A few weeks ago I posted my firm’s top 11 holdings for our actively managed, value-oriented portfolio called The Freedom Fund. I encourage you to take a look at this more traditional model found in this article: 11 Stock Picks for 2011: My Top (Relatively Safe) Holdings. My firm manages another portfolio that I’d like to discuss and share the top six holdings. It’s called The Hayek Fund and we bill it as the first portfolio dedicated to free market principles. It’s what I call semi-actively managed because I adjust allocations, but the stocks are pre-chosen.
Let me give you a bit of background. In my previous career, I worked for a free market-oriented think tank. I was aware of who the corporate donors to our organization were, as well as those who gave to some of the other like-minded organizations. While doing stock research earlier this year I kept coming across some of these names and noticing their outperformance over the long term. On a whim, I decided to create a mock portfolio and run some backtests. The results going back 1, 3 5, and 10 years were impressive. In fact, it outperformed the S&P 500 by nearly 13% per year (with no hypothetical fees taken out) from January 1, 2000 to December 31, 2009. The stocks weren’t cherry-picked either. It was simply made up of equal allocations of the stocks that were used to create the portfolio we have today.
How do we pick the stocks for the portfolio? I’ve chosen a few free market oriented organizations to use as my indicators. From those organizations, I’ve selected every one of the corporations who have given them money in the last year according to required filings. Most of these corporations have given for years, but as the donors change each year, the stocks are removed or new ones added as necessary. As I mentioned, I also will adjust allocations based on valuations.
Why the outperformance? I have two general theories: One, if a corporation gives to free market organizations, they’re more likely to be entrepreneurial in nature. Now, this isn’t true across the board, but it certainly can be an indicator. Two, corporations that have the ability to make donations are more likely to generate a tremendous amount of free cash flow year in and year out. Of course, companies that do that are more likely to outperform. You'll see how that cash generation is helpful in some of the stocks listed below.
The Hayek Fund was launched on September 7, 2010 and has returned 21.2% after taking out the 1.5% annual fees (which covers all trading and adminstrative costs, and firm fees) in its first five months. This slightly beats the 21% gain of the S&P 500 over the same period. The portfolio is currently made up of 23 holdings with the top six making up just under 31% of the portfolio. Here are the current top 6 holdings:
Caterpillar (CAT): Heavy equipment maker Caterpillar has been on a tear the last six months, and is hitting new 52 week highs daily. Its international presence coupled with rising commodity prices should keep demand up for the foreseeable future. CAT’s got a wide moat. Their debt is a risk, but they’re continue to pay it down and they look to be in good shape going forward.
Dole Food (DOLE): Dole has also been on a tear since the launch of the fund, rising nearly 65%. Dole grows fresh fruit, vegetables, and markets other packaged foods. Despite an adjusted loss last quarter the company had positive EBITDA and it has continued to pay down debt. New product introductions have been going well, but rising costs and food prices are both a negative and an opportunity.
Google (GOOG): Google is one of the most innovative and entrepreneurial companies out there. The company continues to coin money, with the biggest risk being paying too much for acquisitions. Google continues to grow revenue at more than 15%/yr, making a low 20’s multiple seem reasonable. I believe the management transition will go smoothly.
VeriSign (VRSN): VeriSign is leaner and more focused now than in the past. The company paid a nice $3 special dividend in December and have a strong enough balance sheet to repeat it in the future with more than $2 billion of cash still on the books. It was also a good sign the company didn’t use the money raised from divestitures on other acquisitions. Going forward, VRSN's business model will help it to have higher operating margins. There is some current legal risk, but I expect it to be resolved in VeriSign’s favor.
Whole Foods (WFMI): Many people wouldn’t place Whole Foods in the economic conservative pile, but the company is strongly Libertarian when it comes to its business. WFMI's CEO caught a lot of flak in the liberal community because he loudly and publicly called for a free market health care law as opposed to what we got. The company’s health care innovations for its employees, and donations to free market organizations, show they rightly belong in the fund. While many grocers are struggling with compressing margins, Whole Foods continues to perform. Like many of these other stocks listed here, Whole Foods has a wide moat and a lot of brand loyalty.
ExxonMobil (XOM): Higher oil and natural gas prices should continue to buoy Exxon’s profits. The company has used its large cash hoard to buy back shares, reducing the count by 23% in the last five years, and to continue to increase dividends. With a below market P/E, rising prices, and continued share repurchases, Exxon’s stock has room to run.