The Big Picture For The Week Of February 17, 2013

Includes: BRK.A, EPRO, KHC
by: Roger Nusbaum

Thursday morning it was announced that Berkshire Hathaway (NYSE:BRK.A) is teaming with 3G Capital from Brazil to buy Heinz (HNZ). Many of our client accounts own HNZ as does RRGR, the ETF we manage. I should say owned, as I sold the position within the first 40 minutes of Thursday's session.

The quick sale after the news is consistent with what I have done before with takeovers or rumored takeovers. Typically, the first reaction will account for the vast majority of the total move. In round numbers, HNZ popped $12 on the news; sticking around for another $0.50 would risk holding on for the deal to unravel and have the stock go back down. That isn't how HNZ traded, that was just an example.

It was nice to get the boost we did from it, but there is a downside. HNZ was generally a low vol high yield name. Relative to what we own, this was a simpler holding to keep track of. We owned it for many years, sometimes it was a top performer and sometimes it lagged but it just chugged along as a good proxy for the staples sector (you can compare to XLP) but with a higher yield. It outperformed the S&P 500 for the last five and ten years but lagged for the last 15 years.

The downside is that now we have to think about how or if to replace Heinz. Heinz fits in well to the conversation we've been having for the last couple of weeks about demystifying stock picking with names that are familiar and relatively easy to follow, compared to other kinds of stocks. Heinz has been around forever, isn't likely to go under and may or may not be a world beater, but it is no surprise that it has been a decent proxy for the staples sector.

Maybe we could replace it with Clorox (NYSE:CLX)? Note that this is a hypothetical scenario. I don't follow Clorox but it has been around forever, isn't likely to go under but not having ever followed it, I don't know how it has done without looking (so it is a random choice).

As it turns out, for most of the past five years it has been better than a decent proxy for XLP --it looks like it outpeformed HNZ coming off the 2009 low, but HNZ has done a little better recently. CLX also outperformed the SPX for the last five years. For ten years it lagged a little behind XLP but was better than SPX and for 15 years it has actually outperformed meaningfully.

I looked up the performance after writing that first paragraph mentioning CLX. I want to stress I picked it randomly as a name I don't follow. It currently yields 3.2%, which is not high for a staples stock but it looks like it has a pretty good track record for growing its dividend. Going forward I have no idea whether it will continue to outperform or whether it will lag, but it is very likely to be a decent proxy for staples.

Hopefully it is obvious that this idea of simplicity does not apply to the majority of stocks or even the majority of sectors. Like in tech, for example, I think a lot of people would say they know Cisco (NASDAQ:CSCO) but it has not been a good proxy for tech. In the last five years CSCO is down 9% while the iShares Tech ETF (NYSEARCA:IYW) is up 38%. For ten years CSCO is up 53% versus 134% for IYW. Dell-- which is probably just as familiar, if not more so-- is actually down 42% for ten years. IYW is a client holding.

In past posts I've talked about it being reasonable for some investors who are willing and able to spend some time on their portfolio to own a few stocks along with their funds and I think the above is consistent with that idea.