Mid-Year Report
Unit share price on June 30 was $13.14 up only slightly from the $13.09 at the beginning of the year. The IRR was 0.7%. In comparison, the S&P 500 was up 1.76% for the same six month period. (Actual gain for the S&P will be slightly higher with dividends.)
Top five advancers for the first half of 2006 were: Occidental Petroleum, OXY (+29.4%), Investors Financial, IFIN (+20.2%), FactSet Research Systems, FDS (+15.2%), Chevron, CVX (11.1%), and Maxim Integrated products, MXIM (+5.0%). The five biggest decliners for the same period were: INTC (-20.2%), Amgen, AMGN (-17.6), Affiliated Computer Systems, ACS (-13.8), Marsh & McLennan Companies, MMC (-14.4), and Stryker, SYK (-8.0%).
With the possible exception of MMC, the fundamentals of the decliners remain intact and don’t warrant sale of these stocks. The wide range reflected by the return of the top and bottom stocks for 2006 underscores the importance of diversification and adding regularly to the portfolio.
June Transactions
On Wednesday, we added 18.8 shares of SNV and 23.9 shares of MXIM. We closed our positions in HDI (20.1 shares) and FITB (39.9 shares). On Friday, we added 11.4 shares of JKHY, 9.8 shares of LOW, 12.1 shares of AMGN, and 10.3 shares of COF.
This reduces the number of companies in the portfolio to 24. We only have 1.1% in cash. UTSI jumped for $6.50 to $7.79 this week. So maybe we should hold a while more.
Here is a dashboard for the portfolio reflecting these transactions.
Sold Fifth Third Bancorp
FactSet Research Systems, Inc. (FDS)
SSG and PERT A | Google Stocks | Company Website
We sold Fifth Third Bancorp on June 28, 2006. FITB’s performance has been subpar for some time. It has also had a defection of senior management people. The proceeds from the sale have been redeployed to other financial stocks in our portfolio that have brighter prospects.
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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.