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Sector Weakness Hits Shares

These three model portfolio names are trading lower along with the rest of the market. Here's our take.
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Along with the broad markets, three of our model portfolio positions are trading lower today and we wanted to update readers. We are taking no action in this Alert.

Shares of McDermott (MDR) , Massey Energy (MEE) and Yamana Gold (AUY) are all trading lower on weakness in their respective sectors. Infrastructure, oil and gold have outperformed the markets over the past three months. The gains over the past two weeks have been quite significant, mostly due to weakness in the dollar. With today being the exception, these sectors have seen huge inflows, which have helped push these positions up more than 100% from our cost basis for each one.

Beginning with McDermott, the company still has more than 20%-plus upside potential from these levels. Three weeks ago, when shares were trading around $18, we pushed our rating to a One based on the company's leverage to oil infrastructure projects, its $10 billion backlog (which has seen few cancellations compared to its competitors) and solid fundamentals.

Next, Massey has been on a tremendous run. Shares were trading above $95 less than a year ago and while the landscape for coal is more encouraging today based on supply cuts and along with demand from China, we believe the risk/reward from current levels is average, thus, the reason behind our Two rating. If shares begin trading back toward the $18.50 level, we will look to add to our position and upgrade our rating.

Finally, Yamana Gold has also had a great run and we plan to continue to let this winner ride. We mentioned over the past nine months that every portfolio should have a gold component since our government still has not outlined a plan to repay the nearly $14 trillion it has spent over the past 15 months.

Some pundits argue that inflation will not creep into the markets in the short term, but the dollar collapse is pushing commodities higher. Plus, the cost of living (oil, gasoline, food, taxes) continues to rise. While bulls and bears debate the timing of inflation, we believe it's inevitable; therefore, buying gold should provide some downside protection.

Yamana remains one of the best mid-tier producers and it has maintained its production estimates over the past two quarters. Shares are up more 150% from our cost basis of $4.18, so if shares pull back to the $8.50 level, we will look to add to our position and upgrade our rating on the stock.

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Frank Curzio is a research associate at TheStreet.com.

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