Multiple Model Portfolio Vs The S&P 500: Q1 Performance Review

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Includes: CLDT, CRWS, DLTH, FL, GILD, HLT, MAR, RGC, SJB, TGT
by: Cory Cramer

Summary

This is a review of my SA recommendations as of the end of Q1 2016.

The results were very good, outperforming the S&P on almost every metric.

Multiple Model Portfolio enters Q2 on the lookout for beaten down cyclicals.

Introduction:

This will be a review of the recommendations I've made here on Seeking Alpha and for the recently established Multiple Model Portfolio. The main focus of this review will be to see how my recommendations and weightings have performed against the S&P 500. At the end of Q1 the portfolio had a high level of cash at 78%. I will save a discussion about the cash position for the annual review and this review will focus exclusively on the recommendations vs the S&P 500.

This review will examine any unrealized positions in the portfolio regarless of when they were made, and it will examine any positions that were realized during Q1 2016. It will not cover positions that were realized before 2016. The first thing I'll examine are the number of positions that outperformed the SPY since recommendation compared to the number of positions that underperformed. This will give an idea of how often I am correct with regard to the prospects of a stock outperforming. The second thing I will examine is how each individual recommendation performed (including weightings). This will give an indication of the magnitude of the individual stock performances. I will also include what sort of impact the stocks would have had on a larger portfolio relative to the SPY purchased at the same time.

There are certainly other angles from which to examine the portfolio, but I think the portfolio needs to mature some more before those other considerations will be very meaningful. As of January 2016 the portfolio is long-only and I am personally long every position.

So far, out of 11 recommendations made, 10 have outperformed the S&P 500 index on a total return basis. Hopefully this is something I can continue to do over the long term. Gilead (NASDAQ:GILD) is the only recommending that is currently underperforming, and I'll discuss that investment--along with each of the others--later on.

The table below contains both the portfolio's realized and unrealized positions as of the end of Q1. ProShares Short High Yield ETF (NYSEARCA:SJB) was the only position realized during the quarter and due to my decision to make the MMP a long-only portfolio, it will be the last of my short recommendations. The reason for the change to long-only positions is to make the MMP more accessible to novice investors, or to investors who simply don't like to take short positions.

Hopefully the table below is mostly self explanatory. I have included Y-chart graphs for each position as well along with brief explanation of my thesis for each position. The "Effect on Portfolio" and "SPY Effect on Portfolio" expresses what effect a position that matched the suggested weight would have had on someone's overall portfolio. For example, a 1% weighted position that appreciated 100%, would produce a 1% gain on someone's total portfolio.

I calculated these all with a simple calculator. I've found doing these things by hand helps me sometimes recognize patterns I might otherwise miss, and it exercises my brain a bit. The downside is that I'm more likely to make mistakes. If you find any, feel free to let me know. I've included Y-charts below that begin on the publication dates of the articles or instablogs, which can all be found in my profile (Target, Foot Locker, and Short High Yield, were all made via instablog, the rest were articles). If the ticker has a (number), that means there was more than one purchase made.

Symbol Long/Short Weight Simple Return Alpha to SPY Effect on Portfolio Alternative SPY Effect on Portfolio Duration Realized this Period?
SJB Long 4% 3.28% 12.98% 0.1312% -0.388% 7 weeks Yes
FL Long 2% 8.83% 7.69% 0.1766% 0.0228% 3 months No
RGC(1) Long 2% 17.2% 17.55% 0.344% -0.007 3 months No
CLDT Long 2% 6.66% 4.24% 0.1332% 0.0484% 14 weeks No
GILD Long 6% -4.73% -8.00% -0.2838% 0.1962% 3 months No
CRWS Long 2% 14.84% 11.57% 0.2968% 0.0654% 3 months No
RGC(2) Long 2% 18.62% 15.35% 0.3724% 0.0654% 3 months No
TGT Long 2% 12.29% 5.83% 0.2458% 0.1166% 3 months No
DLTH Long 1% 18.05% 11.41% 0.1805% 0.0664% 2 months No
BWA Long 1% 27.03% 15.53% 0.2703% 0.115% 2 months No
HLT Long 2% 4.65% 1.24% 0.093% 0.0682% 1 month No
Click to enlarge

The simple weighted total return of the investments is 7.54%. The simple weighted total return of the SPY for investments made at the same time is 2.18%

Held in a larger portfolio the positions would have occupied 22% of the portfolio and contributed 1.96% of return to the overall portfolio. Alternative investments made in the SPY at the same times would have contributed 0.37%. The first investment of the MMP was made Nov. 17th 2015. If one had taken a completely passive approach and invested 100% of their portfolio in the SPY at that time their total return would have been about 1.14%.

Overall, I'm very pleased with the results so far. In a little over four months my picks are outperforming the S&P 500 by almost any metric. I expect things to get much choppier later this year, but I hope that it will offer up some buying opportunities.

Now let's move on to the individual ideas. The only realized position in Q1 was SJB. Here was my reasoning for the SJB position back in early December:

The main takeaway I came away with was that the US is likely to do fine. Energy prices are low, the dollar is strong, and jobs are steady. Interest rates are likely to rise, but only very slowly. The biggest risk to the domestic economy will likely come from bankruptcies in the energy sector. This led me to the conclusion that shorting high yield bonds would probably be a good strategy going into the new year because I think if we see a downturn in the US economy it is likely to emerge in junk bonds first.

In essence, it was sort of a hedge against some of the other positions I had taken that assumed a fairly positive economic environment in the US. I expected it to also act as a canary in the coal mine if the environment happened to change rapidly. I decided to close the position when I decided to make the MMP a long-only portfolio.

SJB Chart

SJB data by YCharts

My Foot Locker (NYSE:FL) recommendation was via instablog back in November. It was a unique opportunity in that it had good short-term, medium-term, and long-term prospects. Foot Locker has recently been added to the S&P 500 index, which should help solidify it's position as a potential long-term hold. Unless serious internet competition arises, I think Foot Locker will do well into the foreseeable future.

FL Total Return Price Chart

FL Total Return Price data by YCharts

Regal Entertainment (NYSE:RGC) might be my favorite pick of the last 4 months. Multiple hedge-fund managers had recommended shorting it and analysts are still declaring that 2016 box office won't surpass 2015. On top of that, I recommended doubling down on RGC at the beginning of the year. It has really been a classic example of how one can benefit from simply thinking for themselves. Stars Wars proved to be the perfect catalyst for the stock, and a strong slate of films into the foreseeable future should help propel RGC at least a little bit higher or at least offer protection to the downside from most macro-economic factors.

RGC Total Return Price Chart

RGC Total Return Price data by YCharts

Chatham Lodging Trust (NYSE:CLDT) is the only REIT so far in the MMP. I am of the opinion that the whole lodging space has been unjustifiably sold off, and that Chatham offers the one of the best dividend plays around for a retirement account because of its focus on mid-tier, select service, branded, hotel properties. This is one a person would do well to go out an buy still today. It's like someone offering to sell you a local hotel that is well managed, makes money, and has a strong brand and loyal following at a fair price. Promises to pay you a 6.5% yield every month even thought you don't have to do any of the work running the business, and you can sell it whenever you wish with the click of a button. And, if you hold it in a Roth account, all of those earnings are tax-free. What is not to like about that?

CLDT Total Return Price Chart

CLDT Total Return Price data by YCharts

Adding to Regal Entertainment, and purchasing Crown Crafts (NASDAQ:CRWS), and Gilead were my top picks for the next two years that I made at the beginning of 2016. Crown Crafts offered a rare opportunity to own a stable small-cap dividend paying stock that was US focused. It's small enough that it offers a special opportunity for retail investors not available to most big investors.

Oh, Gilead! My highest weighted position and my one laggard. Actually, I'm just as bullish on Gilead as when I bought it. Eventually, over the course of the next couple years, they'll find company to buy that wall street likes, and while we wait, they'll be gobbling up their own stock with the loads of cash they rake in each quarter. Even with flat earnings the next two years, I still expect it to outperform the SPY.

SPY Total Return Price Chart

SPY Total Return Price data by YCharts

Target (NYSE:TGT) and Duluth Holdings (NASDAQ:DLTH) were both Peter Lynch style purchases. My personal experience shopping at Target over the holidays, combined with their US focus made me take a closer look at the company, which, considering what they are doing on the customer service side, looked to me like a good value compared to the rest of the market. And Duluth Holdings offered the rare opportunity to own a recent IPO with a lot of growth potential at a decent price.

SPY Total Return Price Chart

DLTH Total Return Price Chart

DLTH Total Return Price data by YCharts

About mid-February I noticed a lot of cyclical stocks were approaching really great buying prices and I spent a lot of time researching and developing a purchasing strategy for these types of stocks. They require a strong stomach and 3-5 time horizon, but they can be very lucrative when purchased at the right time. BorgWarner was the first such cyclic purchase for the MMP.

BWA Total Return Price Chart

BWA Total Return Price data by YCharts

Hilton (NYSE:HLT) was purchased both because I like its brand and because I think that its upcoming three-way split in which it will spin off its time share business and create a hotel REIT, offers some value for shareholders. My plan is to divest the time-share portion of the split and hold on to the other two portions unless I notice something I'm really not happy about with the structure of the split. Hilton had previously sold off quite a bit before the purchase so I felt it offered a good margin of safety. We've seen from the recent bids for Starwood (NYSE:HOT), that there are interested buyers out there for branded hotel properties.

HLT Total Return Price Chart

HLT Total Return Price data by YCharts

Conclusion:

It will be difficult to keep up the sort of outperformance I've had through Q1, but I think the MMP has an advantage over other approaches because it isn't locked in to a single strategy. Quite often, a fund or fund manager can have a good run in the market for a year or two, but then the market changes and they subsequently underperform in the next year or two. My goal is to stay flexible and use a variety of strategies to find value wherever I can in the market. Whether I'll be able to do that is anyone's guess, but I'm going to try.

Disclosure: I am/we are long FL, CLDT, GILD, RGC, BWA, DLTH, TGT, HLT, CRWS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.