We made the following changes to our portfolio:
All of these trades together will increase the overall quality and projected average return of the portfolio. See Manifest Investing dashboard. We are still a little ahead of the S&P 500 for the year.
Between our cash position (4.5%) and funds temporarily invested in Vanguard’s Total Market Index ETF (9.3%), we have sufficient funds to take new positions in up to four companies. Here are several suggestions.
Adding to Existing Positions. It is always a difficult question whether to add to existing positions or buy new companies. Look at our Manifesting Investing dashboard. Of the stocks that account for less than a 4% position in the portfolio, three companies show a good projected average return (PAR > 13.7%) and high quality (quality rating > 65). They are AMGN, BBBY, and GYI. We could add to these positions, perhaps adding the equivalent of 1% of the total portfolio value to each.
Analysts have reassessed Amgen’s drug pipeline and have reduced their earnings projections for Amgen. As a result, the price has declined about 20% this year. With the bad news largely priced in, Amgen may be a bargain. (Of course, I still have the scars from catching other falling knives.)
A Stock to Sell or Exchange. Commerce Bancorp has been a good performer in our portfolio. It has appreciated at an annualized rate of 14.3% since we acquired it in August 2003. However, the fundamentals for CBH seem to be declining. Its return on assets (ROA), one of the key measures of a bank’s performance, has declined to 0.70%. (The ROA was around 0.90% when we purchased CBH.) Margin on net interest income, the return it makes from lending, has also declined. Year-to-date the price is down 3.5%. While declining prices should never be the reason to sell a company, declining fundamentals are. The declining price is probably confirming what we see in the fundamentals. Here is a current stock selection guide for CBH.
The SSG for CBH does not scream “sell” rather it is a “hold.” However, there probably are better opportunities in the financial sector. Two companies to consider as replacements are American International Group (AIG) and Wells Fargo (WFC). WFC pays a 3.2% dividend and has a ROA of 1.7%. For a number of different reasons, AIG’s price has remained relatively static for the past three years while earnings have continued to grow. Look at the two stock selection guides.
Stocks to Consider Buying. The portfolio might benefit from a little more exposure in the technology sector. Two quality large-cap stocks with relatively high PAR are SAP and Microsoft. Microsoft has a near monopoly position in a number of different PC market niches including office products. SAP is probably the last major competitor to Oracle for enterprise software. Like Oracle, SAP has captured a large installed base of customers who annot easily or inexpensively change. Comparing stock selection guides for SAP and Oracle, SAP seems to be the better bargain now. Here are the stock selection guides for Microsoft and SAP.
The final stock to consider buying is General Electric. The stock price has moved sideways, while earnings growth slowed to 7% over the past five years. Value Line projects 7% sales growth and 12% earnings growth over the next 3-5 years. GE’s foreign sales are a plus. Here is a stock selection guide for General Electric. Boring, yes, but the 3.2% dividend, international exposure exposure, financial strength, and steady earnings growth make it a solid core holding.
Summary. Here are the various proposals.
With the advent of digital broadcasting via the Internet, you can find a growing number of investment-related programs. However, they vary widely in quality and content. Here are two excellent broadcasts available in MP3 format.
The Wise Investor Program hosted by Randy Beeman of the Wise Investor Group (affiliated with Ferris Baker Watts) airs on WMAL (630 AM) each Sunday in the D.C. area. This program, started by Ric Malone, has been broadcast for 17 years. It follows a value oriented approach to building a portfolio. You can download the program from the WMAL website the day after the regular broadcast.
Your Money with Chuck Jaffe is another excellent investment program. He broadcasts and records a daily one-hour radio program. He interviews a wide range of interesting guests who discuss stocks, mutual funds, and personal financial planning. MarkeyWatch posts an edited 30-minute version of the radio show. From both technical and content perspectives, this is high quality broadcast. You can also use Apple iTunes to download the MarketWatch version. The full one-hour program can be found on Chuck Jaffe’s website, http://www.yourmoneyradio.net.
If you download the free Apple iTunes software, you will discover hundreds of interesting podcasts on a wide range of topics (besides investing). Install iTunes on your PC and get an MP3 player. Your walking, exercising, and driving around town will take on a new dimension.
While the iTunes program was designed for the iPod, you still can use it to download and organize podcasts for use with any MP3 players. (Both Mac and PC versions of iTunes are available.) It won’t automatically sync with a non-iPod player but the work around is easy, just manually drop and drag the files to your MP3 player. It you have an iPod, it is seemless.
Our lowest PAR, highest P/E stock is FDS
One of the activities in portfolio management is to look for “outliers” in a portfolio. That is part of the continuous process of improving a portfolio. Comparing the projected average return, P/E ratio, projected sales growth, projected revenue growth, and quality metrics for each stock in a portfolio, can help spot outliers. To borrow an airborne term, at least one stock will be standing in the door, ready to jump. Outliers make good candidates for sale when a better opportunity comes along.
The dashboard for our portfolio shows the projected average return for each stocks. Factset Research Data (FDS) is the outlier, with the lowest projected average return (6%) of all our stocks except ChevronTexaco. Looking at the portfolio summary, FDS has a current current P/E of 34 making it the highest P/E stock in the portfolio.
FDS has been one of our winners, +12.3% YTD. However, its run-up in price has reduced its projected average return (PAR) to about 6%. (See updated stock selection guide.) Value Line rates its financial strength B++ and earnings predictability 100. Morningstar rates it “three stars” meaning it is fairly priced.
So the dilemma is do we “let the winner run” or “take profits.” It is probably a hold at this point. If the PAR falls any lower, however, it will be candidate for replacement.
This is a response to a question by one of my young adult children. She was looking for a place to put some safe money (i.e., funds that she might need in the next 1-3 years) and wanted to obtain a better rate of interest than that offered by her bank.
Vanguard money market funds are a good place to park money that you may need in the next 1-3 years. At your tax bracket, I would not worry about finding a tax-free fund. Tax free money market funds don’t become advantageous until you reach the 28% tax bracket or higher. You can ask Vanguard for a check book for your money market account and redeem shares by check. However, the check has to be $250 or more.
Here are three suggestions. The fund are listed with the safest funds first. The spread between the Treasury-based fund and the prime rate fund is very small. It comes out to about a $25 per year difference on $10,000. So you might want to stay with safety (either Treasury or Federal). That way if the world goes nuts, your funds will be secure. (more…)
For the quarter ending March 30, the Moose Pond portfolio increased in value by 2.9%. In comparison, the S&P 500 increased 0.18% for the same period. See the portfolio performance report for the quarter.
The top five advancers for the quarter were SYK (+20.8%), IFIN (+16.9%), GYI (+13.6%).,CAH (+13.4%), and JKHY (+12.7%). The laggards were AMGN (-18.2%), JNJ (-8.4%), INTC (-5.0%), CBH (-5.0), and BRO (-3.9).
Other than normal dividend reinvestment activity, we bought WAG and added to our position in JNJ. We bought more Vanguard total stock market index (an exchange traded fund) as a holding place for funds available to invest. We sold UTSI and IFIN. (IFIN was acquired by another company.)
In 2006 we had a total return of 6.1%. The value of a unit increased from $13.097 to $13.894. While our return was positive, it lagged behind most of the major market indices. For the first time, we are slightly behind the S&P 500 for a five year period (5.9% vs. 6.2%). Portfolio turnover was about 10%. You can find the annual report for Moose Pond Investors here.
More information about the performance of individual stocks in 2006 can be found in the diversification report and performance report.
Learning about investing is a continuous process. There are several radio programs that are available in digital (MP3) format. These “podcasts” can be downloaded and played at your convenience through a computer or with an MP3 player. Here are several excellent programs.
The Wise Investor Show has been broadcast in the Washington, DC, area for 17 years. The program advocates a conservative, value-oriented approach to investing. The program is always informative and educational. The weekly program can be downloaded from the WMAL.com website. Currently, the program is only archived one week at a time, with the Sunday program becoming available on Monday. The program lasts about 2 hours.
Paul Douglas Boyer, who happens to live near here in Vienna, Virginia, has a blog and a podcast that discusses fun investment topics and reviews the Mad Money recommendations of guru Jim Cramer. His weekly podcast last about 30 minutes and is entertaining and well produced. The program advocates an asset allocation strategy. Both podcasts and model portfolios can be found on the Mad Money Machine.com website.
Jim Cramer is interesting, educational, and, at times, controversial. He has a daily radio program that lasts about 30 minutes. Podcasts for the radio program can be found on the TheStreet.com website. He advocates a trading approach with a small percentage of a portfolio. While his near term trading philosophy differs significantly from an NAIC-approach, he often offers interesting and insightful perspectives. His book Real Money: Sane Investing in an Insane World is well worth reading.
It is easy to become a fan of podcasts. You can find podcasts on many different subjects, not just investing. They allow time shifting. With an inexpensive MP3 player, you can listen to a podcast in the car, while walking, or while exercising. Apple offers a free program called iTunes. It includes a link to a podcast directory maintained by Apple. It can be configured to manage your podcasts by automatically downloading new programs and deleting old ones.
In terms of investment return, we been treading water for most of 2006. The value of a unit in the funds is almost where it was when we started the year. We have an excellent portfolio. Although it is weight more heavily with larger growth stocks.
In general terms, stocks that have consistent increases in earnings and revenue, at a rate faster than the growth of the economy, are characterized as growth stocks. In contrast, stocks with a low price-to-book (P/B) ratio and low price-to earings (P/E) ratio are characterized as value stocks. Mutual funds are frequently characterized as either growth, value, or blend (a combination of growth and value). Mutual funds are further characterized as large, medium, or small capitalization. Market capitalization is simply the number of shares issues time the market price of share of stock.
All of this is a leading up to the observation that large capitalization stocks have not done as well as value stocks. Similarly, growth stocks have not done as well as value stocks, in the last 12 months or so. The Callen Periodic Table of Investing Returns shows how different sectors (large, medium, and small capitalization, and growth, value, and blend) have different returns from year to year.
So what do we do at this point? Stay the course. We have an excellent portfolio, even though it is weighted more heavily in larger growth stocks. As we buy more stocks, we should look for opportunities in smaller stocks, especially smaller growth stocks that are cheaply priced.
You can see how growth, value, and market capitalization interact, using this spreadsheet. The spreadsheet calculates return for a portfolio over the last 15 years based on the asset classes in the portfolio. The S&P 500 is a good surrogate for large capitalization stocks. Similarly, the Russell 2000 is a good proxy for small capitalization stocks.
To compare investment returns, enter a number, e.g., “100″ in the blue column for the asset class you want to examine and “0″ for all others. You can also look at the return of various combination of asset classes. You might find this spreadsheet helpful if you are trying to decide how to allocate long term savings.
After a great deal of research, I see considerable merit in having a substantial amount of core savings allocated among index funds that represent these asset classes. I am paying much closer attention to asset classes. (Moose pond Investors is really a large/medium cap, growth asset class.) Asset allocation might be the subject of a future posting if there is any interest. But for now, the returns of the various asset classes will help explain why the Moose Pond returns have not been stellar this year.
The Wise Investor show (WMAL, Washington, DC) on 06 May 2006 with guest David Teitalbaum discussed mutual funds. Here are some of the more interesting funds. His website at www.moneybalance.com includes back editions of his free newsletters. The following links are for the mutual fund web sites and for the Morningstar analyst summary.
The program also mentioned www.fundalarm.com a free, non-commerical web site that helps to idenitfy when to sell a mutal fund.