Market Shadows: Virtual Value Portfolio Update

Virtual Value Portfolio Updates:  Jan. 26, 2013

Courtesy of Paul Price of Market Shadows

Our stocks (in our Virtual Value Portfolio) continued their rise since our portfolio’s inception date last October 26th.  We got positive mentions on Express Scripts (ESRX), Mosaic (MOS) and Kohl’s (KSS) during Barron’s Roundtable (parts one and two). All three remain quite undervalued although the latter pair rose in price late last week.

(Click on charts to enlarge)

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(MOS, KSS and COH charts via Yahoo) 

Our worst performer was Coach (COH) which reported less than expected earnings last week. The shares had moved up above $61 before dropping $10 on the news. It rebounded a bit late but closed Friday at $51.38. I was an enthusiastic buyer on the dip with an ultimate target of $70 or above.

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The new issue of Bloomberg Businessweek discussed the migration of unregulated ‘swaps’ into exchange-traded options and futures. This is very good news for portfolio holding Intercontinental Exchange (ICE). 

Another of our virtual holdings, Lab Corp (LH), was also mentioned in Barron’s (subscription required). LH dropped in sympathy with a decline in revenue from Quest Diagnostics (DGX).

“Those results play to investor fear that the sluggish economy will permanently damage this group, despite its normally defensive attributes. The gloom spilled over to the No. 2 in the industry, Laboratory Corp. of America (LH), which fell 2% after the Quest news, finishing the week at $88.66. Earlier this month, Standard & Poor’s downgraded its rating of Lab Corp by one notch to a still-investment-grade BBB, attributing it to the company’s “more aggressive” financial policy.

“Lab Corp shares have been on the outs for some time, off 12% from their 2011 high of $100 set May 19, 2011. Over the same period the S&P 500 index is up 12%.

“Despite the fact that the health-care sector is considered to be defensive during economic retrenchment, much of Lab Corp’s underperformance comes both on the nation’s economic sluggishness and on uncertainty last year over the Obama health care plan.”

According to Barron’s, Mark Boyar, chairman of Boyar’s Intrinsic Value Research suggested that LH’s performance is levered to employment. People forego visits to the doctor when they’re feeling poor, and Medicare and Medicaid reimbursements also go down. However, Medicare and Medicaid are only about 20% of Lab Corp sales, and Lab Corp is one of the lowest-cost medical testing providers. Boyar thinks its fair value price is about $137, making LH a good opportunity now. Moreover, he expects the number of Americans covered by insurance to increase, and notes that America’s population is aging. “‘That means more lab tests for Lab Corp to do'” he said. 

We’ll be taking one moderate gain this week. I’m going to sell Dolby Labs (DLB) which closed at $31.32 last Friday. Our cost was $30.83, and we received a $4 per share special dividend in December. I’ll be using the proceeds to purchase 81 shares of Coca-Cola (KO) at $36.97 or better when trading resumes on Monday. (Why do I like Coke? ~ It’s the Real Thing for Defensive Growth.)

Current Snapshot of Virtual Value Portfolio:

Virtual Value Portfolio as of Jan. 26, 2013 (1)




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