Portfolio review is a constant activity and one that merits more time than the selection of individual stocks. Let’s look at the Moose Pond portfolio at mid-year. (Also, see Mid-Year Performance Report below.)
Diversification. The portfolio includes 24 companies in 5 sectors: consumer discretionary (20.3%), Energy (3.9%), financial (26.1%), healthcare (24.4%), information technology (23.8%). Within these 5 sectors are 16 different industries. Except for UTSI which has declined in value to 1.3% of the portfolio, the individual stock holdings range in value from 3-6%. We are 96% invested.
As to company size (based on revenue), the portfolio includes large companies (58%), medium companies (38%) and small companies (4%). Conventional wisdom would suggest larger holdings in small companies. However, large companies, especially quality companies, currently seem to offer better value. Just look at the number of large quality companies that Morningstar recently has rated as five-star.
Several recent articles have suggested that the near future looks brighter for growth stocks. See the article “Quality Socks Are Now on Sale” by Pat Dorsey of Morningstar (password required). Also, see articles by Jim Jubak and Timothy Middleton of MSN.
Offense and Defense Reports. The offense report generated by Toolkit 5 shows whether the projected return of stocks we hold meet our targets. This report is simply a sort by projected total return. If projected total return is less than the target return, Toolkit highlights the entry in pink. While the current report highlights five stocks, only one of those stocks shows a significant variance. (ORLY has a projected total return of 11.3% against a target return of 15%.) ORLY’s EPS growth has slowed and it currently has a projected average return of 6.9%. We will have to examine ORLY further.
Looking at the defense report (sorted by EPS growth), also generated by Toolkit 5, we see that the portfolio contains a number of stocks for which the earnings have failed to grow in the near term (last 12 months). These include MMC, PFE, LNCR, UTSI, CAH, FITB, PDCO, COF and IFIN. We have looked at each of these stocks individually and consider their long term prospects to be very positive. That’s why we bought them. However, the current problems faced by these companies have driven their price down. This also explains why the Moose Pond portfolio has not kept up with the major indices like the S&P 500 or the Russell 2000 for the first six months of this year.
Changes in Fundamentals. Several stocks in the portfolio need further study. Projected revenue growth has slowed for HDI to 5.7%. This slow down is reflected in the current price. However, the question is whether we should replace HDI with another quality stock with better long term growth prospects. ORLY also appears somewhat over-valued now with a projected average return of 6.9% although it remains a high quality stock with good growth prospects. Finally, JCI’s projected revenue growth has slowed to 7.6%. JCI remains a good quality stock but its projected average return is only 10.5%. It may be better to continue to hold these three stocks but they warrant a close look.
Summary. We need to take look further at ORLY, HDI and JCI and decide if any of those stocks should be replaced. Also, note that we have taken something of contrarian position on MMC, PFE, LNCR, UTSI, CAH, FITB, PDCO, COF and IFIN. We are holding them in spite of near term issues with earnings. If our long term assessments for even a majority of these stocks are correct, the Moose Pond portfolio should substantially out perform the indices in the next year or so. The key is patience and keeping the long term view in focus.