Companies Demonstrating Expanding ROIC Tend to Surprise to the Upside

Model Portfolio Daily Update:  January 27, 2011

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As we have noted before, over the last few months it has been a better for hedged strategies to short index futures instead of individual stocks, because many relatively unattractive stocks (fundamentally speaking) are increasingly surprising to the upside as the economic backdrop improves against already depressed valuations and fundamentals.

Of Note:
The 25 stocks in our long models have in total for the month to date experienced at least 45 major positive upgrades from the sell side upgrades that we are aware of.

Today, our models experienced four positive revisions:
TRW Automotive (TRW) was upgraded to Buy from Neutral by Goldman Sachs, which also raised its price target to $77 from $60, based on valuation, above average growth, and low expectations according to TheFlyOnTheWall.com.
RPC, Inc. (RES) was upgraded to Buy from Hold by Gabelli.
East West Bancorp (EWBC) had its price target raised to $26 from $22 by Cantor Fitzgerald.  United Continental Holdings (UAL) was upgraded to Buy from Hold at Dahlman Rose.

By consistently buying and holding stocks that demonstrate historical and likely ongoing improvements in returns on capital that are trading a decent relative value, investors are maximizing their chances of being “surprised” to the upside and are equipping themselves to better ignore the incessant noise that comprises financial news stories and seemingly random price action.  UAL is a recent good example of this, having declined nearly 14% last month and risen by almost as much this month.  Nothing significant has changed with its relative standings in our rankings.  Through today at least, it remains a fundamentally solid improving company with relative value.

Avnet Inc. (AVT) reported solid quarterly results after the close today, beating in all key metrics.  Revenue guidance for its next fiscal quarter ended March 2011 is now $5.95-6.55b versus current consensus of $6.198b and EPS guidance is $0.93-1.01 versus consensus of $0.94.  As of today, it seems like AVT will remain a highly ranked stock in the Technology sector.

About this report
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”).  For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live.  See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.