In an attempt to try and help investors achieve more alpha, I was walking through what a potential diversified portfolio would consist of several days ago while talking to a colleague. I had already introduced this person to what I call My Definitive 17 Cardinal Rules for Investing Success, and we were now talking about the topic of diversification.
In an order to make things simple, we decided whether or not he had a bullish or bearish outlook on the market. When he told me bullish, we came up with a simple way to make and example of what a bullish portfolio could look like, limiting ourselves to 10 equities. We placed the limit because often many newer traders don't have the capital to sustain 50 or 100 positions -- the commissions become overwhelming and the gains and losses become negligible.
In an attempt to provide all of my readers with alpha, here's what I feel a diversified bullish portfolio could look like, if you were limited to owning just 10 positions.
Role : Commodity
Equity : SPDR Gold Shares (GLD)
Percentage of Portfolio : 5%
There is quite and argument about whether or not the gold "bubble" is on the verge of bursting with unknown amateur investors like Warren Buffett saying it's about to and well known seasoned expert analysts like myself disagreeing that there's even a "bubble" in the first place. Gold is a finite, non-renewable resource meaning there's only just so much of it to go around. As long as the world remains in a state of Keynesian economics, central banks, quantitative easing and the spontaneous printing of money, Gold is as safe of a bet as you can get. There is a reason that major banks still hold gold in reserve: gold used to be currency and someday might be again.
Role : Dividend Player #1
Equity : AT&T (T)
Percentage of Portfolio : 15%
AT&T is the second largest mobile company, trumped only by Verizon. The fundamentals of the company continue to improve, as 2013 is predicted by the company to be a bang-up year for the company. More importantly, AT&T yields an almost 5% yearly dividend, making it a safe large cap payday each quarter despite the stock's price -- the reason I've chosen it as our first dividend player.
Catalyst Investments recently pointed out about AT&T:
AT&T reported a net loss of $3.9 billion for the fourth quarter of 2012, far less than the $6.7 billion in lost in the same quarter in 2011. For the full year, the company earned $7.3 billion, up from $3.9 billion in 2011. It set records for full year operating cash of $39.2 billion and free cash flow of $19.4 billion. The company's last three quarterly earnings levels have beat analysts projections by about 5% each time.
AT&T anticipates high single-digit earnings per share growth and low single-digit revenue growth in 2013. Free cash flow is expected to decline to $14 billion, primarily due to increased capital expenditures of $21 billion. Those capital expenses are mainly focused on expanding the company's 4G LTE network, which is less than half the size of Verizon's.
Role : Dividend Player #2
Equity : 3M (MMM)
Percentage of Portfolio : 15%
3M is a beast and its share price shows it. 3M is now trading near it's 52 week high, in the $105 region and it sports a 2.4% dividend yield. On the heels of beating quarterly sales and revenues falling inline during their January 2013 earnings announcement, 3M continues to all time highs.
A Twin Cities article writes:
3M's earnings totaled $991 million in the fourth quarter, up 3.9 percent from the same period a year earlier. The profit results matched Wall Street's expectations. Quarterly sales -- up 4 percent to $7.39 billion -- were above expectations of $7.17 billion. Strong sales in Latin America and Canada contributed to the company's performance.
For our portfolio here, we are counting on 3M to yield substiantial upside still, as its as reputable of a dividend paying blue chip you can find.
Role : Large Cap Hold
Equity : Coca-Cola (KO)
Percentage of Portfolio : 15%
Dividend Growth Investor notes about Coca-Cola:
The company raised quarterly distributions by 9.80% to 28 cents/share. This marked the 51st consecutive annual increase for this dividend king. Incidentally, Coca-Cola's ten year average annual dividend growth rate is 9.80% as well. I recently added to my position in the stock on the weakness last week. Analysts expect EPS to reach $2.14 in 2013 and $2.33 by 2014. Earnings per share increased from 89 cents in 2003 to $1.97 in 2012.
I like Coca-Cola for several reasons:
A. They are yet another company that's going to add instant quarterly capital to your portfolio through dividends. In February, Coca-Cola announced yet again -- 51 years and running now -- that they're raising their dividend 10%. Their dividend yields 2.9%.
B. They are one of the most recognizable brands worldwide. They are the universal language when it comes to soda on the planet earth as we know it.
C. They own Glaceau, makers of Vitamin Water. I noted in a recent article how intrigued I was by Vitamin Water:
There have been two times in my life where I've missed huge moneymaking opportunities -- and both have been due to the fact that the company creating the product I was supporting was not yet public.
The first was about 10 years ago. I was driving through a college town and stopped at a 7-11. I overheard a conversation between a couple of college kids who were hooked on Vitamin Water. One was claiming it was great for hangovers, the other couldn't believe that (despite the sugar content) it was "healthy" because it had vitamins. I picked one up to give it a try and found it was surprisingly delicious. Drinking your vitamins? Neat concept.
Upon leaving, I wondered to myself how many college-aged kids nationwide were having the same conversation that I overheard. I quickly phoned Glaceau, whose number was on the side of the bottle. I was informed by the lady on the other end of the phone that it wasn't a public company, but she'd put me on the mailing list.
Ten years later, Glaceau is now a wholly owned subsidiary of Coca-Cola, which acquired the company for $4.1 billion in 2007. Vitamin Water remains the premier drink of its genre with sales and revenues dwarfing that of PepsiCo competitor Sobe Lifewater.
Vitamin Water, in my opinion, has a chance to surpass Gatorade as the most popular refueling drink in the world. It's the first drink I've seen in my lifetime (yes, I've seen Powerade, All Sport, etc) that I think if marketed right, has a legitimate chance to dethrone Gatorade way down the road. Gatorade, of course, is owned by PepsiCo.
Role : Mid-Cap Hold
Equity : Kona Grill (KONA)
Percentage of Portfolio : 5%
You may not have ever heard of Kona Grill if you're not from the Midwest like I am. From their website,
"Kona Grill offers guests freshly prepared food, personalized service, and a warm contemporary ambiance that creates an exceptional, yet affordable dining experience. The menu features a diverse selection of appetizers, salads, sandwiches, chicken, seafood, steaks, pasta, and pizzas that incorporate over 40 signature sauces and dressings that are made from scratch using high-quality, fresh ingredients. Kona Grill also offers guests a wide selection of award-winning sushi, including sashimi, traditional favorites, and several proprietary dishes created by our talented sushi chefs. Our restaurants feature a contemporary design with dramatic interiors which contribute to a superior value for moderate prices. Kona Grill restaurants offer guests distinct dining areas, including a main dining room, full service bar, patio and sushi bar. Our restaurants seat approximately 275 guests and are open daily for lunch and dinner."
From their Q4 earnings, released just days ago:
Fourth Quarter 2012 Highlights vs. Year-Ago Quarter
Same-store sales increased 10 basis points excluding the effect of the Chandler location remodel, lapping 7.8% same-store sales growth,
Income from continuing operations increased 18% to $884,000 or $0.10 per share, and
Signed a new restaurant lease in Boise, Idaho, which is expected to open in the fourth quarter of 2013.
What I like about Kona is that all of their locations are making money hand over fist and they have barely any debt. They have margins around 18% and everywhere they seem to open a new location they are finding success. The reason behind this is believed to be how slow they are rolling out nationwide. As noted in their investor presentation they have :
- 23 restaurants across 16 states
- Average unit volume: $4.2 million
- Nationwide opportunity of 100+ locations
This is a company that is not offering franchise opportunities because they want to grow slowly and organically, focusing on their service and what makes them unique. They're not rushing -- and this is going to yield them consistent results. Kona is the most promising restaurant stock for growth I've seen in years.
Role : Small Cap Hold
Equity : AMC Network (AMCX)
Percentage of Portfolio : 5%
Sometimes you just have to use some common sense and invest in the things you love to use and work with on a daily basis. As I said in a previous article:
"Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful'. "
- Warren Buffett
If you consider yourself a sensible, logical person who prides themselves on their common sense skills, this is a great segue into your portfolio.
Invest in the things you see everyday, have to purchase and like purchasing, and will be around for a while. The products you buy and use every day contribute to the wellbeing of the company that you're invested in. Help your own cause and go long on the items, companies and CEOs that you're comfortable with.
Do you or someone that you know watch or have watched any of the following TV shows?
- Mad Men
- Hell on Wheels
- The Walking Dead
- Comic Book Men
- Breaking Bad
Chances are, they have. This isn't the crusty old AMC of days past, where nary an original program or current looking movie can be found. This is the "new" AMC, with reality programs competing with Discovery and History -- a station that has started to rewrite and redefine itself with it's original programming; not only reality, but drama as well.
It is one of billionaire John Paulson's favorite small caps, according to this MarketWatch article that states:
AMC Networks Inc AMCX -3.56% , the broadcast and cable TV company, is Paulson's second-favorite small-cap, and is also a top pick of Christian Leone's Luxor Capital. AMC Networks' best asset is its original programming, which has generated double-digit viewership growth for shows like "Breaking Bad" and "The Walking Dead," and the company is coming off a third-quarter earnings beat more than 25% above Wall Street's estimates.
For those reasons, AMC is our small-cap pick.
Role : OTC/Penny/Micro-Cap/Low Price Hold
Equity : Medical Marijuana (MJNA.PK)
Percentage of Portfolio : 3%
I hate Medical Marijuana, Inc and I hate it because I took the time to point it out to several friends that invest in OTC speculative stocks around June 2012 and never actually invested in it myself. Since then, it's been up almost 900%. Normally, this would exclude you from buying now (note: the people that buy after 900% runs are generally referred to as bagholders), however there's some fundamentals in place here with MJNA that I really like.
Ed Liston, in this great article about the world of trading medical marijuana does a great job summing up the potential gains to be had from MJNA:
Investment in marijuana stocks is inherently different from other investments. Medicinal use is only one side of marijuana. The other half is illegal and recreational use. While there is a huge nation-wide demand for legal marijuana, the product is largely sold illegally. However, there is a perceptible shift towards a legitimate market and medicinal use of marijuana is gradually being accepted and becoming popular.
Medical Marijuana Inc.
Medical Marijuana is a publicly held company that operates in the cannabis and hemp market. Its portfolio of products includes patented and proprietary cannabinoid formulations, the whole plant as well as isolated extracts. The company's customers include pharmaceutical, nutraceutical, and cosmeceutical industries. The company also offers services for development of health and wellness products based on cannabinoids.
The company released its annual report for the year ended December 2012 showing a net income of $7.1 million on total revenue of $12.38 million - a staggering 60% (approximate) margin on revenues.
During the year, MJNA acquired 50% stake in CanChew Biotechnologies and also entered into a manufacturing partnership for production of its chewing gum. Medical Marijuana also acquired intellectual property of one of the most recognized brands in the medical marijuana industry, Dixie Elixirs.
We are only investing 3% here, as there is serious, substantial risk, as pointed out by reputable SA contributor Alan Brochstein:
My review of MJNA.PK leaves me scratching my head. Greater than $300mm market cap? The share-count has ballooned, the former President signed off on the Q3 quarterly report after he was no longer with the firm, the Chairman doesn't own a single share directly, the company has apparently booked a $35mm sale but can be paid in cash or stock and doesn't disclose the name of the buyer, who has signed an installment agreement. This is before even considering some of the more alarming accusations made by Infitialis.
If the nation continues on the track that it has been and our views on marijuana continue to become more progressive, MJNA has the chance to be the one stock that's ahead of the game by years. There is major upside potential here -- but again, worth noting (espeically with any OTC stock) -- substantial risk of total loss.
Role : Hyper Speculative
Equity : Celsion (CLSN)
Percentage of Portfolio : 2%
Celsion has certainly been something else over the last month. The stock has taken the Nestea plunge from over $9 to recently breaking under $1, all spurred by the fact that their Phase III trial data for their drug ThermoDox for liver cancer turned out to be the Hindenberg of bio-tech Phase III results.
I wrote about Celsion earlier this year :
Celsion had released a press release this morning before its planned conference call indicating that "Celsion has determined, after conferring with its independent Data Monitoring Committee (DMC) that the HEAT Study did not meet the goal of demonstrating persuasive evidence of clinical effectiveness that could form the basis for regulatory approval in the population chosen for study. The HEAT Study was designed to show a 33% improvement in PFS with 80% power and a p-value = 0.05."
Following this press release, CEO Michael Tardugno, sounding demoralized and melancholy, took to a conference call with his right hand man, VP of Corporate Strategy and Investor Relations Jeff Church. Investors like myself, eager to get more information on how close ThermoDox came to performing well, tuned in.
What we got was nothing short of an absolute funeral. The tone of the call was meek and reserved at best, with analysts offering apologies to Celsion executives over the results, with one analyst even offering his "condolences." We also heard from a remorseful and humbled-sounding CEO, who, to his credit, manned up and took the helm of his company's ship on the conference call in the midst of the bad news. Credit is due there.
Celsion's entire pipeline is based on their liposomal delivery of drugs, a la the way the active ingredients were delivered for liver cancer. So, why bother with a company whose pipeline is apparently screwed to the nth degree and is diluting their stock akin to someone dumping half a can of Diet Coke into the Pacific Ocean? Here's a couple reasons:
- Celsion is absolutely dirt cheap, trading at 90% off its highs.
- ThermoDox's next trial will be for breast cancer, where they've shown in prelimiary trials to have the most success (even moreso than they did in prelims for liver cancer). If their reason for Phase III failure has to do only with the location of the cancerous tissue and not the drug or process delivery, Celsion still has a chance to be a grand slam.
- Celsion has a strong balance sheet heading into 2013 and recently just closed another round of financing. The company, although diluting its stock, is not going bankrupt.
This is why its my hyper-speculative choice. There is potential ten bagger results just from the stock if the company can turn things around and find some success with ThermoDox or by changing their corporate strategy altogether. With options, there's even more upside. Either way, there is also eventual risk of total loss.
9 & 10.
Role : Hedge
Percentage of Portfolio : 15% each
My rule : Always Hedge.
In life, we hedge. We carry car insurance, homeowners insurance and life insurance. We want to be prepared for type of disaster that life may throw at us. It's important to take this concept and carry it over to your investing portfolio.
Methods of Hedging
There are countless numbers of ways to hedge, using ETFs, stock positions and options.
- Against a long position, one might acquire cheap premium put options to protect against the value of the equity that one is holding.
- Against a short position, one might buy vanilla calls or write puts.
- Ahead of a binary event, one might play an options strangle or straddle, even in conjunction with taking a position in the equity
- Sector-wise, diversification. Money spread across several sectors protects against an industry crippling event.
- Money-wise, more diversification. Utilize bonds, funds, stocks, options, futures and commodities to make sure your style doesn't get too aggressive or conservative. Maintain balance.
When hedging, it's important to understand your potential loss in each situation. There are no real situations where you're guaranteed to make money, unless you're already in the money on a position. Things like options spreads offer the feel of guaranteed wins sometimes, but the seductive nature of those positions often leads to people scratching their head when occasionally their entire position is wiped out. Do your research.
These leveraged ETFs are going to provide support for our purposes NOT in the case of our particular equities failing to work out -- but for the purpose of protecting against a 2007-esque market pullback.
Since this is a bullish portfolio, our main risk here lies in the market as a whole taking a hit due to a specific bubble bursting or a catastrophic event happening. Aside from that, I picked the QID as a specific way to hedge against what I feel is an influx of internet related social media sites that have a potential to implode after the market figures out they're overvalued (LNKD, YELP, ZNGA).
Nasdaq.com gives us a little insight into each of these inverse ETFs:
ProShares UltraShort QQQ ( QID )
This fund seeks daily investment results, before fees and expenses, of twice the inverse of the daily performance of the NASDAQ-100 Index, which targets the large cap segment of the U.S. equities market. The fund is heavily exposed towards the technology sector with Apple, Microsoft ( MSFT ) and Google ( GOOG ) as the top three holdings.
With AUM of $450 million, the fund is popular and liquid thanks to average daily volumes of about 4.6 million shares a day. The fund was launched in July 2006 and charges 95 bps in fees per year.
ProShares UltraShort Dow 30 ( DXD )
Launched in July 2006, this fund seeks to deliver twice the inverse of the daily performance of the Dow Jones Industrial Average, which is a price-weighted index of 30 blue-chip U.S. stocks. The product focuses on the large cap segment with the industrial sector at the top. International Business Machines ( IBM ), Chevron ( CVX ) and 3M Co. ( MMM ) take the top three spots in the basket.
The fund so far has managed assets of $300 million with an average volume of more than 800,000 shares a day. Like many other products on the list, this one charges a fee of 0.95% per year (read: Three Industrial ETFs Outperforming XLI ).
Cash in Interest Bearing Account or Something You Can Roll Over : 5%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.