As I had previously said, I am trying to follow in Saul, Bear and other’s lead of summarizing my results. I am hoping it gives me a little accountability and perhaps an insight or two that I wouldn’t have had otherwise, and I must admit, I now look forward to go through this process now that I have done it a few times. I find it interesting to see not only the overall performance but to see which investments are working well and which are not as well as how the portfolio is changing, albeit slowly over time.
Total Equity Holdings (not including options)
End of First quarter: 65
End of Second quarter: 63
End of Third quarter: 59
End of fourth quarter: 56
And my changes during the quarter:
Buys: 2 AXY, TLND,
Sells: 6 AGN, CRTO, BLX, EGO, BWLD, CMG,
Adds: 9 HUBS, NRE, SHOP, TRRSD, AIOCF, ANET, NGG, TFSL, PAC,
Reduce:2 LGIH, CHUY,
I know this is not popular here on this board but I do like having a larger number of stocks for a couple of reasons. One, I don’t follow my companies as closely as some here. With a full time job, I buy for the long term and unlike some on this board (Saul!), my ability to zig before my companies zag is not very good. I tend to do exactly the opposite of what I should when I get too active. Secondly, most of my larger positions have gotten there because they started as a small position and the gains have driven their move up the list. I like this philosophy of letting the winners run and really allowing the company performance pick my winners. Having said that, my goal remains to get down to 50 positions or so and I am heading in that direction as I dropped to 56 overall this quarter. I did add a couple but for the most part, I was adding to the stocks I liked as opposed to new positions and I am trying to do this more as well, ie push the ones that are doing well to higher positions quicker.
In addition, a much smaller number of stocks make up the majority of the overall portfolio value. A larger number of them are there because it forces me to keep my eye on them with the idea of adding to them as they grow (and show promise).
Overall, here is my performance for the last four quarters :
Q1 Q2 Q3 Q4 YTD
Mine 5.9% 2.8% 4.1% 5.6% 19.1%
S&P 4.9 2.6 3.1% 6.5 20.1%
R2000 1.2 1.8 4.5% 7.3 13.9%
Nasdaq 9.1 3.8 4.2% 3.6 29.7%
As has been true all year, I am happy with these results until I start reading some of the other portfolio reviews. My goal has always been to beat the S&P, which is what I would mostly own if I indexed and I have done so this year so far (not counting dividends). I haven’t exactly crushed the averages, but I don’t mind this too much as my portfolio is (I feel) lower risk, both because of the companies I own, how I manage it, and because the portfolio is a little more than 15% cash and short-term bonds. (I don’t own any long-term bonds). I will add that historically my portfolio has tracked about ½ way between the Russell 2000 and the S&P500 and in that stead, I am also happy with the performance. I think this board has influenced my portfolio to contain more NASDAQ holdings which is certainly helping recently.
Looking at my top stocks I now have 13 stocks with more than 2% assets (two more than last quarter) with NRE and PRAA being the new additions…NRE because I have been adding and PRAA because it’s value has risen since last quarter. Otherwise it’s the same list with a couple of stocks moving up or down a couple slots only…
Ticker Q4-17 Q3-17 % Q4 Price Incr
AAPL 7.2 6.9% 9.7%
BRK.B 5.5 5.4 8.0
TFSL 4.5 4.7 -7.4
ATVI 4.1 4.4 -1.8
NFLX 3.7 3.7 5.9
LGIH 3.5 2.6 56.1
CLNS 3.2 3.7 -9.2
CGNX 2.6 2.5 10.3
SHOP 2.4 1.7 -13.9
FII 2.3 2.1 21.5
PRAA 2.2 2.0 15.9
GOOGL 2.0 2.0 8.5
NRE 2.0 1.5 4.8
So a short discussion on the top stocks…
APPL(Apple): Really can’t add much here that everyone doesn’t already know. I will repeat what Warren Buffet has said, that APPL is really a consumer products company and is still undervalued. Their services business continues to grow and they are expanding in all directions. The Iphone business is also likely to continue to grow. There is concerns of both Iphone8 and IphoneX, I guess my thought is the combined sales are still very good. The truth is with the cash on hand, etc., the present price is paying for little to no growth. With all that being said, I am thinking of trimming a bit here. It is probably less undervalued and it is easily my largest position.
Brk-B(Berkshire Hathaway): Nothing to say much here except your getting Warren Buffet as a money manager without having to pay for him. The company’s value is greater than the price at present and Warren is directing assets and I am not paying him any fees at all to do so. Very safe holding and if I owned only one stock. This would be it.
TFSL(third Federal S&L): Although not a Saul type stock, this is probably the safest stock in my list even though it was a bad quarter. TFSL is a small bank that is in the middle of converting from a mutual savings and loan. 80% of their shares are owned essentially by the bank (waiting for the second step conversion) and therefore the true book value per share outstanding is approx. $30 (stock at $16) and the true P/E is about 10. They are buying stock back voraciously and they have the cash to keep doing it as they are over capitalized. Last quarter, they increased the dividend 30% and the latest communications sound like the increases will continue. The dividend is presently over 4%, add that to the buy backs and it has a pretty good cushion underneath it, even though it did go down last quarter and I added a little more as well. (I know, it probably seems crazy to many on this board).
ATVI(Activision Blizzard): I think this is a sea change type stock as gaming continues to grow. It is one of those companies that uses the ever increasing technology instead of having to create it. E-sports and Virtual reality are two areas that should lead to even more long term growth. They also now sell their games on-line and make huge margins on the games as well as monthly fees to play the on-line muti-player games.
NFLX (Netflix): Another sea change event that I have bought at a small fraction of today’s price. I didn’t sell any this quarter and of course it moved up my list a slot. It is very expensive but keeps growing and has a huge TAM. I can’t imagine buying at this price, but hard for me to sell it all as it continues to outperform on all fronts.
LGIH (LGI Homes): Well known around here, and my clear winner this quarter. I just recently pulled ½ of what I added after last quarter’s earnings because it doesn’t seem as cheap and it still moved up a bit on my list. I am watching this one closely although the housing market seems in very good shape and I don’t know that I see it slowing down soon.
CLNS (Colony Northstar): This is a real estate trust which is the result of a merger of a couple REITS which were significantly undervalued to their management structures. The market still doesn’t seem to like it and dividend is now over 9%. It may take a bit for the market to believe that value story is there but I am just collecting dividends in the meantime. Another one that I believe in that will not be popular on this board but adds some real diversification and value to my portfolio.
CGNX (Cognex): I have owned this for some time and it sells vision systems for industry. It is in a sweet spot and growing very rapidly. It is growing so fast it is making me a little uncomfortable with it’s price but I hesitate to sell. My position is also in a taxable account and I really don’t like to trade there as I don’t think my trades are enough of an improvement to overcome the tax costs unless I am sure that the future is not good, and their future looks very good.
SHOP (Shopify): Well known here. I started adding to this last quarter when the price dropped after earnings and have accumulated a significant position for me in a pretty short time. I have continued to add when the short attack came and am now pretty happy with my position.
FII (Federated Investors): This is a financial company that runs money market funds. They are cheap and pay a good dividend. With the recent rate increases, the share price is finally showing good movement with a 20% bump this quarter. They are very leveraged to interest rates as their profits climb quickly if rates rise since they reap benefits of both rising rates and increased interest in money market funds. Personally I believe that interest rates will continue to rise and that means they have good growth ahead. There are few money market funds left after the financial crisis, so the competition is minimal. I will also say that this is a good diversification play which counteracts many stocks which could be badly affected by interest rate increases.
PRAA(Portfolio Recovery Associates): Debt collector I have owned for years. Earlier this year I reduced this a bit but they actually may be turning a corner. Actually showed a good price rise this quarter as the market for debt to purchase is finally coming around and the truth is there should always be a market for bad debt as financial companies don’t want to keep it on their books. This has been a huge long time winner for me and I think the future is getting better, just not sure it should be a top holding any more. As the price rises, it might actually become easier for me to part with this one.
GOOGL (Alphabet): I have slowly added to Alphabet over the years. Google is a money machine and is a cornerstone stock of the digital /internet world we live in.
NRE(Northstar Realty Europe): European REIT, I continued to add this quarter, it is very cheap relative to asset value due to it’s present management structure and I think the market is finally recognizing this as the European Real Estate market is starting to improve. As a side benefit, this is a potential target of Colony Northstar (which I own) as they manage much of their property and I believe the market will reward the combined company better than the present structure.
Next 9 holdings are all within 1-2%….(to a total of 22 holdings)
Ticker
HASI REIT in renewable energy, growing and low taxable dividend
ANET Server manufacturer
AMZN Amazon, Long term holding, well known,
PAYX Paychex, payroll firm, long term growth, improves with interest rate increases
ULTA Ulta Salon, very high growth in retail no less!
SKX Sketchers. Casual shoe company who is growing very fast internationally.
INBK Internet banking, still growing well but sold some this quarter as the price to growth has gotten high.
KMI Kinder Morgan, Oil and Gas transmission, rough couple years, but very high cash flows. Hard not to see this as market overreaction.
LUK Conglomeration, similar to Berkshire, priced below book value.
Now a discussion of buys and sells.
Sells: I won’t say much about the sells I made, most are because I have decided to cut back on the number of stocks I own and for one reason or another, I thought I could do better somewhere else. I sold BWLD because they were given a buy-out offer. I have sold both Buffalo Wild Wings and Panara this year due to someone buying them out. I think it shows how poorly the restaurant business has been lately (and the prices more than reflecting this). I did take advantage of short term bumps to get out of Chipotle (CMG) and reduced Chuy’s (CHUY) due to price bumps along with the BWLD buy out without seeing much near term improvements in the individual companies.
I also sold out of Criteo (CRTO). This is a targeting advertising company that has been growing very strongly over a number of years, but significant earnings growth but has never shown a commersurate increase in stock price and now they pre-announce a significant hit to earnings due to software protection in Apple’s latest operating system. This after telling the market for months that the impact is minimal. I have just lost faith in management and decided to look elsewhere.
Buys: AXY and TLND, I can’t add much here that hasn’t been said. I bought TLND very early in the quarter and AXY very late, mostly after the data breach news. I am not sold that the breach was either a big deal or a long term hit. Unfortunately these seem to be a common occurrence lately and in comparison to others this was very minor.
Adds: One of the interesting adds last quarter was AIOCF (Avigilon). I mention this one because it may be of interest to those on this board. It was a topic of conversation here about a year ago, it is a nicely growing video camera surveillance company and as I recall Saul liked it but eventually sold because they seemed to more worried about growth than margins. Well that has changed. Management is talking about growing margins, and margins are in fact growing nicely. In addition, they are starting to move to subscription services to their products and I think this is a potential growth path as well. In any event earnings over the last 2 quarters have been up substantially, 40% last quarter, more than 200% (from a low number) the quarter before.
Summary:
So overall my top 10 holdings make up 39% of the portfolio and the top 20 about 57%. When you add the cash, bonds, and options (which I will discuss in a minute) that puts the remainder of the portfolio (36 positions) at about 20%. I believe that portion acts as a well run (hopefully) mutual fund that allows me to follow a number of interesting stocks than I wouldn’t otherwise. It might interesting to track how that portion of the portfolio does over time, but I will have to think about how to do that accurately… A simple calculation wouldn’t work because a stock that had a great quarter leaves the group, and stocks that do poorly from the top list enter it. A simple calculation would bias the answer down unfairly I believe.
Finally, I should add that I have a decent % of my assets tied to options (maybe 10-15% depending on how you calculate) . Mostly cash protected puts, covered calls, and Diagonals, which are a combination of long LEAP calls and short near term calls. Just to be clear, my quoted cash positions are over and above the cash covered puts, and I believe these options give my portfolio even more stability because they still make money if the market is flat or falls slowly. Overall they should be adding a reasonable return while dampening out volatility. At a high level, I am always looking for ways to diversify away risk while keeping as much upside as possible. Other examples are owning complimentary stocks that do well in a rising/falling interest rate market. Owning both types gives almost a hedge fund thought process since I don’t really know whether interest rates will rise more or less than the market expects.
It will be interesting to see how my overall portfolio does in more flat and down markets since I haven’t really done these type of quarterly comparisons before. I have tracked my portfolio in general but not to this depth. And for that, I appreciate the push this board has given me to do this. I think it is improving my thinking with real, hard numbers… And would recommend the process to anyone. It doesn’t really matter whether you do it monthly, quarterly, or even yearly. I believe that just depends on how often and how much your portfolio changes over time.
As always, I am interested in everyone’s thoughts/ advice / questions.
Randy
Owner of every stock mentioned in this post……( except that ones I sold off)….