Gravity Paid A Visit

Gravity paid a visit to 4th Q equity markets.  Suddenly, earnings mattered.  Earnings shortfalls really mattered, and the idea that tech infrastructure spending might be cyclical finally mattered.  Unfortunately, the S&P 500 index's teleco and tech sectors were down -19% and -32% respectively for the Q.  Simultaneously, investor sentiment changed.  Money rotated to healthcare stocks (which were aided by a Bush victory).  And taking their cues from a rallying bond market, financial and utility stocks continued to gain, up respectively +29% and a huge +66% for the year.  Growth stocks faltered, and value stocks gained.  All returns are after dividends.

Gold Leaf is a lower risk investment firm that buys stocks when they are out of favor at lower multiples. On December 31st, portfolio attributes were:

Waste Management was up +59% during the Q and is now our largest holding.  Philip Morris was +51% for the Q and +100% for the year.  Even beaten down Hercules and Campbells Soup were each up +35% for the Q.  With the exception of Summit Bancorp, most of our largest holdings still have a ways to go; we do not expect imminent sales.  Financials, capital goods, and the basic materials sector are our largest weightings.  All returns are after dividends.

We made three trades during the Q.  At an average cost of $16.44, we bought 1st Source Corp. (SRCE) and Indiana based bank.  Along with the other banks, SRCE had suffered from net interest margin compression and a fear of bad loans.  Yet the bank was well reserved (187% allowance for loans at 3Q) and lent to smaller (more conservative) Midwest entities.  The stock was down from $28 and was trading at 8.3X a 2001 EPS estimate of $2.00.  The price/book of 1.3X was a little more than half the recent acquisition prices of 2.4X book value.  We sold Foster Wheeler and Polariod on declining fundamentals.  Gold Leaf continues to search for undervalued companies with sustainable competitive advantages and free cash flows that generate long term value for our clients.  All returns are after dividends.