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miclane05 (92.48)

May 2012

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]

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