The Good Business Portfolio: 2016 2nd Quarter Earnings And Performance Review

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Includes: AA, ABC, ADP, BA, CAB, DHR, DIS, DLR, EOS, GE, HD, HOG, HPQ, HRL, IR, JNJ, KHC, LB, MCD, MDLZ, MO, OHI, PM, TXN
by: William Stamm

Summary

The portfolio of good company businesses is doing 0.78% below the DOW average year to date (YTD) of 6.12% for a total gain of 5.34%.

The 25 businesses comprise 99% of the portfolio with the other 1% cash and the average total return over the DOW average for the 44.0 month test period is 25.54%.

The objective of the portfolio is to create a portfolio that is balanced, not income, not dividend growth, not bottom fishing, not value, but balanced among all styles of investing.

Of the 25 companies in the portfolio 20 beat the DOW average for total return and 5 missed the total return over the test period of 44.0 months.

This article gives a review of the 2016 second-quarter earnings and 2016 YTD performance of the Good Business Portfolio. Earnings data will be looked at for some of the top positions in the portfolio.

Guidelines (Company selection)

The intent in the Good Business Portfolio guidelines is to create a portfolio that is a large cap balanced portfolio between the different styles of investing. Income investors take too much risk to get their high yields. Bottom-fishing investors get cat fish. Value investors have to have a foresight to see the future. These are guidelines and not rules. (For a complete set of guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review" ). They are meant to be used as filters to get to a few companies on which further analysis can be done before adding the company to the portfolio. So, it's alright to break a guideline if the other guidelines indicate a Good Company Business. I'm sure this eliminates some really good companies, but it gets me a short list to work on. There are too many companies to even look at 10% of them.

You see from the portfolio below that I want a portfolio that is defensive, provides income and does not take significant risks. I limit the portfolio to 25 companies, as more than this is almost impossible to keep track of. I have 25 companies in the portfolio and therefore the portfolio is full at present.

Portfolio Performance

The performance of the portfolio created by the guidelines have year in and year out beat the DOW average for over 24 years giving me a steady retirement income and growth. The table below shows the portfolio performance for 2012, 2013, 2014, 2015 and YTD of 2016.

Year

DOW Gain/Loss

Good Business

Beat Difference

Portfolio

2,012

8.70%

16.92%

8.22%

2,013

27.00%

39.70%

12.70%

2,014

6.04%

8.67%

2.63%

2,015

-2.29%

5.68%

7.97%

2016 YTD

6.12%

5.34%

-0.78%

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In a great year like 2013 the portfolio did fantastic. In a normal year like 2014 it beat the DOW by a fair amount. So far this year the portfolio is a little behind by 0.78% total return below the Dow average gain of 6.12% for a portfolio gain of 5.34% which is above my yearly requirement.

All 25 Companies In The Portfolio

The 25 companies and their percentage in the portfolio and total return over a 44.0 month test (starting Jan 1 2013) period is shown in the table below. I chose this time frame since it included the great year of 2013, the moderate year of 2014, the losing year of 2015 and moderate year of 2016 to date. The DOW baseline for this period is 41.13% and each of the top six easily beat that baseline. The next 19 have five companies that did not beat the DOW baseline but still are great businesses. I limit the portfolio to 25 companies and let the winners grow until they reach 8% - 9% of the portfolio and then I trim the position. JNJ and MO are now in trim position. I start the companies at a base percentage of the portfolio of 1% and add to the position if they perform well during the next six months. At 4% of the portfolio I stop buying and let the company percentage of the portfolio grow until it hits 8% then it's time to trim. In the portfolio only one company is actually losing money over the 44.0 month test period - Freeport-McMoRan Inc. (NYSE: FCX), with copper recovering it's a fair investment at today's price. The Portfolio did buy some FCX when it got down to $4.00/share, there assets were worth much more than $4.00, so this move did reduce the loss, but FCX still needs more time as copper prices will rise over time. I have added a guideline to be careful of commodity companies as a result of the poor total return performance of Alcoa (NYSE:AA) and Freeport-McMoRan.

^DJA Chart

^DJA data by YCharts

DOW Baseline

41.13%

Company

Total Return

Difference

Percentage of Portfolio

Cumulative Total

44.0 Months

From Baseline

Percentage of Portfolio

Johnson & Johnson (NYSE:JNJ)

81.14%

40.01%

8.39%

8.39%

Home Depot (NYSE:HD)

124.84%

83.72%

7.99%

16.37%

Boeing (NYSE:BA)

77.71%

36.59%

7.77%

24.14%

Altria Group Inc. (NYSE:MO)

127.21%

86.08%

7.83%

31.97%

Eaton Vance Enhanced Equity Income Fund II (NYSE:EOS)

60.82%

19.70%

7.14%

39.11%

Walt Disney (NYSE:DIS)

86.97%

45.84%

6.36%

45.47%

Philip Morris INTL INC. (NYSE:PM)

34.61%

-6.52%

6.63%

52.11%

L Brands Inc. (NYSE:LB)

79.68%

38.55%

5.77%

57.88%

General Electric (NYSE:GE)

62.84%

21.72%

5.61%

63.49%

Harley Davidson Inc. (NYSE:HOG)

17.34%

-23.79%

5.25%

73.58%

Cabela's Inc. (NYSE:CAB)

10.88%

-30.25%

4.84%

68.33%

McDonald's Corp. (NYSE:MCD)

42.16%

1.03%

4.55%

78.13%

Automatic Data Processing (NASDAQ:ADP)

66.01%

24.88%

4.45%

82.58%

Omega Health Inv. (NYSE:OHI)

78.93%

37.80%

4.44%

87.02%

Ingersoll-Rand plc (NYSE:IR)

81.78%

40.65%

2.85%

89.87%

Mondelez (NASDAQ:MDLZ)

73.50%

32.37%

1.54%

91.42%

Texas Instrument (NYSE:TXN)

118.98%

77.85%

1.81%

93.22%

Freeport-McMoRan

-57.53%

-98.66%

0.87%

94.09%

Alcoa

14.16%

-26.97%

1.00%

95.09%

Hewlett Packard (NYSE:HPQ)

106.94%

65.81%

1.13%

96.22%

Kraft Heinz Corp. (NASDAQ:KHC)

114.51%

73.38%

0.93%

97.15%

Amerisource Bergen (NYSE:ABC)

108.04%

66.91%

0.93%

98.07%

Danaher Corp. (NYSE:DHR)

43.81%

2.69%

0.42%

98.49%

Hormel (NYSE:HRL)

124.13%

83.00%

0.20%

98.69%

Digital Realty Trust (NYSE:DLR)

44.21%

3.08%

0.52%

99.21%

Average Above Dow

26.10%

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This is my full list of my 25 Good Businesses. I have written individual articles on some of these businesses, please see my full list of article if you are interested.

Click to enlarge

Recent Portfolio Changes and Earnings Comments

For the second quarter's earnings season the 25 portfolio companies did reasonably well with a few laggards, 16 beat earnings estimate, 4 meet estimates and 5 missed estimates a bit.

On 7/19/16 Philip Morris earnings were $1.15 compared to expected at $1.20 and last year at $1.21. Rev was down by $120 Million from the expected with total revenue at $6.6 Billion down by 3.1% year over year. Hold for now and only sell when PM becomes too large a percentage of the portfolio. Exchange rates for the strong dollar are causing a PM ( a total international company) to loss revenue but they came through with fair earnings. They guided at $4.45 - $4.55/year a small increase from the last report. The question is will they increase their dividend with such a large pay out ration of 96%, I think they will but only at $0.02/quarter.

Alcoa had a good report with earnings that beat the expected earnings of $0.09 compared to the actual earnings at $0.15, and the revenue beat by $100 Million. The transformation of Alcoa is starting to take effect and I will wait for the Arconic spin off to see if it's a turnaround or sell. I always like earnings season since most of my Good Business companies have increasing earnings.

Sold some Cabela's covered calls, sold September $52.5's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that CAB goes up so I can sell the calls again in the same month for a Double. August 30 I bought to cover the calls and hope for an upturn to sell them again in this month, if not I will sell next month's CAB calls.

Bought starter position of Digital Reality Trust of 0.52% of the portfolio. I feel the computer industry facilities business has nowhere to go but up and DLR pays an above average dividend. I wrote an article on Digital Reality Trust in April of this year if you are interested.

Sold some covered calls on Harley Davidson , sold August 50's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently above the strike price and I have moved the calls up and out. On August 10 the portfolio moved the HOG calls up and out to November 52.5's.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson is 8.4% of the portfolio, Altria Group Inc. is 7.8% of the portfolio, Home Depot is 8.0% of portfolio and Boeing is 7.8% of the portfolio, therefore JNJ and HD are now in trim position with Boeing and Altria getting close.

Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash from the 787 program in the third quarter of possibly $100 Million. The KC-46A refueling plane has been authorized by the Pentagon for its initial production, this will be a big step to increase Boeing's already high cash flow even more. The contract has still to be awarded, which should be soon. Looking forward I expect Boeing to beat the expected third quarter earnings of $2.52 but will not trim it until it reaches 10.0% of the portfolio. About 1.6 years ago Boeing got above 10% of the portfolio and I trimmed it a little to get it below 10% of the portfolio.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.

Conclusion

The 11 guidelines in the article give me a balanced portfolio of good companies that are large cap and can grow their revenues, earnings, and dividends for years. They have the staying power to fix what ever goes wrong. In each case the company has the size and good management to fix the problem. The portfolio has growth companies, defensive companies, income companies and companies with international exposure giving it what I call balance. Of the 25 companies presently in the portfolio five are underperforming the DOW average in total return. All five companies are being hurt by the strong dollar since they are multi-national and have a large portion of their income coming from foreign operations. The portfolio is a little behind YTD but we have the best time of the year yet to come. It is my intention to write separate comparison articles on individual companies. If you would like me to do a review of one of my Good Business Companies please comment and I will try to do it.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long JNJ, HD, BA, MO, EOS, DIS, PM, LB, GE, HOG, CAB, MCD, ADP, OHI, IR, MDLZ, TXN, FCX, AA, HPQ, KHC, ABC, DHR, HRL, DLR.

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.