2002: Trying to Keep the Powder Dry

The S&P 500 index posted its third year of declines by losing -22.1%.  The S&P 500 index's tech and teleco rallied in the 4Q; they were down -36% and -35% for the year.  Utilities dropped -33% as non-regulated subsidaries stumbled badly.  Industrial, consumer, discretionary, and healthcare sectors were all down over -20%.  The bright spot?  That was the consumer staples sector, down only -6.7%.  All returns are after dividends.

It was very much a year of trying to keep the powder dry by avoiding disasters.  The slowing economy hurt our economically sensitive holdings: Waste Management, Carpenter Technology, etc.  Others, like Laboratory Corp., fell when the market reassessed their growth plans.  Our best decision for the year was to buy significant positions in higher yielding, preferred issues.  (The possible elimination of dividend taxation will give this strategy a boost.)  Our worst decision was to buy the utilities too early.  While those we purchased were easily down -50% from their highs, we underestimated the severity of the liquidity problems in the non-regulated subsidaries and saw the stocks go lower still.  The companies are taking steps to improve their cash flows by rightly selling non-critical assets and lowering their dividends.  We believe they will weather the storm, company liquidity will grow, and the stocks will advance from here.  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:

We do not believe in timing the market; i.e., we do not switch clients in and out of cash trying to anticipate the market's short term moves. Instead, Gold Leaf continues to search for undervalued companies with sustainable competitive advantages and free cash flows that generate long term value for our clients.