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Individual Investor Fund - December 2012 Monthly Update and Review

As the Christmas investment season has come to an end, hopefully all of you got what you wished for. I know I have. For those of you still suffering from the lingering effects of New Year's investment Eve, I wish you a quick recovery. Hopefully the first trading day of 2013 did the trick.

Over the course of 2012, the Fund underperformed the broader markets. While not ideal, the Fund provided solid returns for its first year of performance. For the year, only four holdings provided negative returns, five holdings provided returns over 20%, and the remaining holdings returns ranged from roughly 6%-16%. Detailed information regarding each company's performance is listed below in the Year-To-Date and Previous Month Performance and Management Activities sections.

All of the information regarding the Fund's performance from month to month is compared by a%age point basis. For example, if a stock is up 25% year-to-date in September, and then is up 20% in October, the stock has decreased by 5%age points. All market capitalizations are as of the last trading day for the month of November.

Current Holdings as of December 31, 2012

  • Clean Harbors, Inc. (CLH); market cap - $2.94 billion; industrial goods sector/waste management industry

  • Discovery Communications, Inc. (DISCA); market cap - $23.61 billion; services sector/ CATV systems industry

  • LinkedIn Corporation (LNKD); market cap - $12.34 billion; technology sector/Internet information providers

  • Laredo Petroleum Holdings, Inc. (LPI); $2.31 billion; basic materials sector/independent oils & gas industry

  • Liquidity Services, Inc. (LQDT); market cap - $1.29 billion; services sector/catalog & mail order houses industry

  • MercadoLibre, Inc. (MELI); market cap - $3.47 billion; services sector/business services industry

  • SAP AG (SAP); market cap - $95.65 billion; technology sector/application software industry

  • Scripps Networks Interactive, Inc. (SNI); market cap - $8.68 billion; services sector/broadcasting TV industry

  • TripAdvisor, Inc. (TRIP); market cap - $5.97 billion; technology sector/Internet information providers industry

  • Velti Plc (VELT); market cap - $293 million; technology sector/business software & services industry

  • The WhiteWave Foods Company (WWAV); market cap - $2.69 billion; consumer goods sector/dairy products industry

  • Zipcar, Inc. (ZIP); market cap - $344 million; services sector/consumer services industry

YTD and Previous Month Performance as of December 31, 2012

  • LNKD - YTD 64.9%; previous month 10.8

  • TRIP - YTD 28.5%; previous month 10.8

  • DISCA - YTD 25.4%; previous month 4.8

  • SAP - YTD 24.5%; previous month 2.7

  • MELI - YTD 20.2%; previous month 4.8

  • LQDT - YTD 16.3%; previous month 2.1

  • SNI - YTD 8.3%; previous month (1.9)

  • CLH - YTD 6.3%; previous month (3.9)

  • ZIP - YTD (2.9%); previous month 1.3

  • WWAV - YTD (6.0%); previous month 2.2

  • VELT - YTD (8.6%); previous month 22.2

  • LPI - YTD (14.4%); previous month (4.1)

Benchmark Comparison and Performance

The holdings within II Fund returned 9.9% for the year, a 4.0%age point increase from the previous month. Including the cash balance, the Fund returned 7.4% for the year, a 2.9%age point increase from the previous month. The performance of the Fund's holdings was comprised primarily of unrealized gains representing roughly 71% of the return and realized gains representing roughly 29% of the return.

Comparatively for the year, the S&P 500 returned 13.4%, a 1.1%age-point increase from the previous month, and the Russell 2500 returned 16.0%, a 4.2%age-point increase from the previous month. The VMGMX fund returned 15.2%, a 4.4%age-point increase from the previous month, and the FMCSX fund returned 10.2%, a (0.3)%age-point increase from the previous month.

Management Activities

Month of December transactions where positions were sold included Discovery, SAP, and TripAdvisor:

Half of the Discovery position was sold for a 24.1% gain. Recently, Discovery has made a couple acquisitions including a $1.7 billion purchase of ProSieben's Nordic channels and a roughly $240 million 20% stake in the French broadcaster TF1. While these deals provide for interesting long-term prospects and further diversification for Discovery, the stock has had a 55% run-up for the year. Discovery will be reassessed for a future buying opportunity.

Half of the SAP position was sold for a 22.7% gain. Similar to Discovery, SAP's stock has returned over 50% for the year, for only the second time in the past fourteen years. SAP will be reassessed for a future buying opportunity.

Lastly, half of the TripAdvisor position was sold for a 27.7% gain. Liberty Interactive Corp. acquired 4.8 million shares at a price of $62.50 per share to gain a controlling interest in the company on December 11, 2012. TripAdvisor's stock has returned over 66% for the year. The company will be reassessed for a future buying opportunity.

Positions were not added to any companies during the month of December.

All existing positions that had no buying or selling activity included Clean Harbors, LinkedIn, Laredo Petroleum, MercadoLibre, Scripps Networks, WhiteWave Foods, Velti, and Zipcar:

Clean Harbors stock price has dipped somewhat following the earlier surge after announcing the acquisition of Safety Kleen. Not much has been publicly stated justifying this decline other than concern regarding Safety Kleen's upcoming quarterly earnings. The company's debt, operating margins, and free cash flow will continue to be monitored for long-term prospects.

Stock performance for Scripps Networks has declined over the past couple months. There have been concerns regarding costs and growth prospects. Scripps Networks will continue to be a prospective buy out candidate as it develops premium do-it-yourself programming.

Despite LinkedIn's excessive valuations, the company is positioned very strongly with respect to its financials. While the company has impressed with its recent developments of products and services, LinkedIn will be reassessed as its valuation cannot be ignored. The position may be trimmed in the near-term.

Laredo Petroleum has become the portfolio's major laggard as the year has come to an end. The company continues to budget significant capital expenditures and is expecting over $700 million for 2013. The company has assessed its properties and has the potential to realize significant cash flow generation. Execution to develop the properties will be important for the company's success. Debt levels will continue to be monitored and additional shares may be added to the position in the near-term.

Liquidity Services has been one of the more volatile holdings for the year. The company, despite robust revenue and earnings growth from acquisitions, continues to be pressured by analyst contrary opinions regarding the company's guidance. Liquidity provides adequate value based on its near-term growth prospects. Long-term, integration of acquisitions will potentially provide added value.

MercadoLibre's stock price has remained volatile recently. Not much has changed based on competitive threats from Amazon.com, Inc. (AMZN) and the slowing South American economy. The company will continue to be assessed for a potential buying opportunity.

WhiteWave finished the year down 6%. The company has provided solid growth recently. Dean Foods Company (DF) still owns a major stake in the company at roughly 87%. WhiteWave will benefit from a complete separation from Dean Foods, and it will remain to be seen when and if this occurs in the near-term.

Velti has been the most volatile holding for the portfolio. The stock price has ranged from $3.07 to $14.65 per share. The most recent driver of volatility has been the announcement of Jeff Ross, the former CFO of Sybase, becoming the new CFO for Velti. The first quarter of the year could continue to drive volatility for the company as there will be more information regarding recent contracts Velti has entered into as well as earnings for year-end.

Zipcar has been the second most volatile holding for the portfolio. The company has provided solid financial and business trends despite severe price fluctuations. The most extreme negative price movements occurred during August and October of this past year. The stock has recovered near the $8 range as the company will potentially provide its first profitable year in its next earnings report. At the time of the writing of this article, Zipcar has just been acquired by Avis Budget Group, Inc. (CAR) for roughly $500 million.

There were no newly added individual company positions to the portfolio in November.

The II Fund is currently holding a 37% cash allocation ratio. The fund will be adding cash this year. Significant economic uncertainties remain in the near-term and the fund will continue to position itself aggressively to take advantage of buying opportunities regarding existing positions.

Companies Being Considered

Kinder Morgan Inc. (KMI); market cap - $36.74 billion; basic materials sector/oil and gas pipelines industry

Dr. Pepper Snapple Group Inc. (DPS); market cap - $9.19 billion; consumer goods sector/beverages - soft drinks industry

Based on recent research and screening, two companies which will be considered for additions to the portfolio include Kinder Morgan and Dr. Pepper Snapple Group. A majority of the current holdings of the portfolio provide for aggressive growth potential. Kinder Morgan has excellent exposure to the potential for natural gas distribution via its pipeline networks in North America, and Dr. Pepper Snapple Group provides a diverse set of products and production facilities and could possibly be considered as an acquisition target. A primary concern for Kinder Morgan includes the company's debt levels. Kinder Morgan and Dr. Pepper Snapple Group would allow for fixed income opportunities, as well as further diversification into additional industries. A position may be entered into either of these companies in the near future.

Radar Screen

  • AMC Networks Inc. (AMCX); market cap - $3.6 billion; services sector/CATV systems industry

  • JB Hunt Transport Services, Inc. (JBHT); market cap - $7.1 billion; services sector/trucking industry

  • News Corp. (NWS); (spin-off); market cap - TBD; services sector/entertainment diversified industry

  • SINA Corporation (SINA); market cap - $3.3 billion; technology sector/Internet software & services industry

  • Sohu.com Inc. (SOHU); market cap - $1.8 billion; technology sector/Internet information providers industry

These companies are being watched for potential consideration for the fund. AMC Networks provides an opportunity to gain additional content/media exposure for the fund. AMC's market valuation is low compared to its peers, risks include over-reliance on debt and lack of proven programming sustainability. JB Hunt provides a great opportunity to get into the transportation and logistics area. JB Hunt's stock price has recovered from its recent decline and is trading at a premium however. NWS offers an interesting spin-off investment opportunity with its media and entertainment segment. The spin-off valuation will need to be considered. SINA and SOHU are varying examples of risky China plays with upside potential.

Next Update

The next II Fund update and review will occur at the end of the first quarter for 2013. Updates will continue on a quarterly basis and will include new features such as inception or total return performance and% of portfolio holding buy-out activity.

Source: Individual Investor Fund New Year's Resolution - Beat The S&P 500