ratio of 1.2. Aeropostale Inc. had an annual average earning growth of 27.4% over the past 5 years.

Hussman upped his holdings in 4Q09 from 6 million shares to 6.75 million shares.

No. 3: Kohl's Corp. (KSS), Weightings: 2.94% - 2,750,000 Shares

Kohl's Corporation operates specialty department stores primarily in the Midwest, Mid-Atlantic and Northeast areas of the United States. Kohl's Corp. has a market cap of $16.54 billion; its shares were traded at around $53.94 with a P/E ratio of 16.7 and P/S ratio of 1. Kohl's Corp. had an annual average earning growth of 21% over the past 10 years. GuruFocus rated Kohl's Corp. the business predictability rank of 4-star.

Hussman increased his holdings slightly in 4Q09 from 2.5 million shares to 2.75 million shares.

No. 4: Best Buy Co. Inc. (BBY), Weightings: 2.94% - 3,750,000 Shares

Best Buy selles personal computers and other home office products, consumer electronics, entertainment software, major appliances and related accessories principally through its retail stores. Best Buy Co. Inc. has a market cap of $15.38 billion; its shares were traded at around $36.8 with a P/E ratio of 12.6 and P/S ratio of 0.3. The dividend yield of Best Buy Co. Inc. stocks is 1.5%. Best Buy Co. Inc. had an annual average earning growth of 24% over the past 10 years. GuruFocus rated Best Buy Co. Inc. the business predictability rank of 5-star.

Hussman reduced his holdings in BBY in 4Q09 from 4 million shares to 3.75 million shares.

No. 5: Bed Bath & Beyond Inc. (BBBY), Weightings: 2.88% - 3,750,000 Shares

Bed Bath & Beyond is a nationwide operator selling predominantly better quality domestics merchandise and home furnishings typically found in better department stores. Bed Bath & Beyond Inc. has a market cap of $10.94 billion; its shares were traded at around $41.75 with a P/E ratio of 21 and P/S ratio of 1.5. Bed Bath & Beyond Inc. had an annual average earning growth of 24.1% over the past 10 years. GuruFocus rated Bed Bath & Beyond Inc. the business predictability rank of 3-star.

Hussman almost doubled his holdings in BBBY in 4Q09 from 2 million shares to 3.75 million shares.

No. 6: Cisco Systems Inc. (CSCO), Weightings: 2.85% - 6,000,000 Shares

Cisco Systems, Inc. is the worldwide leader in networking for the Internet. Cisco Systems Inc. has a market cap of $141.51 billion; its shares were traded at around $24.6 with a P/E ratio of 21.4 and P/S ratio of 3.9. Cisco Systems Inc. had an annual average earning growth of 17.1% over the past 10 years. GuruFocus rated Cisco Systems Inc. the business predictability rank of 3.5-star.

Hussman cut his holdings in CSCO from 7.5 million shares to 6 million shares.

Conclusion

On the long side, Hussman found value in consumer services and technology.

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