Kendall Capital

The GARP portfolio’s primary focus and strategy are to own companies with unique products and services and that are growing revenues and earnings faster than the overall market.  We believe these companies will have long-term superior relative and absolute performance.

Revenues and earnings for the GARP portfolio continue to be very strong.  Over the past 12 months the dollar weighted revenue and earnings for the GARP portfolio grew at 9.8% and 68.2% respectively, compared to the S&P 500’s revenue decline of -1.7% and earnings growth of 53.5%.

From a valuation point of view, we feel that our GARP portfolio is still relatively inexpensive on a historical and absolute basis.  Even though the portfolio experienced price appreciation along side the overall market during the 3rd quarter, the GARP portfolio is trading at only 13.7 times 12-month forward earnings, versus 15.5 times 12-month forward earnings for the S&P 500.  Additionally, to compare the relative attractiveness of the portfolio, we can also focus on the earnings/price ratio, which is just the inverse of the price/earnings ratio. The GARP Portfolio’s earnings/price ratio is an earning yield of 7.37%, which represents more than three times the 2.35% current yield available for a 10-year U.S. Treasury.

Now, instead of focusing on the portfolio’s quarterly trading activity as I usually do, I would like to address an overall macro issue that is affecting the overall stock market and in fact our GARP portfolio.  It’s very clear to me that there has been a very strong recovery in the broad market’s corporate earnings over the past two years, to the point that earnings have reached pre recession highs.  During 2010, earnings for the S&P 500 are expected to exceed $82.00 per index valuation of 1,150 (see chart below). However, although corporate earnings have recovered considerably, the S& P 500 index continues to be valued at over 25% discount from the 2007 highs.  The best explanation I have for why the value of stock prices has not recovered to pre 2007 highs is investors’ risk aversion (see chart below).   The average individual has not been making investment decisions based on the fundamentals of return of future cash flows and the predictability of that cash flow, but has been driven instead by uncertainty and fear.  With this in mind, I continue to believe that stocks are cheap relative to future cash flows.  Investors should own companies with our simple thesis of growing revenue and earnings faster than the broad