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Individual Investor Fund or IIF - March 2013 Quarterly Update and Review

The IIF portfolio, or Fund, is managed through a Roth Individual Retirement Account, or Roth IRA. There are two driving factors that mandate a current high cash position in the portfolio based on the fund's objectives. They are the constrained amount of allowed annual contributions ($5,500 for 2013) and the need to have an ample supply of cash for managing the portfolio. It is anticipated that over time that the ratio of cash will decrease, however, it is the philosophy of the fund to always have significant cash reserves available for investing opportunities.

The Fund has adjusted its objectives to include the consideration of companies within the $10 plus billion to $30 billion market capitalization range in addition to the primary focus on companies within the $300 million to $10 billion range. Additionally, the fund is now providing quarterly updates rather than monthly and will include a link to the previous quarter for comparison; please refer to Individual Investor Fund New Year s Resolution Beat The S&P 500 for 2012.

The first quarter for 2013 has provided robust growth for the primary market indices including the Dow Jones Industrial Average, S&P 500, and NASDAQ. This trend is a continuation stemming from solid performance for 2012.


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For the IIF portfolio, the first quarter has yielded excellent performance for many of the Fund's holdings with the exception of a couple. To date, the Fund is holding twelve companies. Four of the twelve companies returned greater than 20% for the quarter, six companies returned between just over 0% to 11%, and the remaining two declined by roughly 17% and 51%. Detailed information regarding each company's performance is listed below in the Total Return, YTD, and Previous Month Performance table and Management Activities section.

All of the information regarding the Fund's performance from quarter to quarter is compared by a percentage point basis. For example, if a stock is up 25% at year end, and then is up 20% in the first quarter of the next year, the stock has increased by twenty percentage points. All market capitalizations are as of the last trading day for the first quarter of 2013. All data including charts and tables are provided by proprietary databases unless otherwise noted. Activities and opinions expressed within are solely related to the management of the Fund and should not be construed as investment advice.

Current Holdings as of March 29, 2013

  • Clean Harbors, Inc. (NYSE:CLH); market cap - $3.51 billion; industrial goods sector/waste management industry
  • Discovery Communications, Inc. (NASDAQ:DISCA); market cap - $28.76 billion; services sector/ CATV systems industry
  • LinkedIn Corporation (NYSE:LNKD); market cap - $19.20 billion; technology sector/Internet information providers
  • Laredo Petroleum Holdings, Inc. (NYSE:LPI); $2.32 billion; basic materials sector/independent oils & gas industry
  • Liquidity Services, Inc. (NASDAQ:LQDT); market cap - $940 million; services sector/catalog & mail order houses industry
  • MercadoLibre, Inc. (NASDAQ:MELI); market cap - $4.26 billion; services sector/business services industry
  • SAP AG (NYSE:SAP); market cap - $95.96 billion; technology sector/application software industry
  • Scripps Networks Interactive, Inc. (NYSE:SNI); market cap - $9.55 billion; services sector/broadcasting TV industry
  • TripAdvisor, Inc. (NASDAQ:TRIP); market cap - $7.51 billion; technology sector/Internet information providers industry
  • Velti Plc (VELT); market cap - $131 million; technology sector/business software & services industry
  • V.F. Corporation (NYSE:VFC); market cap - $18.49 billion; consumer goods sector/textile - apparel clothing industry
  • The WhiteWave Foods Company (NYSE:WWAV); market cap - $2.95 billion; consumer goods sector/food - major diversified industry

Total Return, YTD, and Previous Quarter Performance as of March 29, 2013

Holding

Total Return

Realized Gain % of Total Return

YTD

Previous Quarter

% of Portfolio

LinkedIn

58.6%

63.5%

20.8%

+ 20.8

2.1%

TripAdvisor

44.5%

41.1%

46.6%

+ 46.6

3.3%

Discovery

40.7%

30.0%

24.0%

+ 24.0

3.2%

MercadoLibre

33.8%

31.8%

22.9%

+ 22.9

3.1%

SAP

24.6%

46.2%

0.2%

+ 0.2

2.6%

Scripps Networks

20.3%

N/A

11.3%

+ 11.3

4.9%

Clean Harbors

12.2%

N/A

5.6%

+ 5.6

9.1%

V.F. Corporation

8.9%

N/A

8.9%

+ 8.9

4.7%

WhiteWave

3.3%

N/A

9.8%

+ 9.8

4.2%

Laredo Petroleum

(4.4%)

N/A

3.0%

+ 3.0

7.8%

Liquidity Services

(9.6%)

N/A

(16.6%)

- 16.6

7.4%

Velti

(47.5%)

N/A

(51.1%)

- 51.1

7.5%

Cash

N/A

N/A

.02%

+ .02

39.3%

Note: Total return is based on realized and unrealized gains from the initial date a position was taken and varies for each company for the years between 2011, 2012, and 2013. Where gains have been realized, percentages are included to be considered against the total return.

Overall, fund performance has been very positive. Both Liquidity and Velti have weighed on the portfolio's performance and are the laggards. The II Fund is currently holding a 39% cash allocation ratio. The fund will be adding cash this next quarter. 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.

Benchmark Comparison and Performance

The IIF portfolio has returned 2.4% YTD. This performance is comprised primarily of unrealized gains representing roughly 71% of the return and realized gains representing roughly 29% of the return. Comparatively, the S&P 500 has returned 10.0% and the Russell 2500 has returned 12.5%. The VMGMX fund has returned 12.3% and the FMCSX fund has returned 13.1%.


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Management Activities

Recent transactions where positions were sold included both LinkedIn and TripAdvisor:

Seventy percent of the LinkedIn position was sold in the first quarter for an 8% gain. LinkedIn, for the foreseeable future will continue to provide a high risk, high reward opportunity. To date, LinkedIn has been very successful in building a web-based and mobile international professional network via its core revenue segments; Talent Solutions, Marketing Solutions, and Premium Subscriptions.

While LinkedIn is an exciting growing business, the decision to trim the position is based on the company getting ahead of itself from a valuation standpoint and overall market uncertainty. Key trends based on the year-end earnings report include the following; six consecutive quarters of increased registered membership growth, six consecutive quarters of increased talent solutions customers, and solid growth in page views and unique monthly visitors. These results translated into significant annual and fourth quarter revenues and profits of $972 million and $21.6 million, and $304 million and $11.5 million respectively. Please refer to LinkedIn Is A Part Of The Individual Investor Fund Portfolio, Should It Be A Part Of Yours? for an overview of the company's prospects.


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Source: Yahoo! Finance

Thirty-eight percent of the TripAdvisor position was sold in the first quarter for a 57% gain. The decision was based on valuation trends and market uncertainty. TripAdvisor offers a business model focused on travel user-generated content and is the leading travel site based on travel reviews and opinions. The primary distinguishing factor between TripAdvisor and other travel site operations is that TripAdvisor does not directly receive commissions for merchant bookings, but rather primarily relies upon click-based advertising revenues.

Key trends based on the year-end earnings report include the following; achievement of over 100 million reviews and opinions, 25% sequential quarterly growth in unique visitors per month via mobile devices, and 44 million Facebook Inc. (NASDAQ:FB) members. TripAdvisor generated $763 million in revenues and $195 million in profits for 2012. Please refer to TripAdvisor: The Future Travel Industry Online Advertising King for an overview of the industry and company's prospects.


(Click to enlarge)

Source: Yahoo! Finance

Positions were added to Laredo Petroleum, Liquidity Services, and Velti in February, January, and March respectively:

Laredo Petroleum has seen its stock price decline to all-time lows during the first quarter of 2013, only to spike up after the annual earnings report. The latest corporate presentation for Laredo speaks to the significant potential that the company is in the process of developing, particularly in the Permian Basin. I would also recommend a read through Michael Filloon's Seeking Alpha article Bakken Update: Estimated Ultimate Recoveries In The Permian Part I as well as parts two and three for additional information with respect to this geographic area.

Laredo spent roughly $920 million on capital expenditures during 2012. For 2013 the capital program is estimated at $725 million. The biggest impact to profitability and cash flows has been the capital investment program. Debt to equity for Laredo is high at 146%, long-term debt has grown to just over $1.2 billion, and interest expenses are growing at a 125% compound annual growth rate, or CAGR over the past few years, while operating cash flows, $377 million during 2012, are growing at a 50% CAGR during the same period. The decision to add to the position is primarily based on expectations of improvements to free cash flow as production ramps up and as capital expenditures stabilize.


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Source: Yahoo! Finance

Liquidity Services has transitioned into 2013 repeating its volatile trends from 2012. The year-end annual and fourth quarter earnings report generated a steep sell-off similar to the mid-2012 earnings report. During both occasions positions were added for Liquidity based on valuation trends of the company.

The primary concern for Liquidity throughout has stemmed from management's growth estimate revisions. As a result on the conference call update, analysts have estimated that Liquidity will grow revenues just below 15% over the next couple of years, however earnings are estimated to grow 25% and 20% during this period. Since 2004, Liquidity has grown revenues at a CAGR of 26% and earnings at a CAGR of 23%.

Other general concerns that have added to the volatility for Liquidity have included the CEO's desire to sell shares of the company, the shifting of CFOs recently, perceived competitive threats from Ebay, Inc. (NASDAQ:EBAY), and revenue dependency on the Department of Defense with surplus and scrap contracts (43% of 2012 revenues) and Wal-Mart Stores Inc. (NYSE:WMT) in connection with the Jacobs Trading acquisition (20% of gross merchandise volume, or GMV)


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Source: Yahoo! Finance

For those of you not familiar with Velti's business model, they provide mobile marketing and advertising services. This is a robust growing segment within the non-traditional advertising market. There are a wide variety of research reports regarding trends for both online and mobile marketing and advertising.

Simply put, Velti has been crushed after the annual and fourth quarter earnings report. The company has made drastic adjustments in the fourth quarter and earlier first quarter of this year. Without getting into too many details, Velti is forgoing revenue contracts which it feels are not worth the collection time and require significant investments in software development. This significantly shaved roughly $70 million or 20% off of revenue estimates for 2013. Acquisition-related earnings payouts have also added pressure as revenues have been decreased. The company is in a transition year and needs to establish financial stability through its cash flows in order to sustain the business model.

Investors should consider Velti a highly speculative company as it undergoes this transition. The company was in violation of its debt covenant for earnings before interest, taxes, and depreciation or EBITDA in the quarter and is working on resolving this issue.

Despite the "doom and gloom", Velti is taking necessary steps to position itself for the continued growth in this market. Jeff Ross, the new CFO as of January, has been taking conservative steps to instill financial visibility and accountability for the company. Velti has just recently launched its new ad network to align itself to better directly compete with the likes of Google, Inc. (NASDAQ:GOOG) and Millennial Media Inc. (NYSE:MM). The company has extensive experience with fortune 500 clients and is focusing in key geographic markets where growth is significant. For these reasons, a position was added after the earnings report debacle.


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Source: Yahoo! Finance

All existing positions that had no buying or selling activity included Clean Harbors, Discovery, MercadoLibre, SAP, Scripps Networks, and WhiteWave:

For the first quarter of the year, Clean Harbors has displayed some volatility with its stock price. With the Safety Kleen acquisition complete, the future holds solid prospects moving forward. Interesting developments from the annual and fourth quarter earnings report include the following; just under $2.1 billion in revenues with profit margins declining for the second year in a row, long-term debt totaling $1.4 billion or roughly 98% of equity, and record free cash flow generated totaling $131 million.

Moving forward the company should be able to generate consistently solid free cash flows as it continues to grow its competitive position within the hazardous waste and environmental and industrial clean up markets. It would be nice to see these cash flows improve the debt to equity ratio.


(Click to enlarge)

Source: Yahoo! Finance

Discovery continues to develop its international programming reach organically and through acquisitions. 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 acquisitions broaden Discovery's content, it will be interesting to see the updated financial impacts once completed.

Interesting developments from the annual and fourth quarter earnings report include the following; long-term debt totaling $5.2 billion (debt to equity is at 83%), third year of increased equity investments into the Oprah Winfrey Network, or OWN (just over $400 million for 2012), and significant increases in stock repurchases over the past three years (just under $1.4 billion for 2012).

While we should see strong growth in revenues and profits resulting from acquisitions, any complications or revisions by management for expectations may negatively impact the current valuation, just shy of $30 billion.


(Click to enlarge)

Source: Yahoo! Finance

MercadoLibre continues to display solid growth and performance despite concerns with Brazil's slowing economy. Venezuela continues to be the fastest growing geography followed closely by Argentina, both with compound sequential quarterly growth rates, or CQGR near 13.5% since March 2011. Mexico and the other countries category both are outpacing Brazil, which has become the slowest growing geography.

Other key operating metrics of interest include confirmed registered users (81.5 million with a 5.6% CQGR as of 2012 year-end), gross merchandise volume, or GMV ($1.6 billion with a roughly 8% CQGR as of 2012 year-end), number of items sold (19 million with a roughly 8% CQGR as of 2012 year-end), and total payments volume ($525 million with a 11.5% CQGR as of 2012 year-end) and total payment transactions (6.7 million with a 14.5% CQGR as of 2012 year-end); all compared to the March 2011 baseline.

MercadoLibre displays solid financials when considering margins, free cash flows, etc., however, the company trades at a steep premium and in the event guidance is missed or the macro environment changes quickly, the stock may face negative impacts.


(Click to enlarge)

Source: Yahoo! Finance

SAP has been actively moving in a trading range between roughly $78 and $84 per share this year. The company continues to invest heavily into the cloud via acquisitions and database management (HANA) for its products and services which range from supply chain, employment management, to customer relations among others.

It will be important to continue to monitor the developments of licensed software products versus subscription and software-as-a-service, or SaaS within SAP's own revenue segments, with conventional competitors such as Oracle Corporation (NYSE:ORCL) and International Business Machines Corporation (NYSE:IBM), and newer cloud-based threats such as Salesforce.com (NYSE:CRM) and Workday, Inc. (NYSE:WDAY), among others.


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Source: Yahoo! Finance

Stock performance for Scripps Networks has returned back near the $65 per share level in the first quarter of 2013. Buy-out speculation has faded for the company, however, from a valuation standpoint, the stock is priced fairly well, which could entice a large buyer. Significant lifestyle media properties include Food Network, HGTV, Travel Channel, DIY Network, Cooking Channel, and Foodnetwork.com and Food.com, among others.

Interesting developments from the annual and fourth quarter earnings report include the following; higher than typical earnings for 2012 were due to a tax benefit, long-term debt totaled just under $1.4 billion (65% debt to equity ratio), the company repurchased roughly $600 million of stock in 2012 and paid out roughly $166 million in dividends to noncontrolling interest, and dividends have grown at a CAGR of roughly 34% over the past three years. Scripps


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Source: Yahoo! Finance

WhiteWave manufactures and sells products in three categories; plant-based foods and beverages, coffee creamers and beverages, and premium dairy. Many consumers are quite familiar with WhiteWave's products including Silk (57% market share), Alpro in Europe (38% market share), International Delight (30% market share), Land O Lakes half & half (22% market share), and Horizon Organic (43% market share).

Interesting developments from the annual and fourth quarter earnings report include the following; improvements to both gross and profit margins, long-term debt totaling roughly $766 million (99% debt to equity ratio), and record free cash flow of roughly $135 million.

The company is still majority-owned by Dean Foods Company (NYSE:DF) despite last year's spinoff. On page 3 of WhiteWave's 10-K filing it states that Dean Foods intends to sell the majority of their remaining stake in WhiteWave and possibly the entire position later this year. Complete separation for WhiteWave will bode well for the long-term.

WhiteWave is also investing in production capabilities as demand is outpacing current facility capabilities requiring third-party operating costs. Greater manufacturing efficiencies should improve margins further over time.


(Click to enlarge)

Source: Yahoo! Finance

Newly added positions only included V.F. Corporation:

The V.F. Corporation is the only new holding that has been added to the portfolio so far in 2013. V.F. Corporation, organized in 1899, is a worldwide leader in branded lifestyle apparel, footwear and related products. The owns a significant amount of well-established brands including The North Face, Timberland, Vans, Kipling, Napapiijri, Reef, Eastpak, JanSport, SmartWool, lucy, Eagle Creek, Wrangler, Lee, Lee Casuals, Riders, Rustler, Timber Creek by Wrangler, Rock & Republic, Red Kap, Bulwark, Horace Small, Majestic, Nautica, 7 For All Mankind, Splendid, and Ella Moss.

Interesting developments from the annual and fourth quarter earnings report include the following; long-term debt totaled roughly $1.4 billion (36% debt to equity ratio), dividends paid out totaled just over $333 million and dividends per share have grown at a CAGR of 10.5% per year, and profit margin have improved consecutively over the past three years.

V.F. Corporation was added to the portfolio as a unique company offering stock price growth as well as dividend growth.


(Click to enlarge)

Source: Yahoo! Finance

Holdings That Have Been Acquired

Since the portfolio's inception last year, three of the fifteen holdings or 20% of the portfolio have been acquired. This trend, while purely coincidental to the fund's objectives, will be monitored moving forward. The table below provides an overview of the realized gains as a result of these acquisitions.

Holding

Date Purchased

Date Acquired

Acquiring Entity

Total Return

Ancestry.com

Fall 2011

December 2012

Permira

(0.4%)

Kayak Software Corp.

October 2012

March 2013

Priceline.com

21.6%

Zipcar

2011, 2012, & 2013

March 2013

Avis Budget Group

34.3%

In my opinion, the following holdings represent potential buyout candidates, in no particular order; Clean Harbors, Laredo Petroleum, Liquidity Services, MercadoLibre, Scripps Networks, and Velti. The only companies garnering publicized buyout rumors recently have been Scripps Networks and Velti.

Companies Being Considered

In previous updates both Dr. Pepper Snapple Group, Inc. (NYSE:DPS) and Kinder Morgan, Inc. (NYSE:KMI) have been considered for inclusion into the portfolio. At this time, further research and analysis is being conducted to determine whether any company merits a serious consideration. Once further review is complete this section will be updated if a company is determined to adequate for consideration.

Radar Screen

AMC Networks Inc. (NASDAQ:AMCX); market cap - $4.5 billion; services sector/CATV systems industry

Dr. Pepper Snapple Group, Inc. ; market cap - $9.5 billion; consumer goods sector/beverages - soft drinks industry

FedEx Corporation (NYSE:FDX); market cap - $31.0 billion; services sector/air delivery & freight services industry

W. W. Grainger, Inc. (NYSE:GWW); market cap - $15.28 billion; services sector/industrial equipment wholesale industry

JB Hunt Transport Services, Inc. (NASDAQ:JBHT); market cap - $8.6 billion; services sector/trucking industry

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

Precision Castparts Corporation (NYSE:PCP); market cap - 27.35 billion; industrial goods sector/metal fabrication industry

Many of the above listed companies if not all are trading near fifty-two week highs and have current premium valuations. Entertainment media and content will continue to be a highly valuable opportunity for investors to consider moving forward and AMC and News Corp. will be monitored as well as their peers.

Global and regional demand for shipping and logistics needs will be a growth generator over the long-term and an overview of companies within this area will assessed. FedEx and JB Hunt will be the initial companies reviewed. There are a few different ways to engage within this area including directly through North America with trucking and logistics companies or through a third-party contractor allowing for global growth.

Other companies to be considered include Dr. Pepper Snapple Group, Grainger, and Precision Castparts. All three of these companies offer additional diversified options for the IIF portfolio to consider.

Next Update

The next IIF portfolio update and review will occur at the end of the second quarter, June for 2013.

Source: Individual Investor Fund: Mr. Market Keeps On Going