Online Journal for the Moose Pond Investors Club

Portfolio Rebalancing

We are finally moving close to positive territory for portfolio return for the year in spite of or losses in UTStarcom and Pfizer. See year-to-date return report. Pfizer will most likely bounce back, but a recovery by UTStarcom is much less certain. Internal rate of return for the portfolio for the year to date is 0.5%. The S&P 500 is up 1.9% for the same period.

Most companies have reported their third quarter earnings. This is a good time to take a close look at the Moose Pond portfolio. The stock selection guides (SSGs) for all holdings have been revised. Go to the portfolio summary and click on the links for each stock to see the individual SSGs. Also, look at the current diversification report.

Consumer Discretionary (18.9% of portfolio). Harley Davidson (HDI), Johnson Controls (JCI), and O’Reilly Automotive (ORLY) are all quality companies and have all done well. However, the projected average return (PAR) for JCI and ORLY is only 7.5% and for HDI is only 10%. We should be looking for companies with a PAR > 15% to replace at least two of these stocks.

Energy (3.5% of portfolio). We only have one energy stock, Chevron. This is an oil mega cap. We may want to increase our exposure in this sector slightly, increasing the position in Chevron to 5% and adding a large producer/refiner (5%). See the current McDep report for a discussion of possible buys.

Financial (24.2% of portfolio). The financial sector, especially the banking, has been beaten down with the recent rise interest rates. We have a little redundancy in this sector. The companies with the lowest PAR are Brown & Company (BRO), PAR of 11.4%, and Capital One Financial (COF), PAR of 11.2%. It is a toss up whether to hold or replace these two stocks. Synovus Bank look interesting. It is a regional bank that derives about one third of its revenue from its interest in TSS, a credit card processor. See the SNV stock selection guide.

Healthcare (24.2% of portfolio). Amgen had a nice run-up this year but going forward, PAR is only 12%. Patterson Companies (PDCO) has a PAR of 10.2% and Lincare (LNCR) has PAR of 8.4%. LNCR is a prime candidate for replacement. Lower federal reimbursement for supplemental oxygen has cut into its margins.

Information Technology (26.2% of portfolio). Fiserv provides information management systems and services to the financial industry. However, Fiserv (FISV) has had several quarters of slowing revenues. Its PAR is 10.5%. It might be time to sell FISV and replace with additional shares of JKHY and new shares of SNV. UTStarcom has not done well and company guidance does not project positive earnings until the second half of 2006.

What to Do? Over the next month or two we may want to:
(1) Sell JCI, FISV, LNCR and ORLY.
(2) Purchase Synovus (see SSG).
(3) Increase position in CVX to 5% and add purchase 5% position in ConocoPhillips (COP).
(4) Increase positions in ACS, BBBY, FITB, JKHY, LOW, PFE and WMT to 5% each. (All of these stocks have a PAR of at least 15%.)

This would reduce the number of stocks held in the portfolio by 2 to 24. The new weighted PAR would be 15.1% and quality would be 72.1 The Excel spreadsheet shows the changes. Total trasaction costs for all of these changes would be about $36.

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