Wayman Value Investing February 2025 Portfolio
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February 2025 Outlook
The markets started 2025 with a continuation of last year's momentum, though with some notable shifts in leadership. The S&P 500 advanced 2.70% in January, while the Dow Jones Industrial Average posted an even more impressive 4.70% gain. What's particularly interesting about these gains is not just their magnitude, but their composition. The market's previous darlings – the Magnificent 7 – actually declined as a group, yet the broader market pushed higher. This suggests a healthier market breadth than we've seen in recent quarters, with 355 S&P 500 stocks advancing versus 148 declining.
The transition of power in Washington has brought swift and significant policy changes that the market is still digesting. President Trump's inauguration on January 20th was followed by a flurry of executive orders targeting everything from immigration to energy policy. Perhaps most relevant for markets are the proposed tariffs and the ambitious $500 billion AI initiative announced with major tech companies.
The earnings picture continues to provide a foundation for current valuations, though at these levels, there's little room for disappointment. Fourth quarter earnings are coming in above expectations, with a notably high 77.7% of reporting companies beating estimates. More importantly, operating margins are projected to reach 12.15%, well above the long-term average of 8.49%. This profitability, combined with continued share buybacks, has helped support equity prices. However, it's worth noting that the market's P/E ratio stands at 25.9x for 2024 earnings – a level that historically has led to more modest forward returns.
The Federal Reserve appears to be taking a more cautious approach than the market had hoped. While they've already reduced rates by a full percentage point, Chair Powell's recent commentary suggests a "wait-and-see" approach rather than the aggressive cutting cycle some had anticipated. The probability of a March rate cut has declined to 20%, with the market now focusing on June for the next potential move. This patience from the Fed, combined with still-elevated inflation readings, suggests that the era of easy money isn't returning as quickly as some had hoped.
Looking ahead to February, several key events warrant attention. The implementation of new tariffs could create near-term volatility, particularly in sectors with significant international exposure. The February 27th deadline for budget reconciliation adds another layer of political uncertainty. However, the broader picture suggests a market that's transitioning from one driven by a handful of mega-cap tech stocks to one with broader participation. While this transition could create some near-term volatility, it typically represents a healthier market structure over the longer term. As always, the key will be maintaining discipline and focusing on value rather than short-term price movements.
User Guide - Tracking the Spreads
What are spreads, and why should you care? I believe that tracking spreads is essential for making informed investment decisions. Each month I categorize stocks into tiers based on the spread between their calculated value and market value.
Here’s how it works:
STASH: This tier includes stocks with the largest spreads. These are the hidden gems that offer significant potential upside. Based on my valuation, now is the perfect time to capitalize on their undervalued status.
GATHER: Stocks in this tier have a substantial spread, but not as significant as those in the Stash tier. They still offer attractive opportunities for investment, and I recommend considering them for your portfolio.
STORE: The Store tier consists of stocks with modest or tightening spreads. While they may not have as much potential for immediate growth, they still hold value and can contribute to a balanced portfolio. Wayman holds these stocks, but I am not actively buying additional shares this month.
CACHE: In this tier, stocks have narrow or no spreads, indicating that their market value aligns closely with Wayman’s calculated value. It may be time to consider exiting positions in these stocks and reallocating your resources.
Categorizing stocks based on spreads helps you identify stocks with the greatest potential for growth. I believe in capturing maximum upside while minimizing potential losses, and Wayman’s tiered system allows you to prioritize your investment decisions.
Model Allocation
For the purpose of third-party portfolio tracking and validation we use the following model portfolio allocation:
65% invested in Stash tier stocks
30% invested in Gather tier stocks
5% invested in Store tier stocks
The Wayman portfolio is tracked and audited by Hulbert Ratings, which has been rigorously tracking the real-world performance of investment advisory newsletters for over 40 years. You can follow our performance here.