I believe in the themes covered in the previous “Themes” post. However, I’m realizing that finding companies to take advantage of those themes is hard.
That is the problem with top-down investing. So many factors are involved in a company’s profitability. I might short Vitamin Shoppe based on its participation in an overall theme (the death of brick and mortar retailers). But there might suddenly be a vitamin craze, then VS makes enough money to completely revamp what they’re doing. Or they might get bought out.
I’d have to short a basket of stocks to get away from idiosyncrasies. Unfortunately, my portfolio is a little too small – the time involved in finding an entire basket of companies to represent at best 20% of my portfolio (the % I’d put into this theme) is probably not worth it.
So I’ll probably continue to work bottom-up.
Unrelatedly, I realized my screen isn’t all that great for at least two classes of stocks:
- defense stocks: I pulled up both RTN and NOC. Highly dependent on defense contracts, which to some extent are known in 2011.
- banks: With the interest coverage requirement, I cut out all sorts of strong banks like HCBK. For a regular business, I want to make sure they can pay their bond coupons, but I think that banks have a huge interest expense component which reflects their deposits and is really just a cost of business.