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Hussman Top Stocks: Aeropostale Inc., Netflix Inc., Life Technology Corporation, Panera Bread Company, Microsoft Corp., Humana Inc.

Saj Karsan

guruek

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John Hussman, president of Hussman Econometrics Advisors has an outstanding track record. His bond fund, Hussman Strategic Total Return, beats 99% of his peers in the past 5 years. Throughout April 30, 2010, his stock fund, Hussman Strategic Grown Fund, returned -4.74, -0.89, 1.27, and 7.84% respectively for the past 1, 3, 5, and since inception of July, 2000.

Performance

The stock fund outperformed the S&P 500 index benchmark by a large margin. $10,000 invested in the fund would have roughly doubled in the 10 years.



Year-by-Year performance of the stock is as follows:

Performance of Hussman Strategic Growth Fund

YearReturn (%)S&P500 (%)Excess Gain (%)
20094.6326.5-21.9
2008-9.02-3728.0
20074.165.61-1.5
20063.5115.79-12.3
20055.714.910.8
20045.1612-6.8
200321.0828.7-7.6
200214.02-22.136.1
200114.67-11.926.6
200016.4-9.125.5


Much of his outperformance came when the overall market tanked: whenever the S&P500 returned negatively for the year, Hussman would beat the market handily. Whenever the broad market had a decent year, Hussman would actually underperform the market. But overall, he smoothes out the turbulent market returns and made his investors some serious money during a decade in which the broad market had a negative return.

Hedging

The contrarian behavior of the fund stems from the fact that Hussman employs hedging techniques. Most time during the past decade, Hussman put a substantial portion of his portfolio under hedge. Hussman achieved his hedging by using options on market indices. As of December 31, 2009, the last time Hussman discloses such information in the Semi Annual report, his option positions included:



In total he used 2.3% of his asset to achieve full hedge of his portfolio. Despite the cost of the time-value loss of these options, Hussman’s hedging strategy has brought him positive return over the past ten years.

Mind you, though, Hussman does trade in and out the option positions, so do not treat the task of hedging as trivia. To enjoy the benefit of his hedging strategy, you are better served by investing in his fund directly.

Current Market Outlook

No doubt, Hussman is very bearish towards the stock market right now. He publishes a market commentary each week, and this is his assessment of the market for this week that was published on May 24, 2010:
As of last week, the Market Climate for stocks was characterized by unfavorable valuations and unfavorable market action. We also observed a leadership reversal last week, coupled with lopsided negative breadth, which as noted above tends to be associated with unusually hostile market outcomes. The Strategic Growth Fund is fully hedged here.


Even the recent market slump did not deter his bearish view towards the market valuation level. As for a possible market rebound, Hussman said, based on his statistics, do not count on a positive return after the recent decline. This is from the same May 24 commentary
of the 3257 issues traded on the NYSE last week, 2955 declined and just 275 advanced. The S&P 500 has now abruptly erased nearly 8 months of progress. Moreover, we observed a "leadership reversal" with new 52-week lows flipping above the number of new 52-week highs. Our broader measures of market action deteriorated to a negative position as well. Historically, we can identify 19 instances in the past 50 years where the weekly data featured broadly negative internals, coupled with at least 3-to-1 negative breadth, and a leadership reversal. On average, the S&P 500 lost another 7% within the next 12 weeks (based on weekly closing data), widening to an average loss of nearly 20% within the next 12 months - often substantially more when the Aunt Minnie occurred with rich valuations and elevated bullish sentiment.


Yesterday (May 27, 2010), John Hussman talked with Bloomberg's Julie Hyman about risk facing the U.S. stock market. In the interview, Hussman advised investors to take some profit during the market climbing in the near future.



(Source: Bloomberg)


Top Holdings:

When the market valuation and internals are against his ideal world, like they are now, Hussman would hedge his stock portfolio fully and depends on the outperformance of the stocks over the broad market to deliver positive returns. The strategy makes selecting the right stocks very crucial.

As of March 31, 2010, According to GuruFocus data, Hussman owns 137 stocks that worth $5.67 billion. They are allocate in this sectors:

Industry2009-12-312010-03-31
+Technology30.3%24.6%
+Financials0.5%0.5%
+Utilities0.9%0.8%
+Consumer+Services39.8%29.4%
+Health+Care11.4%23.6%
+Consumer+Goods4.8%10%
+Industrials3.2%2.9%
+Basic+Materials0.8%0.7%
Oil+%26+Gas5.3%6.2%


Consumer services, Technology, Health Care are the top three sectors. He tends to diversify among the individual names, a 2% weighting is a large position. Here are the top holdings:

No. 1: Aeropostale Inc. (ARO), Weightings: 2.95% - 5,802,500 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 $2.61 billion; its shares were traded at around $27.74 with a P/E ratio of 11.2 and P/S ratio of 1.1. Aeropostale Inc. had an annual average earning growth of 32.5% over the past 10 years.

Hussman held this stock for a long time. He sold some shares of this stock. See the history:



No. 2: Netflix Inc. (NFLX), Weightings: 2.77% - 2,129,000 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 $5.83 billion; its shares were traded at around $108.86 with a P/E ratio of 49.2 and P/S ratio of 3.5.

Hussman made some good money on this stock. He rode the stock to the recent highs, but I 1Q10 he sold a good percentage of the stock. Click here to access Hussman’s full holding history of this stock.

No. 3: LIFE TECHNOLOGIES CORPORATION (LIFE), Weightings: 2.77% - 3,000,000 Shares

Life Technologies Corporation is a global biotechnology tools company. Life Technologies Corporation has a market cap of $9.1 billion; its shares were traded at around $50.23 with a P/E ratio of 15.8 and P/S ratio of 2.8. Life Technologies Corporation had an annual average earning growth of 20.5% over the past 10 years.

Hussman increased the stock dramatically in 1Q10. Click here to access Hussman’s full holding history of this stock.

No. 4: Panera Bread Company (PNRA), Weightings: 2.6% - 1,930,000 Shares

Panera Bread Company operates a retail bakery-cafe business and franchising business under the concept names Panera Bread Company and Saint Louis Bread Company. Panera Bread Company has a market cap of $2.57 billion; its shares were traded at around $80.67 with a P/E ratio of 26.2 and P/S ratio of 1.9. Panera Bread Company had an annual average earning growth of 26.3% over the past 10 years. GuruFocus rated Panera Bread Company the business predictability rank of 4-star.

Hussman sold a small position in this stock in 1Q10. Click here to access Hussman’s full holding history of this stock.

No. 5: Microsoft Corp. (MSFT), Weightings: 2.58% - 5,000,000 Shares

Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft Corp. has a market cap of $228.03 billion; its shares were traded at around $26 with a P/E ratio of 13.4 and P/S ratio of 3.8. The dividend yield of Microsoft Corp. stocks is 2%.

Hussman more than doubled his holding in this technology giant. Click here to access Hussman’s full holding history of this stock.

No. 6: Humana Inc. (HUM), Weightings: 2.48% - 3,000,000 Shares

Humana, Inc. is a health services company that facilitates the delivery of health care services through networks of providers to its medical members. Humana Inc. has a market cap of $7.78 billion; its shares were traded at around $45.71 with a P/E ratio of 7.5 and P/S ratio of 0.3. Humana Inc. had an annual average earning growth of 23.5% over the past 10 years. GuruFocus rated Humana Inc. the business predictability rank of 3.5-star.

Hussman added position to this stock. Click here to access Hussman’s full holding history of this stock.

Conclusion

Bearish John Hussman likes Consumer Services, Technology, and Health Care companies. He is fully hedged against market down-turns and he expects these sectors will deliver above average returns.

GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and John Hussman for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.





About the author:

guruek
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, and an undergraduate engineering degree from McGill University.

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