Wall Street sealed the month of May with yet another advance. Friday’s gains gave the major market indexes their third straight monthly gain and longest winning streak since October 2007. The Dow was up 4.1% for May, the S&P 500 index was up 5.3%, and the Nasdaq gained 3.3%.
The ValueHuntr Portfolio gained 89% for the month of May, thanks to a whopping 835% surge of Vanda Pharmaceuticals (VNDA). Kevin Tang, a VNDA shareholder, had proposed liquidating the business and returning the cash to shareholders. At the time of our purchase, VNDA’s net cash value was nearly 100% above market value. FDA approval of VNDA’s Fanapt drug to treat schizophrenia prompted investor Kevin Tang to withdraw its proxy to liquidate the business.
When VNDA is excluded from our portfolio, May returns are a more reasonable 6.5%, still outperforming the S&P500 by over 100 bps.
Our Portfolio Management Method
We select stocks which are undervalued and with a catalyst in place. However, as a group, our stocks are managed based on their price advances relative to intrinsic value using CAVM, a model we have developed as an alternative to the CAPM model used by analysts and professors today. CAVM allows us to account for risk by defining it as the probability of loss rather than as volatility.To read more about CAVM, see our explanation here
According to CAVM, our portfolio’s expected return has diminished greatly as our stocks have advanced. Our expected return is currently 20% (annualized), a sharp contrast relative to our expected returns of 43% at the the time the model was developed. We are still well above the 6% historical market returns, which indicates that our portfolio as a whole will at least achieve returns greater than the average investor.