Sold Harley Davidson
Harley-Davidson, Inc. (HDI)
SSG and PERT | Google “Stocks: HDI” |Company Website
We sold Harley Davidson on June 28, 2006. Although a high quality company, HDI is no longer a growth company. Projected average return is under 8%. The proceeds from the sale were invested in other companies in the portfolio with better long term prospects.
Portfolio Realignment
This might be a good time to do some late spring cleaning on our portfolio. We have 26 companies in our portfolio. Reducing the number of companies to around 20 would help eliminate the stocks with the lowest projected return.
Portfolio Evaluation Tools
There are two tools that can help with this portfolio The Portfolio Evaluation Review Technique or PERT chart takes most of the important data from the stock selection guide and arrays it logically for each stock in the portfolio. It is very useful for comparing stocks in a portfolio. Take look at the PERT chart for the portfolio. (The attached PERT report is sorted by Compound Annual Rate of Return from lowest to highest total report.)
The left side of the PERT chart shows how EPS, sales, pre-tax profit have changed in the current quarter. It also shows how the trailing 12 month EPS. The pink areas show growth less than 15%. If a stock has a pink shaded area, it is a good idea to learn why.
Several nuances of the a PERT chart generated with the Toolkit software are important to understand. First, the current P/E is actually the forward P/E, that is, the projected EPS for the next 12 months divided by the current price. The PERT chart uses analyst consensus earnings for the next 12 months. Second, the compound annual return total return uses the 12 month EPS estimate extended out 4 more years using the EPS growth rate. This approach obviously relies on the accuracy of the 12 month EPS projection and the 5 year PES growth rate but is certainly a good approach.
The Portfolio Trend Report is also a good tool for comparing stocks in a portfolio. It also uses data from the stock selection guide. It shows Total Return and Projected Average Return (PAR). Remember, Total Return uses a projected 5-year high PE while PAR uses an average 5-year PE. (Note that Total Return differs slightly from compound average annual return on the PERT chart.)
Proposed Portfolio Realignments
Here are some proposed changes to our current portfolio:
1. Sell Harley Davidson (HDI). Although a high quality company, HDI is no longer a growth company. Projected average return is under 8%. The proceeds from the sale can be invested in other companies in the portfolio with better long term prospects.
2. Sell Fifth Third Bank Corp (FITB). We hold several financial stocks in the portfolio: Commerce Bankcorp. (CBH); Capital One Financial (COF), and Synovus (SNV). FITB seems to rank fourth among these. It has a hard time establishing itself as it expand and there has been a turnover of a number of senior executives. The proceeds could be used to bring our positions in CBH, SNC, and COF up to 5% each.
3. Sell UTStarcom (UTSI). OK, it’s official. This stock is a loser (and I originally recommeded it). It might be better to take the loss and move on. Lesson learned — growth that looks to good to be true, probably is too good to be true.
4. The proceeds from the sale of HDI, FITB, and UTSI could used to add to positions in those stocks with a projected average return of 15% or better. (See attached speadsheet.) Here are the proposed additions:
$800 Amgen (AMGN) – PAR of 16.8%
$900 Capital One Financial (COF) – PAR of 12.7%*
$230 Jack Henry & Associates, Inc. (JKHY) – PAR of 16.9%
$600 Lowe’s Companies Inc. (LOW) – PAR of 16.7%
$750 Maxim Integrated Prod Inc. (MXIM) – PAR of 18.6%
$500 Synovus Financial Corp. (SNV) – PAR of 17.8%
* COF is our lowest PAR. However, we used a very conservative estimate. COF seems to be a good prospect.
While this looks like quite a few transactions, it only includes $922 of new cash. Rebalancing to 5% among our stronger companies should improve the quality of the overall portfolio. The transaction costs are relatively small ($3 x 9 =$27). The proposed changes are summarized in this spreadsheet.
Purchased More PDCO
Purchased additional shares of Patterson Companies at $34.80. Here is the stock selection guide.
Patterson Cos. (PDCO)
SSG and PERT A | Google “Stocks: PDCO” | Company Website
Patterson has had a somewhat mediocre year but the company seems to be on track to improve sales and earnings in fiscal year 2007. (PDCO’s fiscal year begins on April 1.) PDCO has invested in sales and marketing. With its year-end earnings report, PDCO gave earnings per share guidance for 2007 of $1.61-1.64 (about 13% growth).
Growth. Value Line projects revenue growth of about 12% while Morningstar projects 13%. The revised stock selection guide uses 12%. Future growth will come from a combination of internal growth and small acquisitions. Internally, PDCO sets a goal for growth of 4% above the market. Its dental business is currently growing faster than its other lines of business.
Quality. PDCO remains a high quality stock (although Morningstar gives it a narrow moat). Manifest Investing rates quality at 71.3 (out of 100). Value Line rates PDCO’s financial strength an “A” and it earnings predictability 100.
Valuation. Projected average return is 13.5%. PDCO has always sold at relative high PE. Its current PE is about 24. The stock selection guide uses an average future PE of 24.
We purchased PDCO in March 2003 and have enjoyed an annualized return of 12.5%. It represents 2.25% of the portfolio. This would be a good time to add to our position.
More Open-End Mutual Funds
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.
- Value Funds (all caps): Fairholme Fund –> FAIRX and Muhlenkamp Fund –> MUHLX
- Mid Cap Value Funds: Third Avenue Value Fund –> TAVFX and FAM Value Fund –> FAMVX
- Small Cap Value Funds Third Avenue Small Cap Value Fund –> TASCX. The program also discussed the Royce small cap funds but their best open-end fund is currently closed to new investors. The Royce closed-end funds discussed below are probably better alternatives.
- International Funds: Dodge & Cox International Fund –> DODFX and Harbor International Fund –> HAINX.
The program also mentioned www.fundalarm.com a free, non-commerical web site that helps to idenitfy when to sell a mutal fund.
Some Mutual Fund Ideas
Mutual funds can help provide asset class diversification. The following small and mid-cap funds and international funds look interesting. The embedded links are to the funds’ web sites and to the Morningstar summaries (which may require logon to M* to view).
Closed End Funds
- Source Capital –> SOR is a value oriented fund that has outperformed the Russell 2500, S&P 500, and the NASDAQ for the past 1, 3, 5, 10, and 15 years
- Royce & Associates, a manager of portfolios of small- and micro-cap companies, has three closed end funds with excellent track records: Royce Focus Trust (FUND), Royce Micro-Cap Trust (RMT), and Royce Value Trust (RVT)
Some Open-End Mutual Funds (that don’t suck)
- Neuberger Berman International Fund –> NBISK invests primarily in common stocks of foreign companies of all sizes in developed and emerging industrialized markets and has consistently outperformed the EAFE.
- Brandywine Blue –> BLUEX focuses on mid to large cap growth stocks and limits the portfolio to about 30 holdings
- Forward Hoover Small Cap Equity –> FFSCX has outperformed the Russell 2000 but it has a high expense ratio and has not performred as well as the Royce funds
- Third Avenue Value –> TAVFX is a mid-cap blend with a very good track record
For example, a diversified portfolio might include:
- 50% Large cap (35% Investment Club Units, 15% Source Capital)
- 30% Small- or mid-cap (15% Royce Value, 15% Royce Focus)
- 20% International (20% Neuberger Berman)