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miclane05 (92.97)

Recs

7

July 2013 Update

July 12, 2013 – Comments (1) | RELATED TICKERS: AAPL , RAX

July 2013 - When to Sell:

This update is a few weeks early, and there are several other changes that I'm making at the same time.  The last several updates have been spaced approximately 7 1/2 months apart, which was an arbitrary timeframe that began because it fit into my own personal schedule. I think a bi-annual timeframe makes a lot more sense, and having an update at the end of December allows people to consider the tax consequences of their actions and chose whether late December or early January make more sense for their adjustments. That makes this the midway point in the year, so now seems like a better time to update things rather than wait until the end of July and then February for updates.

So far, this has been a very good year for investors, although the last few weeks have been quite volatile and there's no shortage of analysts and pundits predicting a big pullback in the near future.  There are, of course, reasons to doubt some of the market bears and view the current market conditions are somewhat normal.  See http://www.newyorker.com/talk/financial/2013/05/27/130527ta_talk_surowiecki  (recognizing popular bear market sentiment while suggesting their fears overlook important factors).  Whether the next 3 or 6 months are good or bad also misses the point that, as investors, the odds are in our favor over the long term, so net buyers of stocks shouldn't become overly concerned with predictions about short term trends.  See, e.g., http://www.fool.com/investing/general/2013/06/04/why-im-an-optimist.aspx; and http://www.fool.com/investing/general/2013/06/18/your-last-remaining-edge-on-wall-street.aspx  (why a long-term horizon is to the advantage of individual investors).

At its core, investing is really just a matter of making two decisions. First, should I make this investment? And second, should I sell this investment? A disproportionate amount of time is spent on the former, while the later is, in my opinion, a substantially more difficult and complicated decision. For one, although Warren Buffett might suggest that the holding period for any stock is forever, most investors have a finite amount of money to invest, and those funds might be needed for a future expense years down the road. If you bought stock to help pay for a child's college tuition, "forever" is not a very practical time-frame. With limited money to invest, if your money is tied up in an asset you don't expect to appreciate much over the next couple of years, holding onto that investment in lieu of something that will appreciate more also has an opportunity cost, even if it doesn't require you to spend additional money. Finally, the allocation of your investments can fluctuate rather dramatically, leaving you with a portfolio that does not reflect your desired risk or diversification. If you're playing along at home, you bought Melco Crown Ent. ("MPEL") for $4.55 in April 2009 when I first recommended it, and have held it this entire time. With its current 500% gain, its allocation in your portfolio is probably a bit high and you might be concerned about how much money you have tied to a gambling establishment in Macau and whether Chinese regulators will wipe out your holdings before tomorrow's opening bell. So, after almost 4 years of tracking these picks and beating the S&P500 at every interval, I realize that a focus on the second decision of these investments is needed.

First, lets look at our list of picks and their performances since the last update. (Please note that these figures were compiled over the past 2-3 days, so they might be slightly off at the time of posting).

MercadoLibre (MELI):                31.6%
Berkshire Hathaway (BRK.B):    26.6%
Melco Crown Ent. (MPEL):        23.7%
Intel (INTC):                          15.7%    
Atwood Oceanics (ATW):         14.9%
McDonalds (MCD):                  14.4%
Aflac (ALF):                            12.3%
Phillip Morris Int. (PM):              1.9%
Nat. Oilwell Varco (NOV):           1.8%
Nucor Steel (NUE):                     (2.1)%
Rackspace Hosting (RAX):          (45.3)%

Average non-dividend adjusted return is 8.7%, which is behind the S&P 500's gain of 11%.

And here are our total returns since adding each selection:

Melco Crown Ent. (MPEL):     495%
Phillip Morris Int. (PM):           72%
Nat. Oilwell Varco (NOV):       69.9%
Aflac (ALF):                          59.8%
MercadoLibre (MELI):              48%
Berkshire Hathaway (BRK.B):   46.7%
Atwood Oceanics (ATW):        44.6%
McDonalds (MCD):                37.6%
Rackspace Hosting (RAX):     23.8%
Intel (INTC):                          15.2%
Nucor Steel (NUE):                1%

Average return since adding selection is 83% and the mean age of each selection is 31 months. For reference, the S&P 500 is up 47% over the past 31 months. Returns are not dividend adjusted, so actual returns are better than listed (see Jan. 2013 Update for Details).

While an 8.7% gain in 7 months is nice, this is the first update period that we have not beaten our benchmark, which is upsetting.  In hindsight, last update I wrote that I considered replacing AFL and ATW with Tesla (TSLA) and Whole Food Market (WFM). Considering that the first two returned 12.3% and 14.9%, respectively, while TSLA is up 359% and WFM is up 16.7% perhaps I shouldn't have hesitated so much. Which brings us to the theme of the update, when to sell. While creating a new list of 11 picks to best perform between each update is not the goal, and would turn this long term portfolio into short term speculation, much like a real-life portfolio has a limited amount of money to invest, our picks are limited in number to represent our best ideas. Although removing a pick from our list is always warranted if the business fundamentally changes or our thesis proves incorrect, I also think that its appropriate to replace some selections when the risk/reward balance has shifted and there are more attractive ideas that are not on our list. This is not an endorsement for high turnover, but I think we can identify two selections that should be removed for this update.

Closing picks:
Rackspace Hosting (RAX): What a difference 6 months can make.  Without RAX weighing down our picks this update, our stocks returned 12.81% and would have beaten our benchmark again.  Back in January I wrote "I remain optimistic while recognizing that the move to the cloud is a disruptive technology, and trying to pick winners or losers is difficult. RAX has to fight against GOOG, AMZN and CRM for market share, which is no small task. At the same time, RAX has made its business with its fanatical focus on customer service and if that continues, it should fare well against its rivals. Unfortunately, this also makes RAX our most vulnerable pick and customers could quickly turn on them if service issues arise, so we'll keep watching for warning signs."  While revenue and earning per share continue to grow each quarter, the competition is taking its toll and RAX looks somewhat like an army that keeps winning battles but never gaining any reinforcements to prolong the war. Its momentum has been slowing each quarter and if AMZN and GOOG keep cutting prices and shrinking margins, I'm not sure RAX will be able to last. There are talks of buyouts, first from IBM and now from Dell or HP, but buying a stock in the hopes of a favorable acquisition seems more like a gamble than a sound investment strategy. At this point, our pick is still up almost 24% since we first bought it in October, 2011, and we did so recognizing that we were trying to swing for the fences a bit. Considering the risks, especially from AMZN, I simply cannot justify keeping it on the list in the hopes that things get better.

Melco Crown Ent. (MPEL): While I expected the start of the year to be slow for MPEL, it continued its great run these past 7 months. Up roughly 500% since we added it to our list, risks of an economic slowdown in china have grown, concerns over regulations remain, and while Studio City and the planned casino opening in the Philippines could provide additional growth, right now, MPEL appears overpriced. Competition from WYNN in the next couple of years adds another concern here and, after such a healthy run but with this many questions regarding future growth, I've decided to remove it from the list and put our gains to use elsewhere.

New Additions:
Apple (AAPL): Yes, I've been bearish on AAPL for awhile and have called it out before for having unattainably-high expectations baked into the price. At the end of 2011, I wrote about how Microsoft (MSFT) was a good value and then stated "Not to digress too far, but too many people are bullish on Apple, without considering that its size will weigh on future growth, its industry and its own performance have been historically cyclical, and competition driven commoditization will lower avg. sales prices and squeeze revenue. I'm sure tomorrow's iphone 5 will send the stock shooting higher and everyone will cheer and say that another year of 80% growth, or even 40% growth, lies ahead. I will not be one of them."  AAPL closed at $400 when I wrote that and although it continued to soar higher, nearly two years later it is right back to hovering just over the $400 mark. During that same period, MSFT returned 35% on top of its almost 3% dividend.  So what has changed? AAPL did grow its revenues and earning per share over 20%, and it instituted a dividend yielding almost 3%. Once valued at 30 times earnings and praised by everyone, its now trading at 10 times earnings and everyone claims that AAPL's day is over. This is exactly when adding a strong, innovative company that is sitting on a mountain of cash makes sense, so its joining our list.

Middleby Corp (MIDD) - This addition really isn't a new pick, because it was on our list and was never actually taken off, but it somehow got forgotten as I transitioned from writing these updates simply to myself to then sharing them with friends and posting them in a blog (http://caps.fool.com/Blogs/ViewBlog.aspx?t=01004025244630325297).  Back in April, 2010, I wrote "go through its history and try and find a quarter in which it did not beat earnings estimate. This making of industrial restaurant equipment (i.e. ovens, etc) has demonstrated impressive growth over several years, and is currently discounted with the recession's slowdown of restaurants. When business picks up, this small cap play will continue its charge."  Back then, it traded at $58, so its has enjoyed a solid ride to its current price of $182 over the past 3 years. Since we never officially dropped this pick but have now dropped two stocks from our list and have a goal of 11 picks at all times, this is a good time to reconcile the past oversight.  That said, we're not adding some dead weight to our portfolio simply because it should have been here in the past. Its not the bargain that it was when we first added it to the list, but its PEG ration remains attractive due to its solid growth. Beating wall street estimates for the past 7 quarters, MIDD is also looking towards emerging markets and is focused on increasing its margins. See also http://beta.fool.com/vinny3001/2013/06/03/middleby-continues-adhering-to-a-profitable-recipe/34667/?source=TheMotleyFool (another blog's take on MIDD's healthy future).


Notes on some remaining selections:
Berkshire Hathaway (BRK.B): Not much to say besides that Buffett's great recession deals have paid off handsomely and the company remains a great holding to anchor any portfolio.

National Oilwell Varco (NOV): The energy sector makes up a decent chunk of the entire S&P, although the developed world's demand for oil has been declining for over a decade, with the 2008 recession drastically speeding up that trend. Its also somewhat apparent that technology in the developed world will increase the rate at which better fuel efficiency and cost-effective fuel alternatives decrease demand for oil in the future. Of course, demand in the emerging markets is increasing, and whether that will fully balance out the decreased demand in the developed world is anyone's guess.  When it comes to NOV, however, it is important to realize that while NOV's profits do increase as the price per barrel of oil increases, NOV also has natural gas exposure, so its far better positioned than pure oil plays that are gambling on demand in emerging markets fully compensating for the developed world declines. After providing us with some solid gains a few years back, NOV has been stuck in the mud lately, despite its earning per share rising above their pre-recession highs, it recently doubling its dividend, and substantial new orders in 2013.  Berkshire also recently increased its stake in NOV at today's prices, and it appears both better priced and  less-risky than alternatives within its sector.  See http://beta.fool.com/thebargainbin/2013/06/05/a-cheap-energy-stock/36133/?source=TheMotleyFool (analysis by someone else who agrees there is minimal downside and significant upside at current prices). Although it was one of our worst performers so far this year, I'm keeping it on our list and hoping our patience pays off.

Phillip Morris Int'l. (PM): Though its price got a tad lofty for awhile, its now trading back at a reasonable valuation and is the cream of the crop of an industry that has provided some of the best investments of all time while straddling the precipice of certain destruction decades. Former parent Alria (MO) currently maintains almost an identical valuation despite significantly more pressure to its sales, margins, and litigation risk due to its operation exclusively in the U.S.  PM obviously operates exclusively abroad, and for those who invested at its initial recommendation and reinvested dividends, our initial investment has more than doubled (by comparison, other non-volatile (though more socially acceptable) blue chips like JNJ have returned half as much during that period). Even with its isolation from the U.S., there are foreign risks to the business, especially in the EU and Australia and I'm sure there will come a day when the headwinds overcome PM, but at its current price, I'm keeping it on the list and looking for another dividend raise this October.

MercadoLibre (MELI): Just over a year ago, in May, 2012, I added it to our list at $73/share, and stuck by it in January, 2013's update when it was trading just over $83. At today's $115, we're up almost 60% in a year and I'm happy to continue letting our thesis play out.  Even though Amazon entered the Brazilian marketplace last year, MELI remains the hands down number one e-commerce provider in the region. Its projected p/e is still pricey (though less than AMZN), but e-commerce growth in Latin America has drastically outpaced every other region in the world and, as the preferred provider in the region, MELI is capturing that growth.  With a market cap of 5 Billion (compared to AMZN's 125B), MELI still reminds me of our MPEL pick in 2009, picking the small company that was positioned in the right place at the right time over the big American behemoths invading the space (like WYNN, MGM, etc.)

Nucor (NUE): Like copper, iron, and other materials industries, the steel industry is still waiting for macroeconomic conditions to improve. Soft demand remains and is unlikely to get better in the near term, but Nucor is one of the better positioned companies in the business with a stable dividend. Patience will pay off for those with the time to wait.

Thats all for now. I suppose our discussion of when to sell is lacking in depth, but this update has grown a bit unruly and if I don't finish now, it'll be another month before I can write again and all the numbers will have changed. So we'll head to December with our slightly new list of 11 picks and check back in at the end of the year.  As always, all comments are welcome. 

* Disclaimer: I currently maintain real-life holdings in several of the companies discussed in this update, including AAPL, MELI, RAX, NOV, PM, BRK.B, INTC, and AMZN. Your interest in these companies could, on the most miniscule level, benefit me personally. This article is intended for educational and discussion purposes only and is not investment advice.   [more]

Recs

7

January 2013 Update - A focus on dividends

January 05, 2013 – Comments (0) | RELATED TICKERS: INTC , PM , MPEL

January 2013 Update - A focus on dividends

Another 7 1/2 months have elapsed since my last posting and, unless you're name is Rip Van Winkel, you've heard that the Fiscal Cliff was averted, for now.  For a good summation of those details, see http://www.theatlantic.com/business/archive/2013/01/fiscal-cliff-deal-faq-what-just-happened-and-what-it-means-for-you/266743/  The citizen in me is relieved that our own man-made economic doomsday device didn't destroy us, but I must admit that part of me was eager for the mass hysteria creating 2009-type stock bargains.

Beyond the Fiscal Cliff nonsense, the past 7 1/2 months were rather uneventful for the market.  Our economy continues its slow but steady recovery and Greece is still part of the Euro.  See http://www.fool.com/investing/general/2013/01/03/2012-the-year-few-got-right.aspx (poking fun at the many wrong predictions of 2012).  The S&P 500 performed fairly well over this period, returning 10.6% since the last update. Since the last update, this is how our picks performed, not adjusted for dividends:

MPEL    47%
RAX       44%
NUE       29.1%
AFL        25%
ATW       17%
BRK.B   16.45%
MELI      14%
NOV      12.8%
PM        1.5%
MCD      (1.7)%
INTC      (18.5)%

7 of our 11 picks outperformed the S&P's 10.6% return, and the mean average was 16.97%, or 6.37 points above the S&P (which, as a percentage, is roughly 60% better than our benchmark).

Here's each stock's non-dividend adjusted performance since being selected:

MPEL   283.2%
RAX      119.6%
PM        70.65%
NOV      69.22%
AFL        39.14%
ATW       33.7%
BRK.B   19.25%
MCD       14.17%
MELI      14%
NUE       2.93%
INTC      (3.1)%

The mean average return is 60.25% and the mean age of each pick is 24 months.

Since I started tracking stock performance in 2007 and keeping this blog at the end of 2009, I've refrained from trying to include dividends because it takes a lot of work, or perhaps more mathematical ability than I possess. At the same time, I have frequently recognized the important of dividends, and back in April 2010 referenced Jeremy Siegle's well known analysis of original S&P corporation returns, as well as the returns of those companies added to the index over time. If you haven't read Siegle's "The Future for Investors", I highly recommend it. Those familiar with the book or research know that the top of the list of best-performers is dominated by dividend payers, with MO, ABT, and BMY taking gold, silver, and bronze and turning $1,000 from '57 to '03 into $4.625 Million, 1.281 Million, and 1.209 Million, respectively.

While our picks have beaten the S&P 500 without accounting for dividends, its important to recognize the impact that dividends have on returns over time, especially considering that reinvested dividends play a large part of my thesis for market-beating returns. Accordingly, I've sifted through the historical data and broke out my calculator for a quick demonstration of how dividends have boosted PM's performance.

Lets say a crazy Christopher Loyd took you for a ride in his DeLorean back to spring 2008, when PM was spun off from MO. Even though you knew that you were about to invest before the largest financial collapse in 80 years, you naturally had complete faith in my investment advice and, for the sake of this example, no moral qualms about investing in an evil corporation (I've covered oil, defense, gambling, tobacco, and fast food with the list, so sorry if my picks limit your participation, but I swore off bio-med stocks and their "promising" pipeline cures long ago). With $5,000 you invested in 100 shares in April 2008 as the price fluctuated between $48 and $52. Your July dividend payment of $46 bought you .852 extra shares, but as the price declined in the fall and the dividend payment increased to .54, your October dividend payment bought you 1.4 additional shares. You kept reinvesting your quarterly dividends and while PM completed its nearly $30 Billion in share repurchases, it also raised its quarterly dividend each subsequent October to .58, .64, .77, and .85.

Fast forward to present day and on January 11, your 121.79 shares will pay out a quarterly dividend of $103.52. Without dividends, your 100 shares bought at $50 for $5,000 would now be worth $8,652 - a solid 73% gain in 4 1/2 years considering that you bought pre-recession. With dividends, however, that original $46 dividend payment is worth $73.69 and increased your future dividend payments so that, along with the other 4 years of reinvested dividends, your holdings are now worth $10,537 for a 110% gain.  Additionally, if you want to stop reinvesting your dividends and treat your holding as an income source, its now yielding 8.3% interest on your original $5,000 investment and will pass 9% in October 2013. By comparison, interest on a 10-yr Treasury is 1.73%

From this example I've decided to "double down" on my faith in INTC right now for any new money. Its paying close to a 4.5% dividend, which has grown 13% over the past 5 years, and the payout ratio is 37, so there's little danger of them lowering the dividend out from under their shareholders. The p/e has been dipping below 9 for the past 2 months and most of the press you read over the past year is how PCs are dead, Intel was late to the mobile phone market, and now they're going to enter the ultra-competitive TV market. I won't tempt fate by making some bold prediction, and yes, INTC has been my worst performing pick on this list in terms of price (its been taking a multi-year rest so that it can go on a tear:), but the numbers just don't add up right now. Intel is sitting on a pile of unneeded cash. As safe as this dividend is, its yield alone makes it a good pick over bonds and other fixed assets and that isn't considering that its chips run in nearly all servers. I'm also ignoring the mobile market and the new-found TV venture. At the end of the day, does it seem likely that we won't need processor chips in the future? INTC has the money to stay in the game and pay back its shareholders. Maybe this won't be my home-run stock in a decade, but I see little downside and ... maybe those TVs become a hit after all.

Because of its dividend payments, INTC's poor performance on this list is also deceiving. (Really wish I had found this Total Return Calculator prior to doing all of this math: http://www.intc.com/calculator.cfm). In our time-machine DeLorean scenario, you might have also bought 100 shares in mid-April 2008 for $2200. Reinvesting those dividends, you would currently hold 116 shares worth $2446, an 11% gain on your pre-recession investment. Thats not great, but this was also our worst-performing pick and during that time the S&P 500 only returned 7.8%.

Other holdings on our list ripe for new money include MELI, NOV, BRK.B, and MCD, as well as PM if the price is right. MELI's thesis from last update remains and I'm still confident that its growth will surprise everyone.  Latin America is still developing and the next few years should see a surge of internet usage. NOV also looks like a good value at this price and MCD is nearing its 52 week low while it keeps raising its dividend.  There's not much to say about BRK.B that hasn't already been said. Its a tank and its not overvalued.  Its basically an index fund of strong companies diversified across many sectors. Even though BRK.B is up 7% in the last month, its still trading around 1.2 p/b, which is the price at which Buffett has stated it would buy its own shares back at.
 
MPEL has been on a tear lately as its City of Dreams resort saw increased revenue and December revenue all over Maccau was higher than expected. LVS still gets most of the attention in Maccau but I like MPEL's pure play in the area and 2014 will see the opening of their Studio City resort with another resort planned for 2015 in the Philippines.  Without any new projects in 2013, hopefully they will focus on improving margins in 2013 while the large Chinese middle class pours into the Cotoi strip. It could take investors a year to start factoring the Studio City opening into their valuations of MPEL, so this could be a slow year for MPEL, but I'm fine waiting.  RAX has been a nice addition to our list and I remain optomistic while recognizing that the move to the cloud is a disruptive technology, and trying to pick winners or losers is difficult. RAX has to fight against GOOG, AMZN and CRM for market share, which is no small task. At the same time, RAX has made its business with its fanatical focus on customer service and if that continues, it should fare well against its rivals. Unfortunately, this also makes RAX our most vulnerable pick and customers could quickly turn on them if service issues arise, so we'll keep watching for warning signs.

From our current list, the stock I'm most willing to replace is AFL, with ATW coming in a distant second, but despite their solid performances over the past 7 1/2 months, neither of them are pricey on a p/e level, nor have their fundamentals drastically changed. I will say that I'm growing more pessimistic of insurance companies in the wake of Hurricane Sandy. BRK.B obviously has insurance exposure as well and for the past several years, Buffett has commented about how one "superstorm" or another caused an avalanche of claims and hurt the business. But it seems like each year brings a bigger storm with bigger insurance losses. With a p/e below 9, perhaps I should be clinging to AFL, but something tells me AL Gore might be right and 100-year storms might occur more than every 100 years going forward. I'm not a scientist and I'm not bailing on AFL right now, but I'm hesitant to put more money in even though I recognize that I could be wrong and that reacting to a dramatic event fresh in everyone's memory is precisely what I caution against.

So sadly, I've decided not to add a new stock to the list for this update. Had the Fiscal Cliff played out differently, I anticipated having several ideas. I've flirted with everything from TSLA to WFM, and even added RGR to my watchlist and seriously considered putting it on the list in place of AFL, but at the end of the day, I'm just not completely sold. Rather than taking action for action's sake, I'm going to stick with the current list in its entirety and see how things shake out over the next 7-8 months.  I heard that Warren Buffett once suggested that people could drastically increase their investment returns if they were only allowed to make 20 investments in their entire lifetimes, forcing them to be more patient and thoughtful before taking any action. Counting the 11 current selections, I think I've gone through 17 companies in this blog in 3 years, so I'd better slow down.

Next update scheduled for July '13.


* Disclaimer: I currently maintain real-life holdings in several of the companies discussed in this update, including RAX, MPEL, NOV, PM, BRK.B, INTC, NUE, and AMZN. Your interest in these companies could, on the most miniscule level, benefit me personally.  [more]

Recs

9

Semi-Annual review

May 17, 2012 – Comments (0) | RELATED TICKERS: RAX , MELI , MPEL

Well, its been 7 1/2 months since my last posting, which is slightly shorter than the previous intervals, but June and July predict to be busier months.

Since the last update, the S&P 500 is up nearly 15% and as demonstrated in more detail below, the stocks highlighted back at the beginning of October, 2011 have handily beaten that benchmark once again.

I've stuck with the S&P 500 as my benchmark primarily because its what I started with back in '07 and '08, but I don't really think it makes a difference whether a more narrow benchmark like the Dow is used, or a broader one like the Wilshire, the important goal of accountability is still served. This is especially important with the recent market, as the end of March 2012 marked one of the best 3 year periods in stock market history (remember when I wrote that early '09 was like getting to invest in 1931?), so a chimp throwing mud at a ticker over the past 3 years could still post profit and without a benchmark to temper our results, we'd be celebrating the macro forces, not our investing choices.

So after besting our benchmark by 9.7% in October (and by 8.31% last January), we've once again outperformed by an average of 6.4%.  Naturally, its been nice watching our picks succeed, although Warren Buffett recently reminded shareholders of this reaction:

"If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply."

So now that Buffett has rained on our parade, lets look at the recent results with disappointment over the price appreciation that befell many of our selections.

RAX       52.4%
MPEL    48.2%
PM       34.6%
ATW     25.1%
INTC      21.3%
NOV     15.5%
AFL      11.2%
BRK.B   10.02%
MCD      6.5%
NUE      6.1%
WM       0.01%

Average gain = 21.1%, 6.4% over S&P 500 gain of 14.7%.

Since this only give us insight into the most recent 7 1/2 month period, I also calculated the returns since each of the remaining picks initially made the list, which break down as follows:

MPEL   160%
PM       68.2%
RAX      52.4%
NOV     50%
MCD     22.8%
INTC     21.3%
ATW     14.3%
AFL      11.2%
BRK.B   2.5%
WM     (6.8%)
NUE    (21%)

*all figures are non-dividend adjusted, though more on that in a bit.

Some thoughts. First, several of our picks have been hammered in the past 2 weeks, which MPEL, RAX, and NOV seeing the brunt of the blows as the large runs of strong growth companies over the past 4 months has subsided and high-beta stocks have giving up some of their prior 2012 gains. Even low beta picks like MCD and PM have come down 5-10% from recent highs, but after such strong runs this isn't that unexpected and actually poses some relief that we're finally seeing some decent prices for net buyers after March and April runs made it pretty hard to find anything at a decent price.

Like previously updates, I don't see much need to make radical changes to the list because the investment thesis' (whats the plural of thesis?) remain intact. MPEL's exposure to the Cotoi strip leaves it well positioned even though its margins need improvement, RAX has demonstrated its legitimate growth in the cloud computer arena without signs of slowing, BRK.B remains historically cheap on a book/value basis, and PM, MCD, and NOV keep trucking along, with NOV particularly attractive after the recent pullback. INTC still seems a bit pricey to me, but as discussed more below, I'm trying to overcome my bias against the seemingly high price of growth investments.

While the inclusion of dividends poses too much work for these casual updates, its important to recognize that since adding these picks to the list, their performance is substantially boosted through dividend returns, and while PM traded at $50.7 when added, its since paid $5.45 per share boosting returns more than 10%, while MCD has paid $3.22, WM has paid $2.66, and NUE has paid $1.82.

I've decided to stop tracking the stocks previously put on "hold" or discarded because, frankly, my time is limited and if the stock isn't on my list of top 10 or 12 picks, its just doesn't deserve the same level of surveillance.  When I get older and, hopefully, have a far larger real life portfolio, I could see that the tax ramifications of selling a position with a low cost-basis and realizing a large gain might encourage maintaining the position long after I felt that new money in the holding would be a strong investment, and accordingly my number of individual holdings could increase quite a bit. For now, however, my picks represent my best ideas and, even if i can't tell you which is no 1 vs no. 2, I know that stock pick no 20 is not a "best" idea. I'm satisfied with holding steady at 10-12 stocks comprising the list at any one time. Thats not to say that strong companies like WFM, ABT, AMZN, and MSFT don't catch my attention, its just a recognition that I'm not an investment professional and hobbies should remain fun and not interfere with what pays the bills.
 
Moving forward, I'm removing WM from my list strictly for a professional reason and my desire to hyper-vigilantly avoid any conflicts of interest. While it has been one of our worst performers since its early selection, it was always intended as a long term selection whose share price has regularly appeared lofty over the past few years. But the dividends have grown and currently yield 4.3% at today's prices, and with what I see as temporary weakness in earnings for a business that is well positioned for the future, today's share price is a reasonable entry point and I would not otherwise remove this selection from my coverage if I hadn't made these posting public long ago.
 
In its place, I'm adding MELI (MercadoLibre), a cross between E-Bay and Amazon of Latin America complete with paypal. Recently meeting expectations on EPS but missing revenue estimates by 600K (on 84 Million) sent share prices plummeting and finally within what I consider a reasonable range.  I'm trying to expand what I consider a reasonable value for a high growth company, and after tracking this company since June, 2009 (its up 220% since then) this pullback quickly caught my attention. Since keeping this blog and tracking picks, I realize that the two flaws I suffer from most often are 1) watching a high growth company soar higher while I wait for a "cheaper" entry point that never happens (See RAX circa 2010), and; 2) selling multibaggers because they've "grown too popular." After finally pulling the trigger and adding RAX to the list in October, I'm putting another high growth pick with MELI.  To be sure, its still expensive and a p/e multiple north of 40 only looks good next to a 5 year high of 369, but so long as it keeps growing over 20%, I realize that I'm unlikely to find someone willing to sell their shares to me for a p/e in the 20s. I love looking at the PEG ratio, but MELI isn't a tiny company thats undetected and its not a company down on its luck, so I'm attempting to learn from past mistakes and bite the bullet at today's price.  Since dropping AKO-A two years ago, MELI provides more exposure to the emerging S. American markets and their expanding middle class. The impressive margins, combined with the growing customer base, should keep the money rolling in for years to come, and 2014 World Cup and 2016 Olympics should push Latin America further into the spotlight. Plus, even though the dividend is miniscule, the fact that a mid-cap tech-growth company initiated a dividend shows a demonstrated commitment to returning value to shareholders and they aren't taking on debt or stunting their growth in the process. After three years of waiting for the right time, at $73/share I'm throwing off the bow lines and setting sail.

Finally, we're now a couple years into picking, tracking, and discussing individual investments that, throughout this period, have consistently outperformed the S&P 500.  We've achieved these results with 7-9 month intervals between any updates, so timing the market or using complex daily, weekly, or monthly trading strategies based on moving averages were all ignored. And while I support call options on low-beta dividend stocks, we've left options and any other forms of leverage completely out of these picks as well (for the record, I do not support other forms of leverage because, if your call option ends in the money, you're forced to enjoy your profits, whereas if your leveraged investments bought on margin lose value, you have to give them your wallet, car, house, etc. and people smarter than me seem to suck at doing well with lots of leverage, just ask Jamie Dimon, Jon Corzine, AIG, etc.) 

This is all to say that very simple and basic investing strategies can succeed.  While investment professionals have an incentive to make financial planning sound complicated and confusing (and best left to them), we should require professionals to deliver better returns, or provide more peace of mind, than we are capable of achieving on our own. Lest anyone think its best to unconditionally trust their adviser, please read this: http://www.fool.com/investing/general/2012/03/20/the-cold-hard-truth-about-brokers-and-financial-a.aspx

Thats it for this update. I strongly encourage thoughts, comments, criticism, and all other forms of discussion. Next update likely to occur in or around January, 2013.


* Disclaimer: I currently maintain real-life holdings in several of the companies discussed in this update, including RAX, MPEL, NOV, PM, BRK.B, NUE, and AMZN. Your interest in these companies could, on the most miniscule level, benefit me personally.  [more]

Recs

4

picks of 2011 in review

October 05, 2011 – Comments (0)

I considered compiling this update/ review a couple of weeks ago and am glad that I waited for the last month to finish out. I'm pretty sure all of the stocks identified lost value during that time, and it would be easy to look at the cumulative 4.5% decline since January as a negative. Yet, not only have the picks again beaten the S&P 500 by just shy of 10%, but when you also factor in MPEL's 40% decline in the past 60 days, PM's 17% loss over that period, and NOV's big fall as well, I start to smile as I realize that, despite these large losses, each of these picks beat the index, and that environments like these, with steep losses all over the market, remind me of '08 and early '09 when ownership of outstanding companies went on sale and set the stage for big gains.

Lets start by looking at the top 11 picks' performance.  The S&P 500 is down 18.7% since June 1, and 14.1% since January 7, 2011, with my prior picks besting that mark by an average of 9.7%, meaning that they are, on average, down 4.4% since January 7. Specifically, they break down as follows:*
 
MPEL +32.5
MCD +29.9%
PM +24.6%
LMT +15.3
AVAV +8.2%
ATW +3.4%
MSFT +2.3%
NOV +2.3%
Brk.B +2.1%
WM +0.9%
NUE (15.1%)

*numbers are versus S&P 500 (Since Jan. 7, 2011) and are not-dividend adjusted.
Average +9.7% gain over S&P 500.

As mentioned earlier, the past two months dramatically altered the performance of several of these picks, as well as the broader market. MPEL's pullback stems from reduced growth projections in china, though, considering revenue in Maccau grew 57% last quarter, the market has probably over-corrected for the "slowdown" and I remain optimistic. In a bit a selfishness for my real life holding, the pullback actually brings the call option i sold awhile back "out of the money" which is nice because I never anticipated the huge gains from earlier this summer and would've had to leave some of that profit on the table if the option expired "in the money." currently trading around $8/ share, I see mpel returning to double digits rather quickly. Considering the current list is a bit risk-averse, mpel offers the highest ceiling, but also the most volatility.

PM's pullback is mainly due to eurozone problems, since the company reports in U.S. dollars but earns all of its revenues overseas, and large portions throughout the EU, a stronger dollar will drag down EPS due to currency conversion. That said, the company just raised dividends 22%, to .77 per share this quarter, and international turmoil always provides a great entry point. It has outperformed the market every year since its '08 spinoff and provides a growing, 4.5% dividend yield, so I maintain my belief that investors should keep some change available to grab a few shares on these temporary price dips. Yes, new Canadian and Australian proposed regulations add to the constant calls for the industry to whither away. But Europe is still a cash cow, Africa and Asia are growing, and with all the dividend increases, my real life holdings already sport a 7.1% effective yield. At this rate, in three more years, the effective yield will beat the interest rate on my credit card, so yeah, i'm still bullish.

That leaves NOV (and also ATW and NUE) as other hard hit companies as of late. Obviously, oil and steel shares have taken a beating as investors worry about global recession or slow growth. At these prices, all three stocks are attractive to investors with long enough horizons to take advantage of time-arbitrage and stable balance sheets to weather any prolonged downturn. Steel, and to a lesser extent oil, are cyclical and investors willing to purchase at these low p/e multiples can still enjoy decent dividends while awaiting for global consumption to pick up. I still think NOV and NUE are the preferred picks of their industries balancing the spotless balance sheets of both, with the growth prospects ahead, but I do understand that some investors might prefer the dirt cheap MT right now over NUE.

Speaking of buying shares at low valuations, Brk.b just authorized its first ever share buyback as a result of valuations, on a price-to-book metric, dropping all the way to 1. Currently trading just over 1, the market has not only removed any "buffett premium" but its removed all premiums despite brk.b's ability to command favorable deals and obtain concessions that no other conglomerate enjoys. At the same time, I understand why its not at the top of buyer's shopping list because, realistically, its the least likely pick on this list to post a 50% gain next year. Even a 30% gain would be surprising, while half of my other picks have posted gains exceeding 30% in the past two years. At this stage, buying shares of Brk.b is somewhat akin to buying an index fund or spdr. While brk.b has a low beta, so do half these other picks, so its hard to even point conservative investors to brk.b when growth is so limited. But, I keep brk.b on this list for the same reason that i use a generic target retirement fund for my roth ira. One day, armageddon may finally hit the tobacco industry, china may outlaw gambling in maccau, scientists might invent a way of decomposing trash into fuel, eliminating WM and NOV at the same time, but owning brk.b means that I own Geico, General RE, Kraft, Coca-cola, Moodys, Wells Fargo, Burlington Northern, American Express, Bank of America, Fruit of the Loom, and of course, McLane Company, just to name a few, all at the same time. I hope that it continues to beat the market in the long term, but having shares of brk.b anchor my portfolio allows me to jump at other, less certain, opportunities without too much worry. If I hit a home run, like NFLX or AAPL (or AMZN if I hadn't bailed early), then I'll be happy, but having a bunch of brk.b means that i can afford to swing at a few pitches and not hit a home run every time.

With so many great ideas out there though, some of the picks have to move into the hold category to make room. Thus, LMT is coming off my list and moving into the hold box. In January, it was just too cheap not to pick up, especially considering its decent dividend yield. Factoring in the dividend (3.3%), LMT was a good spot to park money at a time when good opportunities were harder to find, but new money has better options these days. AVAV comes off the list and into the hold box as well because the current opportunities in lower risk stocks outweigh adding to a speculative pick. Finally, MSFT also goes into hold, even though I maintain that its due for a comeback and think that anyone buying AAPL near $400 needs to consult some historical charts before clicking the "purchase" button. Not to digress too far, but too many people are bullish on Apple, without considering that its size will weigh on future growth, its industry and its own performance have been historically cyclical, and competition driven commoditization will lower avg. sales prices and squeeze revenue. I'm sure tomorrow's iphone 5 will send the stock shooting higher and everyone will cheer and say that another year of 80% growth, or even 40% growth, lies ahead. I will not be one of them.

In reviewing the old "hold" bin of AKO-A, HAS, and FO, and discard pile (RST), we also did a good job of ditching RST rather than sufferring further losses, and new money in AKO-A and HAS would not have performed as well as the remainder of the list. FO, on the other hand, continued to have another strong year and recently completed its spinoff (you now own 1 share of BEAM for each share of FO), but I'm still keeping in on hold for now.

That brings us to new addittions heading into 2012.

Intel - INTC: Take a product that is ubiquitous with technology, give it an above average growth rate (14.9%), combine it with an above average and growing dividend yield (3.3%), then sell it for a p/e of 9. Thats intel. Even if consumers continue to migrate away from PC sales in favor of using smartphones and tablets, businesses continue to shift away from paper data storage in favor of electronic storage or cloud computing. All of those servers still need intel's chips.

Aflac - AFL: Aflac grew its revenue 14% this year, raised its dividend (yielding 3.3% at today's price), and after losing over 30% of its value in the past 7 months, sports a p/e of 9. Much of its decline is due to slowing growth in japan and investors fear over the risk of some of its muni-bond investments. yet, aflac has been addressing those concerns and their numbers continue to shine. Like LMT in January, this is simply too good a business at too good a price to pass up.

Rackspace Hosting - RAX: Considering how risk-averse the rest of this year's list is, we need something to get excited about beyond a lot of chinese gambling. So I'm tapping RAX as my pick to continue the trend of electronic data storage and cloud computing. RAX is a leader in the field and has lofty growth prospects. This naturally means that the stock always looks too expensive, and was precisely why it didn't make the 2011 list. But after another year of beating expectations, and the S&P 500 (by 21%), I'm ready to jump on board before the rest of the bandwagon. Growth next year is estimated at 52% and this type of data storage should completely take over in the next few years. RAX is also probably a buyout target. The one concern is that RAX' accounts receivables has outpaced revenue growth the last couple of quarters, meaning money is falling through the cracks of the floor for some reason. I'll pretend that they've been too focused on growth to start chasing the pennies, but don't want the trend to continue for long. Still, RAX is my best bet to add a little excitement back into this list after departures from MVL, NTES, and NFLX were replaced by more conservative choices and have given a pretty risk-averse bias to the list.


Thats all for the 2011 wrap-up.  [more]

Recs

2

looking ahead to 2011

January 07, 2011 – Comments (0) | RELATED TICKERS: MSFT , MCD , ATW

Its been 9 months since my last manifesto and the 11 stocks discussed back in April of 2010 have averaged a non-dividend adjusted 13.91% gain versus the S&P 500's 5.6% gain, for an 8.31% lead over the market. Obviously the gain is larger when accounting for the dividends, but i don't have time to add in all of that data. Specifically, the percentage gains break down as follows:

ATVI     + 4.4
ATW     (1.8)
BRK.B + .42
AKO.A + 32.7
FO      + 23.25
HAS    + 16.48
MPEL  + 36.27
NOV    + 50.4
PM      + 8.4
RST    (20.7)
WM     + 3.29

Sadly, my real-life holdings don't include all of these picks, but I suppose thats the purpose of emailing myself these comments. Moving forward, the biggest winner, NOV, still looks like a strong play. I'm holding current shares but would consider buying more only if I saw a strong market pullback. Staying within the oil sector, at current valuations, I'm redoubling my interest in ATW, which has yet to bounce back from the BP spill but should see increased profits and earnings as demand increases and oil continues to rise. Of all the picks, this one's negative performance has been most surprising.

I'm maintaining original thesis behind BRK.B., PM, MPEL, and WM, but remaining picky on each's purchase price and not buying if higher than average P/E.

I am moving ATVI into the "cautiously optomistic" category as I hold shares and wait for the next two quarters, and place AKO.A, HAS, and FO on temporary hold after solid one year runs over 50% each and with FO spinning off its golf club and bathroom fucett divisions to focus solely on alcohol. Also looking to see how HAS negotiates its licensing agreements going forward, as its reliant on third parties to capitalize on much of its IP value.

That leaves RST, which I am abandoning with full awareness that I might regret this decision. While doubling down after hard hits account for a majority of my long term gains, the exudus of executives at RST this past summer is concerning. The "I just want to leave and spend more time with my family" press releases are unconvincing. More importantly, the product is expensive and requires significant labor by the customer to be effective. I don't see any barriers to entry and am not convinced that XYZ Corp couldn't put a better product on the market next month. Finally, anyone outside the U.S. under the age of 40 already speaks multiple languages, and the percentages only increase inversely by age. In only 9 months, I struly cannot understand why I got so caught up with RST. Its rare that I abandon a company after such little time, either i did not have enough confidence with my original pick, or the summer's resignations brought too much doubt. Either way, there are too many other great plays out there.

New additions:

McDonalds (MCD)
Lockhead Martin (LMT)
Nucor Steel (NUE)
Microsoft (MSFT)
AeroVironment (AVAV)

First, weapons and fast food were missing from my "evil companies" 2009 and 2010 picks but now MCD and LMT appear to be poorly valued considering their history and dividend yields. First, U.S. investors aren't looking past the cyclical healthy food phase here at home and focusing on MCD's growth abroad. Or maybe its the anticipated spike in food prices that's scarying everyone off but, if thats the case, i'm betting MCD's can come up with a cheap and filling meal faster than competitors buying into the same food supply market. At $74 and change, i'm sold.

As for LMT, sure, our deficit is out of control and defense spending is a favorite target over the harder SS or medicare reform, but have you seen pictures of the new Chinese Stealth Jet? LMT is trading as historical lows and our air dominance is what lets us sleep soundly at night. On that note, what about micro-cap AVAV. Not only do they produce unmanned (drone) aircraft, which everyone loves, but they're an innovator of electric technologies and produce charging docks for Nissan's electric vehicles. Considering the stability of the other picks, a $600 Million corp with backing from the pentagon and auto manufacturers is worth the potential reward.

Sure, businesses have been hesistant to spend money as we meander out of recession, but that can only last so long. We're starting to see continued employment growth, and consumer spending, and once the gears start turning, businesses will turn to america's favorite steel, NUE. While all the focus is on renewable energy, cloud computing, and fancy consumer technology, steel will remain in demand and Nucor's growing dividend can keep me happy while I wait watch production increase and revenues flow.

That leaves my top pick, Microsoft- that company everyone talked about 10 or 15 years ago before the iPod, iTunes, iPhone, iTouch, iPad, and iDestruction came and conquered all. While nobody was paying attention, they started growing a dividend yield, remain a software leader in many areas and just created a gaming platform that will revolutionize the industry and make the Nintendo Wii look like an old Atari. Not only did MSFT just sell 8 million units in 2 months, but the market still hasn't grasped that the Kinect is not simply a video game controller add-on- its a new way to play games, and play dvds and music on your tv, oh, and share your photos, and chat with your friends and family, and more. Ever see a futuristic movie where people are presenting information to each other by waving their hands and moving entire screens of data? thats the Kinect. Its 30% smaller than Apple, the market expects 1/3 as much growth, and its pays and is increasing its dividend. Where do i sign up?  [more]

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