- The portfolio has a near 7% return year-to-date.
- May and June marked months where a significant number of holdings were added to further diversify the portfolio.
- Individual holdings are gravitating towards better weighting proportions and cash inflows will be coming in during July and August.
Individual Investor Portfolio - June 2014 Quarterly Update and Review
At December 2013 year-end, the majority of the portfolio's holdings were liquidated in order to create a more diversified allocation of company holdings. The first quarter reflected an initial step in this direction; however, a majority of holdings still represented too much exposure on an individual weighted basis. The second quarter has seen a dramatic improvement for diversification and relative weighting. As time marches by, this trend will continue. All information is as of June 30, 2014. The fund will continue to be managed through a Roth Individual Retirement Account, or Roth IRA. The Roth IRA account will max out the contribution limit of $5,500 during the 2014 tax year.
The second quarter has seen a robust recovery for all major indices, including the Dow Jones Industrial Average, S&P 500, and NASDAQ. For the year, the Dow is now up near 1%, while the S&P is up 6%, the NASDAQ is up near 5.5%, and the Russell 2500 is up just over 5%. As a result, many broader sectors and industries have witnessed significant recoveries from their lows. Technology has especially witnessed a late rally as the Nasdaq-100 is up just over 7% for the year.
CURRENT HOLDINGS AS OF JUNE 30, 2014
All enterprise values are as of June 30, 2014.
The current holdings include Apple Inc. (NASDAQ:AAPL), Amazon.com Inc. (NASDAQ:AMZN), Arista Networks, Inc. (NYSE:ANET), Baidu, Inc. (NASDAQ:BIDU), Biogen Idec Inc. (NASDAQ:BIIB), Celgene Corporation (NASDAQ:CELG), Cummins Inc. (NYSE:CMI), ConocoPhillips (NYSE:COP), Deere & Company (NYSE:DE), Discovery Communications (NASDAQ:DISCA), eBay, Inc. (NASDAQ:EBAY), Facebook, Inc. (NASDAQ:FB), Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Gilead Sciences Inc. (NASDAQ:GILD), JD.com, Inc. (NASDAQ:JD), Laredo Petroleum, Inc. (NYSE:LPI), Precision Castparts, Corp. (NYSE:PCP), Pharmacyclics Inc. (NASDAQ:PCYC), Phillips 66 (NYSE:PSX), Qiwi (NASDAQ:QIWI), Rice Energy, Inc. (NYSE:RICE), AT&T, Inc. (NYSE:T), Twitter, Inc. (NYSE:TWTR), Tyson Foods, Inc. (NYSE:TSN), Union Pacific (NYSE:UNP), United Parcel Service (NYSE:UPS), V.F. Corporation (NYSE:VFC), Wells Fargo & Company (NYSE:WFC), and WhiteWave Foods (NYSE:WWAV).
As evidenced, the portfolio's composition is heavily weighted in the consumer discretionary category, with energy, health care, and technology being other core investment focus areas. These areas are expected to moderately adjust as more positions are added, but remain as the leading broader sectors. Geographically, North America will continue to be the dominant region representing the majority of holdings. Aside from Emerging Markets, other areas of interest include Europe and the Pacific. The portfolio does not hold any companies with core revenue segments in Canada or Mexico, so 100% of the North America composition is within the U.S.
The strongest component of the consumer discretionary category is retail. This focus is balanced between e-retail and traditional retail, with more weighting towards e-retail. The fund will continue to add more e-retail companies in the near term so the weighting will remain near the 25-30% level through the remainder of the year. Other industries where holdings are focused include transportation and media. Business services is an industry that will be considered in the future. Long-term, the goal of the portfolio is to have consumer discretionary and technology near the 20% level, with energy and health care in the mid-high teens.
TOTL RETURN, YTD, AND PREVIOUS PERFORMANCE AS OF JUNE 30, 2014
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% as of the first quarter, and then is up 20% in the second quarter of the year, the stock has increased by twenty percentage points. 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 2012 and 2014.
Since the last update, three positions were sold including NetEase, Inc. (NASDAQ:NTES), SouFun Holdings (NYSE:SFUN), and Yandex (NASDAQ:YNDX). Chinese positions were reduced in order to create room for stronger companies to be added. JD.com is one of those new companies and Alibaba Group (NYSE:BABA) is forthcoming. Baidu was kept as it is by far, the strongest advertising company in China with Tencent Holdings (OTCPK:TCEHY) at a distant second. Yandex was sold for a 9% gain, however, a long-term position will be re-entered at the appropriate price. Additionally, a short-term position was established during the quarter for Five Below, Inc. (NASDAQ:FIVE) which was sold on the final day of the quarter for an 8% gain.
During the quarter which reflects a 91-day period, 16 companies were added, including Apple, Amazon, Arista Networks, Biogen, Cummins, ConocoPhillips, Deere, Discovery, Freeport, Gilead, JD.com, Rice, AT&T, Tyson Foods, V.F. Corp, and Wells Fargo. Fifty-percent of these newly added companies have performed positively during this abbreviated time period. Many of these companies were being assessed prior to their inclusion and/or were previously owned since the fund's inception.
The strongest performers during this period include JD.com, WhiteWave, Celgene, Twitter, Union Pacific, and Facebook. All of these stocks performed better than 15% during the quarter with Facebook being the exception just near 14%. The major laggards during the period include Rice Energy, Phillips 66, and eBay. These stocks delivered paper losses of 8%, 5%, and 3% respectively.
BENCHMARK COMPARISON AND PERFORMANCE
The portfolio has averaged a return of 17% per year since its inception in 2012. Aside from the Dow Jones, this reflects an underperformance against the identified peers below during this same period. The portfolio's further diversification will provide an opportunity to outperform this peer group in the future. To date, the portfolio is up 6.7%. Comparatively, the Dow Jones is up 1.0% and the S&P 500 is up 6.0%. The Vanguard VIGAX fund has returned 6.4% and the Fidelity FLCSX has returned 3.0%.
As the portfolio has further been restructured and diversified, the majority of holdings reflect large-cap companies. In prior years, the fund has focused more on small and mid-cap holdings. For 2014, the Vanguard and Fidelity funds have been updated to include large-cap growth funds to benchmark the portfolio better. Additional benchmarks will be added as time goes by to build a stronger comparison. Similarly, the Dow Jones has been added too to replace the Russell 2500 which is no longer appropriate.
The expense ratio for the portfolio has negatively been impacted by the high number of transactions during the first half of the year. This has resulted in an expense ratio of 3.4%. This ratio is expected to go down as more cash is added to the fund throughout the year. Despite the 3.4% expense ratio the portfolio is outperforming all current benchmarks. It is anticipated that the expense ratio will significantly decline over time.
The portfolio's primary goal is long-term growth but fixed income will be received from a number of holdings. Dividend payouts are included within the performance both holistically and on an individual basis. To date, the yield on cost, or YOC, for the fund is 0.1%. Many of the companies have had positions entered of late so the full dividend will not be recognized until next year. It is anticipated that the YOC will be near the 1.0% level in the near future.
Additionally in the future, both the expense ratio, and YOC will be assessed on a Y/Y basis.
COMPANY PROFILES & MANAGEMENT ACTIVITIES
A new screening tool has been developed. This tool's value is through its conservative approach, generating a basis for longer term growth and distilling a price target, or PT. Further detailed analysis is required to validate more precise assumptions for the PT. The fund looks to enter positions with the majority of its holdings expecting a near-10% per year individual stock price return. As a result, the fund's overall goal is to return 10% per year over the long term; to date, the fund is beating this goal by 70% per year.
In the past, this section has focused on updates to the fund's holdings. The fund currently holds 29 companies and this number is expected to approach 50-100 companies over the long term. As a result, each company section overview has been reduced. Fundamental analysis and research goes into analyzing a wide variety of companies. In the future, the fund will provide more comparative information on a company basis for fundamentals, valuation, and momentum. Many databases and tools have been incorporated to assess investment decisions; questions, comments, and discussion are highly appreciated.
All charts in this section are used from Yahoo! Finance.
Apple: Apple has recovered significantly from its yearly lows. The company continues to push forward with the iPhone leading the way. The new anticipated iWatch has mixed reviews as to expectations and will be interesting to watch unfold. Regardless, Apple continues to be a force in the consumer goods realm. The 2% dividend and policy towards future increases adds value.
In late June, a new position was established at $93.81/share.
Amazon: Amazon's release of its new smartphone was the new buzz as of June 18, 2014, but declining sales of the item from Amazon's Top 100 has cast some doubts. I am a believer that the strategy Amazon has undertaken to use Prime as its core revenue driver for the future is a smart move, which will lead to higher profitability over the long term. On a side note, I am on the sidelines for buying a Fire phone this year but will probably become a new Prime member.
The portfolio invested in Amazon earlier in the year and the position was quickly sold. In early June, a new position was established at $317.50/share.
Arista Networks: Arista Networks made its public debut in June. The company has some tension between its co-founders with a lawsuit that is expected to settle. This company is growing at a rapid pace, but faces some formidable competition from the likes of Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR) among others. The company could be a buyout candidate at some point, hopefully not because of near-term depressed performance.
In early June, an initial position was established at $57.48/share.
Baidu: Baidu continues to grow its revenues at a solid pace and is well positioned to replicate Google Inc.'s (NASDAQ:GOOG) comparable success within China. New competitors have emerged and digital advertising continues to evolve in China as is the case globally. Robin Yi has been a good steward of the business for shareholders and I'm comfortable with management long-term.
The fund invested in Baidu earlier in the year, but gains were taken. In late May, a new position was established at $169.45/share.
Biogen Idec: Biogen Idec is in a strong position when considering the company's present financial snapshot. The company has a strong pipeline of upcoming products that will allow for potential further continued growth. With some consolidation occurring in the industry, and company stock splits taking place, it would appear there is some speculation that Biogen may be performing a 3:1 stock split soon.
In early June, an initial position was established at $321.00/share.
Celgene Corporation: Celgene has been under some pressure due to patent infringement litigation. Anyone looking to invest in the biotech industry will need to have an appetite for these sorts of events. The company has an excellent management team and positioned for further growth. Celgene recently announced a 2:1 stock split and has shot up as a result.
In early April, an initial position was established at $70.43/share.
Cummins: Cummins has become a significant part of the future for diesel and natural gas truck engine development, manufacturing, and distribution. With federal Environmental Protection Agency, or EPA, and California Air Resources Board, or CARB, policies pushing for zero to near-zero fuel emissions, Cummins will continue to be at the forefront of truck engine technology.
In mid-June, an initial position was established at $158.25/share.
ConocoPhillips: ConocoPhillips competes with the likes of companies like Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM). The company is smaller than these peers, but very formidable with its oil operations. The recent spin-off of Phillips 66 has served both companies well. The company was added for dividend yield and stability.
In late May, an initial position was established at $79.90/share.
Deere & Co: Managing and investing in agricultural equipment has always been an important part of the U.S.'s growth as a major agricultural-producing country. Deere has been able to establish itself as a major global manufacturer and distributor of agricultural and turf, and construction and forestry equipment.
In late May, an initial position was established at $92.28/share.
Discovery Communications: Discovery has had a nice run over the past couple of years. The company has made some strong European acquisitions and is beginning to diversify into sports content. The company has mulled acquiring Scripps Networks Interactive (NYSE:SNI), but so far no action has occurred. Discovery has additionally made public statements regarding subscription streaming aspirations.
An initial position was taken in Discovery in mid-July of 2012; the position was sold last year. In late June, a new position was established at $74.68/share.
eBay: eBay has witnessed a slew of negative events which have impacted the stock price. This has ranged from Carl Ichan's proxy fight to have the PayPal segment spun-off, to the hack-in of marketplace passwords, to the recent departure of the PayPal unit's head executive to Facebook. Despite these events, the company is still growing well and is a formidable competitor in the e-commerce and e-payments space.
In late May, an initial position was established at $54.46/share. In mid-June another position was added at $49.92/share.
Facebook: Facebook, while still trading at a premium, continues to evolve its business through acquisitions and improved mobile advertisement revenues. Initially, the thought process was to wait for a pullback under the $50/share level; however, the potential for Facebook is worth the risk. The company is generating significant free cash flow and is poised for diversified business opportunities.
In late March, an initial position was established and quickly sold. In mid-May, a new position was established at $59.10/share.
Freeport-McMoRan: Freeport is a company that has undertaken significant investments to diversify the business. The company still maintains a large exposure to copper production as its core operation. The dividend yield and mid to long-term growth potential offers investors with long-term investment horizons a solid opportunity.
In mid-May, an initial position was established at $35.09/share.
Gilead Sciences: Gilead Sciences has traded in a volatile manner with the rest of the biotechnology industry. The company has strong therapeutics for both HIV and Hepatitis C diseases. Uncertainties surrounding expectations for the company's blockbuster Hepatitis C product, including pricing are currently weighing on the stock performance.
In late May, an initial position was established at $82.73/share.
JD.com: JD has established itself as the clear e-commerce leader in China based on revenues. Alibaba Group will be a formidable competitor. The company has to date outperformed its major peer in the first quarter for 2014. China will continue to dominate global e-commerce growth in the near term.
In late May, an initial position was established at $22.38/share.
Laredo Petroleum: Laredo Petroleum is on the cusp of generating substantial increases in revenue based on its oil production over the next couple of years. The company is based in the Permian Basin in Texas and should begin to recognize stronger efficiencies of optimized drilling investments.
An initial position was added in July 2012. In March 2014, the entire position was liquidated, and in late March, a new position was established at $24.52/share.
Precision Castparts: Precision Castparts continues to execute its organic and acquisition-based growth strategies. The company's growth has consistently provided investors with stable opportunities to invest in the company during the course of the past couple of years.
An initial position was added in April 2013. In August 2013, the entire position was liquidated, and in early April 2014, a new position was established at $253.38/share.
Pharmacyclics: Pharmacyclics has witnessed some volatility during the past several months and through most of 2014. The company's primary product Imbruva, which was FDA approved last fall, displayed strong results at ASSHTO and is awaiting further FDA approval for additional treatments.
An initial position was added in early April and quickly sold. In late May, a new position was established at $92.12/share.
Phillips 66: Phillips 66 has taken a recent hit with policy discussions hinting at lightly refined crude products being exportable. Phillips is positioned strongly for a wide variety of energy refinement and marketing of products. The company has witnessed some volatility due to pricing spreads as well.
An initial position was added in mid-February and quickly sold. In mid-May, a new position was established at $83.54/share.
Qiwi: Qiwi has been volatile of late as have most all Russian stocks. The company reported stronger than expected first quarter results and rallied as a result. The company is poised to capitalize on Russia's expansion into electronic payment systems and kiosks.
An initial position was added in early April and quickly sold. In late May, a new position was established at $44.45/share.
Rice Energy: Rice Energy will continue to be a volatile holding due to the lofty expectations, versus unknown realization of this potential. The stock has significant upside potential based upon recent initial well performance, which should translate into robust revenue growth in the near term. The company is still in its early development stages.
In late May, an initial position was established at $33.19/share.
AT&T: AT&T is one of the largest wireless communications providers. The company has significant assets related to the telecommunications industry. The recent acquisition of DIRECTV (NASDAQ:DTV) is a result of consolidation in the media distribution side of the industry. The company pays a solid dividend and generates substantial cash flows.
In late May, an initial position was established at $35.70/share.
Tyson Foods: Tyson Foods' recent acquisition of Hillshire Brands Company (NYSE:HSH) has been scrutinized much since the bidding war with Pilgrim's Pride Corporation (NASDAQ:PPC). The volatility of the stock during the bidding process created an interesting long-term opportunity.
In mid-June, an initial position was established at $35.81/share.
Twitter: Twitter has seen its stock price decimate from its highs in the $70s. The company has been experiencing a slowdown in user metrics and growth, however, advertising revenue has continued to grow robustly. I'm betting that Twitter eventually gets it right at some point.
In late March, an initial position was bought and sold quickly. In early June a new position was added at $32.84/share.
Union Pacific: Union Pacific continues to perform as the number one railroad in North America. The company recently added a new intermodal rail yard in New Mexico. In early June the company issued a two-for-one stock split. The company is most likely going to remain as one of the top performers of the year.
In early January, an initial position was established at $168.40/share.
United Parcel Service: UPS has cemented itself as one of the top global supply chain and logistics companies while at the same time operating the most dominant ground service in North America. Similar to FedEx Corporation (NYSE:FDX), UPS has also competed well within the less-than-truckload, or LTL, market. Despite FedEx's solid earnings, UPS will continue to lead on a revenue basis.
In mid-February, an initial position was established at $97.28/share.
V.F. Corporation: VF is a weathered leader in outdoor apparel. The company owns well-recognized brands including The North Face, Timberland, and Vans. There has been speculation that the company will potentially acquire Lululemon Athletica (NASDAQ:LULU), however, the business is on an excellent trajectory from its recent acquisitions and organic growth. I say VF marches on without adding a significant sports-related business.
An initial position was established in February 2013 and sold in October 2013. In mid-June, a new position was established at $62.54/share.
Wells Fargo: Wells Fargo continues to perform very well during 2014. The company pays a solid dividend and has provided a major blue chip business to diversify the portfolio. Bank stocks will continue to face challenges based upon government policies and regulations. Wells Fargo has proven its ability to mitigate risks and return value to shareholders during challenging environments.
In late May, an initial position was established at $49.22/share.
WhiteWave: WhiteWave is one of three companies that the portfolio has continued to hold since 2012. It has been challenging to develop a diversified portfolio to be held long-term, but WhiteWave has been the portfolio's top performer on a total return basis. The company should continue to be one of the fastest growing food-related companies in the market.
In October 2012, an initial position was established at $16.53/share.
Companies being considered for the portfolio are listed on the Instablog, Radar Screen .
The next IIF portfolio update and review will occur at month end, September 2014.
Disclosure: The author is long AAPL, AMZN, ANET, BIDU, BIIB, CELG, CMI, COP, DE, DISCA, EBAY, FB, FCX, GILD, JD, LPI, PCP, PCYC, PSX, QIWI, RICE, T, TSN, TWTR, UNP, UPS, VFC, WFC, WWAV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.