Looking at our Portfolio
As we head into the fall season, the equity market has improved significantly from its bleak lows in March. However, even though we are beating the S&P 500 (an index of large-cap stocks) our portfolio has not fully recovered. Year-to-date, we are up 17.4% compared to 15.1% for the S&P500.
There are several tools, some of which were developed by NAIC / Better Investing, for looking at an entire portfolio. The portfolio evaluation review technique or “PERT” takes data from individual stock selection guides and creates a table. Sorting this information allows identification of the outliers.
How are we doing?
Like the fighter who says “if you think I look bad, you should see the other guy,” a few hard blows have landed on the Moose Pond portfolio but we are still ahead of the broad market indices this year by slightly more than 10%.
Using the performance benchmark report in Bivio, the internal rate of return for the Moose Pond portfolio was a negative 27.6% year-to-date on October 31. In comparison, the Vanguard Total Market Index Fund was down 38.6% and the Vanguard S&P 500 index Fund was down 38.5% for the same 10-month period.
It will take a strong post-election rally to take the edge off the losses for this year. Stock valuations are at a low for several decades. So while there has to be pony in here somewhere, no one can be sure exactly when we’ll find it. In the interim, we should continue to follow out investment objectives and remain fully invested and commit new cash.
We do have an opportunity to replace several of our stocks with ones that have a higher projected average for the next five years. More to follow on that.
Here are performance reports for the one month and 12 month periods ending on October 31, 2008.
Weathering the Storm
Despite the tumultuous week on Wall Street, our portfolio weathered the storm. Since the beginning of the of the year, the value of a unit share in Moose Pond Investors declined about 2% from $13.647 to $13.375. However, the overall stock market declined 13.1% for the same period (using the Wilshire 5000 index). Our internal rate of return, which takes into account all cash flows for the portfolio, for the same period is -2.5%. Here is a detailed YTD performance report.
AIG was the big loser, dropping 93%. The stock is probably a lost cause. Good thing we didn’t but any more! The other contributors to our losses this year were Synovus Financial (-50.8%), Total System Services (-35.2%), Microsoft -28.5%), and Intel (-26.5%).
An astute reader of this blog pointed out that most of the drop in price for Synovus Financial (-50.8%) this year was a result of the spin-off of TSS in January. That’s exactly correct. Just looking at the price of SNV does not tell the whole story. At the beginning of the year, our holdings in SNV had a value of $1,758. SNV and TSS currently have a combined value of $1,392. So the actual decline in value this year is only 20.8%.
But for the losses on AIG and TSS, we would have been in positive territory for 2008.
We do have some winners this year. They include Helmerich & Payne (+40.3). Wells Fargo & Co. (+36.2%), Amgen (+29.1%), Sun Hydraulics (+26.4%), and Lowes (+26.3%). This underscores the importance of diversification and quality in a portfolio.
Take a look at the portfolio dashboard from Manifest Investing. We may want to consider selling Bed, Bath & Beyond and Brown & Brown. At the same time, we may want to slightly increase our holdings in Microsoft, Walgreen, Transoceanic, and FactSet Research. Each of these companies have a high quality rating and high projected average return.
Portfolio Update
As of this past Friday, we survived the market turmoil. The internal rate of return for Moose Pond Investors was 2.4% for the year to date. This slightly lagged the S&P 500, which was up 4.3% for the same period. See performance report.
Several stocks accounted for the mediocre performance.
Getty Images GYI (-38%) had a disappointing quarterly earnings report. Morningstar star reduced its fair market value estimate. Investors Advisory service recommends selling GYI, noting that the company faces increased competition in the Internet photo images market. Morningstar reduced GYI’s moat rating from “wide” to “narrow.” The visual section of the stock selection guide show the downturn. See the current stock selection guide (SSG) which shows a projected average return (PAR) of only 7.6%. My bad for recommending this one. We should probably sell GYI at some point soon.
Amgen AMGN (-26.6%) has been down for the year. However, most of the analyst reports cite its pipeline and consider it a strong long term buy. Here is the current AMGN SSG. Note that the PAR of 22.7% and that assumes a relatively modest EPS growth of 11%. AMGN is definitely a hold and probably a buy. Now if the market will just recognize what we do!
Of course we had several winners YTD as well. These include INTC (+23.7%), ITW (+24.9%), JKHY (+25.2%), and OXY (+27.8%). This highlights the importance of diversification.
Here are three transactions that may improve our portfolio performance for this year.
- Replace Stryker (SYK) with Medtronics (MDT). Stryker has advanced 22% this year. The price increase has diminished its long term prospects. Morningstar rates it two stars (a little over priced). In contrast MDT is rated five stars (a bargain). Both companies are quality medical suppliers, however, the prospects are a little better for MDT.
- Sell Getty Images (GYI). We are better off selling and redeploying the cash.
- Buy Superior Energy Services (SPN). BNP Is a diversified provider of specialized oilfield services and equipment. While oilfield services are cyclical, the prices for oil and gas have not gone down and the demand for oilfield services continues. The SSG for SPN looks strong. Neither Morningstar nor Value Line cover SPN, but it received a five star rating from Standard & Poors. We should move quickly on SNP as it appears particularly undervalued now.
Semi-Annual Report
For the first half of the year, our internal rate of return is +6.2% which is slightly ahead of the S&P 500 (+6.0%). See portfolio performance report for the first half of the year. Our challenge is to do much better than the S&P 500.
Portfolio Activity
We made some adjustments to our portfolio this quarter to improve portfolio quality and increase diversification. In the energy sector, we replaced Occidental Petroleum and ChevronTexaco with ConocoPhillips and Helmerich & Payne. This split our energy holdings between a mega-cap energy company that both produces and refines, and a quality company that provides contract drilling services to oil and gas producers.
In the financial sectors, we replaced Commerce Bank and Capital One Financial with American International Group. (There is nothing inherently wrong with CBH and COF, although COF has a low return on assets; we just wanted realign our financial stocks.) We exchanged East West Bancorp for Wells Fargo & Co.
We added to our position in Getty Images, Bed, Bath & Beyond, and Amgen. Unfortunately, BBBY reported mediocre earnings after we increased our position. This clipped our overall portfolio earnings for the quarter a little. See chart. However, BBBY remains a high quality company.
Finally, we added information technology holdings with new positions in Microsoft and SAP. We sold UTStarcom. All these transaction together raised the quality rating of the portfolio to 72.2 (out of 100 with 65 being excellent) and the projected average return to 13%.
Most Recent Quarter
Our biggest winners for the quarter were Intel (+24.7%), Maxim Integrated Products (+14.2%), and our energy stocks, Occidental Petroleum (+16.2%) and Chevron Texaco (+10.0%). We had several stocks that did not earn their keep this quarter, Bed, Bath & Beyond (-12.4%), Brown & Co. (-6.8%), Stryker (-4.9%), Synovus (-4.5%), and Walgreen (-5.0%).
The Past 12 Months
It is always interesting to look back over the past year. We had some outstanding winners,Stryker (+50.4%), Factset Research (+45.3%), Chevron Texaco (+34.1%), and Jack Henry & Assoc. (+32.2%). Two stocks disappointed, Amgen (-15.5%) and Brown & Co. (-13.3%).
Looking Forward
Not being a market prognosticator, I’ll leave it for others to predict where the stock market is heading. Morningstar had a very readable outlook, that included a sector by sector analysis. Morningstar observes that some of the mega-cap stocks, like Walmart and Johnson& Johnson are very cheap.
First Quarter 2007
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.)
Good News for January
For the month of January, the Moose Pond portfolio is up 3.6% (in comparison with 1.4% for the S&P 500). We may be back on track. As of today, Feb 2, the portfolio return is up 4.5%, compared with 1.95% for the S&P 500. That is good news!
This month we sold UTStarcom (UTSI) for a loss of $717 and Investors Financial (IFIN) for gain $199. We are 6.8% in cash. We will be using some of that cash to round out our holdings of Walgreens (WAG) and will park the rest in the Vanguard Total Market Index (VTI).
Getty Images really took off this month, up 15%. They did better than the analysts expected. We are back in the black for that stock.
We have two stocks that have doubled since we bought them. Lowes (LOW), one of our first stocks, is up 248% for an annualized return of 22.4%. Factset Research Service (FDS) is up 123% for an annualized return of 32.3%. We need a few more stocks like them.
You can see the entire portfolio at Manifest Investing.
Annual Report for 2006
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.
How Are We Doing?
So how are we doing so far this year on return? The answer is OK, but not as well as we should be doing. We have an internal rate of return of 7.3% year to date. (Internal rate of return takes into account when we receive funds. It is a more accurate measure of performance.) 7.3% is in line with the Wilshire Large Growth Stock index which is up 8.5%. However, some of the broader market indices have done much better, such as the the Wilshire 5000 which reflects the total market, is up 13.2% for the year.
How we are doing depends on the index to which we compare our portfolio performance. Here is a table showing year to date return data taken from the Wall Street Journal as of Wednesday, November 22.
Note that value stocks and small stocks have out performed both large and growth stocks. This has been a trend for a number of recent years. If you want to compare investment returns by asset class (large, small, value growth, etc.) take a look at the Callan Periodic Table of Investment Returns.
As you can see from the matrix on the right, our portfolio is weighted heavily toward large growth stocks. It was only some recent purchases of GYI and VTI that improved our style balance. Large growth stocks have not done as well as the smaller stocks and the value stocks this year. We need to include more small and medium size companies in our portfolio. It may be inconsistent with an NAIC approach, but we also need some value stocks. Value stocks are generally defined as ones have lower price to earnings or low price to book ratios.
The next two graphs compare our portfolio return over the past 12 months with two Morningstar indices. The first graph compares our return to the Morningstar large growth index. Our return tracks that index fairly closely.
The second graph, below, compares our return with the Morningstar U.S. market index. This is a broad index that includes all stocks. We are not doing as well as that index.
Getting Ready for Winter
Most of our companies have announced their 3rd quarter results. Here is an updated PERT chart (portfolio evaluation review technique). Also, here is the portfolio summary. The average quality rating for the portfolio is 67.5 (65 is very good) and average projected average return is 13.3%.
In looking across the portfolio, two, possibly three, companies seem like good candidates for replacement. These are Marsh & McClennan (MMC) and Affiliated Computer Systems (ACS). The third possibility is Pfizer (PFE). We may want to consider replacing these companies with smaller quality companies with better growth prospects. Also, we should look at adding to our position in some of our better holdings.
Marsh & McClennan has not yet recovered from its myriad of regulatory problems. Click here for a SSG. It has failed to re-establish growth in either revenues or earnings. Return on equity and pretax margins have dipped significantly, with no immediate sign of recovery. It may be a good value stock (Morningstar rates it 4-stars) but it currently fails as a quality growth stock. MMC is a prime candidate for replacement.
Affiliated Computer Systems seems unable to move forward. Click here for a SSG. As the chart below shows, it seem it has been unable to grow its revenue and earnings in any significant way over the past 4-5 quarters. It is now mired in an options pricing mess and will have to restate its earnings. ACS failed to fully report its current quarter and instead offered up instead “non-GAAP” (GAAP = generally accepted accounting principles) metrics of performance. Its TTM pre-tax margin (10.5%) is below the industry average (15.8%). Morningstar still rates ACS 4-stars but also rates it F for stewardship. ACS may be a decent company about to turn the corner — assuming its options pricing problem doesn’t get worse — but it seems to be another prime candidate for replacement.
Pfizer is no longer a classic growth stock. It’s price has rebounded in the last 12 months up more then 22%. However, both growth and quality of earnings are in doubt gonig forward. Sales projections over the next 5 years vary from 2.6% to 6%. Click here for a SSG. PFE might be a good candidate for replacement.