Midyear Portfolio Review

by: Alex Filonov

Usually I review my portfolio only once a year. Of course, some corrections are possible during the year, but they can be done without a full portfolio review.

This year is different. I already changed my economic forecast from cautiously optimistic to quite pessimistic. Austerity measures in different countries and coming tax hikes will make situation worse. The only question is: how much worse? I have already decided to open positions in depression-proof stocks (here's the link). But the changing situation warrants a full portfolio review.

Portfolio goal. Growth. This is a high beta, unapologetic growth portfolio with some safeguards and some boring investments. The goal remains unchanged.

Basic Principles. Most of the stocks in this portfolio were chosen for long term investment, which, for me, is about 18 months. Every stock is under review all the time, with a major review of portfolio once a year. I can trade around any position that I I feel like. The portfolio is not diversified by sectors. Maybe "diversification is the only free lunch" (Jim Cramer), but I'm a big believer in TANSTAAFL (There Ain't No Such Thing As A Free Lunch, popularized by Robert Heinlein). Diversification reduces risk, but it also reduces potential gain. No change in basic principles either.

  • Paradigm Changers. These are stocks of companies that are changing business in sectors or even in the whole world.

The ultimate disrupter. Google is changing the advertising world. The company is also aggressively moving to mobile internet advertisement.

Risk: All great empires were destroyed by internal problems. But there is also a threat of internet fragmentation, with ISPs and device producers restricting use. Example: Apple (NASDAQ:AAPL) banning Google advertisements in applications developed for iPhone and iPad.
Plan: Hold

Intuitive Surgical (NASDAQ:ISRG)
Robotic surgery is changing the nature of surgery. The company has a monopoly on robotic surgery right now. No changes since last review.

Risk: New technologies are being developed, legislation changes can reduce demand.
Plan: Hold.

This company completely changed video rentals model. It's going to put Blockbuster (BBI) out of business soon, becoming almost monopoly. I was wrong in my previous review, NFLX is so far the leader in rentals over the internet. Since my last review, the stock shot up. I sold a significant part of the position into strength.

Risk: Things on the internet are changing quickly.
Plan: Hold, add on weakness.

Cloud computing is all the rage, and VmWare is on the frontline. If the company wants to create its own cloud, VmWare is the way to go. Since the last review, the stock is up a lot.

Risk: It's not clear that internal clouds would win over external ones or over software as a service.
Plan: Sell some into strength, hold the remaining part of the position.

  • Banks. Change of course here. I don't think banks (with one exception) will be good investments in a time of depression.

US Bancorp (NYSE:USB)
This is a very good bank. But it has to go anyway.

Plan: Sell into strength, probably after the Treasury approves dividend increase.

Goldman Sachs (NYSE:GS)
New position. Bought it before well known SEC investigation became public. I'm down on this position about 4%. This is not exactly a bank, more of a broker/trader. Absolutely best Wall Street company. Yes, it's living on the edge of the law, hence a huge settlement with SEC. I think the company can recover and bring more profits to shareholders.

Plan: Hold, add on weakness.

Since last review, I sold my Citi Group (NYSE:C) position. I don't consider it an investment anymore, but can use as a good trading tool.

  • Steady growers / high yield. Companies with steady growth, high dividend or both. I am increasing the weight of this group because such companies are the best investments in depression times.

Annaly Capital Management (NYSE:NLY)
Just started this position. Huge dividend and good management are main reasons. The company makes money on distressed mortgages, current holdings are mostly supported by the US Government. Since the last review I added to this position during the May panic.

Risk: Possibility of management mistakes, another real estate crash.
Plan: Hold, add on weakness, reinvest dividends.

Brookfield Asset Management (NYSE:BAM)
The company owns a lot of high income properties, including power generation and transmission, commercial real estate etc. It's also involved in financial asset management. Sometimes referred to as a "mini-Berkshire". A Canadian company, can also be in "International" category. I'm changing my mind here. The company has a lot of commercial (mostly office) real estate properties, and in a depression this is not the best way of making money.

Risk: Successful asset management is an art, and management changes. If this happens, it can kill any such company quickly.
Plan: Sell part or all into strength.

Altria (NYSE:MO)
I don't smoke. I don't recommend anybody to smoke. But people do anyway, and they pay exorbitant prices for tobacco products. Altria grows profits steadily in any environment, ignoring tobacco lawsuits, tax hikes and anti-tobacco campaigns.

Risk: Ban on tobacco, tobacco deregulation- both are highly unlikely. Possible huge legal expenses.
Plan: Hold, reinvest dividends.

Phillip Morris International (NYSE:PM)
Same reasons to hold as for Altria. Can be also put into "International" category. I added to this position during the May-June panic and then sold some.

Risk: Same as with Altria.
Plan: Hold, reinvest dividends

Pepsico (NYSE:PEP)
Position was added after last review. This is a "staple" company. People buy its products no matter what. Products are sold in US are also addictive, because most of them contain caffeine.

Risk: Management mistakes.
Plan: Hold, reinvest dividends.

General Mills (NYSE:GIS)
This position was also added since the last review. Another "staple" and it's a local company headquartered in Minnesota.

Risk: Management mistakes.
Plan: Hold, reinvest dividends

  • International

Indian Fund (NYSE:IFN)
India is the only part of BRIC which I like now.

Risk: Political.
Plan: Hold, add on weakness.

Spain Fund (NYSE:SNF)
Since last review, I like the EU, and Spain, even less. But this fund is still priced for Armageddon, and I don't think Armageddon is gonna happen any time soon. On the other hand, the fund is not paying a regular quarterly dividend anymore.

Risk: EU financial and political problems.
Plan: Sell if trades at NAV, look for other EU opportunities.

Since the last review I sold my position in Brazilian bank Banco Bradesco (NYSE:BBD). I don't like Brazil anymore and the reasons are outlined here.

  • Fixed Income. Usually very small part of my portfolio, but increased sharply in size last year.

Blackrock Income Opportunity Trust (NYSE:BNA)
I am changing my mind on this position. Don't want to sell it anymore, because this fund holds mostly high quality corporate bonds and Treasuries. Good depression hedge.

Plan: Hold, add on weakness.

Wells Fargo Capital Trust XII (NYSE:BWF).
I use it to hold cash I don't need right now. Good yield.

Risk: Bankruptcy of Wells Fargo.
Plan: Hold, sell when I need cash.

Evergreen Income Advantage Fund (NYSEMKT:EAD).
Changing my mind here. The fund mostly holds junk bonds, risky in a depression environment.

Plan: Sell into strength.

Helios Total Return Fund (HTR).
Fund holds mostly mortgage backed securities. With a depression in sight, not such a great investment. As a play on agency backed paper, Annaly is better.

Plan: Sell into strength.

PowerShares Financial Preferred ETF (NYSEARCA:PGF).
This is a bet on recovery in financials plus excellent cash management tool. I added to this position during the May panic.

Risk: Another crash in financials.
Plan: Hold, sell if I need cash, trade around position.

Nothing is sacred. Any position can be sold any time I feel like that. I can trade around any position when I see the opportunity.