Completing the Conservative Growth Portfolio

Includes: CSCO, NATI
by: Alan Brochstein, CFA

This is the last in a series of articles regarding my recently introduced “Conservative Growth/Balanced Model Portfolio”.    Last week, I shared the background and overall asset allocation.  You can refer back to the article or visit my website to learn more.  As I stated in the previous article, the equity component of the portfolio is overweight relative to the S&P 500 in the Industrial, Consumer Discretionary and Financial Sectors.  I previously shared my basis for taking these exposures.  I am now going to address the two stocks that make up the Technology investments, National Instruments (NASDAQ:NATI) and Cisco Systems (NASDAQ:CSCO), the latter of which I added a week after I launched the initial model.  See below if you would like to review the rest of the portfolio:

NATI, an original pick and also a member of the Top 20 Model Portfolio, offers designers and engineers a better way to test products than traditional instrumentation.  Its software is also used in automation and control.  The company reported a great quarter despite challenging times Wednesday, rocketing the stock ahead by 16%.  Despite the advance, I think that this global player is likely to continue to enjoy success.

I included NATI originally as the only Tech selection in the portfolio.  Despite its small size, I view the stock as "conservative" due to a historically low PE (18 at the time), its high margins that reflect lack of competition, massive FCF generation, 28% insider ownership, lack of debt and a healthy dividend (1.5%).  Its customer base is very diversified by geography and by industry.  The stock has been in  a relatively tight range over the past several years and isn't too far from an all-time high.


Download NATI_10_Years.jpg

CSCO, which I added after the model started and also recently added to the Top 20 model portfolio, seems to be priced extremely pessimistically.  Given the CEO's downbeat comments earlier this summer, I guess it isn't too surprising.  I find the valuation, though, to be compelling (10X EV/EBITDA).  The company has finally transitioned, in my opinion, to that of "value" stock, though the underlying growth is still well ahead of economic growth broadly.  The analyst community isn't very enthusiastic these days either.  The inventory growth has been impressive, declinining over the past year despite sales growth.  I am not sure that the portfolio will be marrying this one, but perhaps we can enjoy an extended dating period!


Download CSCO_16_Years.jpg

While the two picks in the Technology sector appear to be very different based upon market caps, there are a couple of similarities that I hope prove to drive investment performance.  First, both companies are very global:  CSCO reports about 1/2 of sales OUS, while NATI has over 50% outside of North America.  Second, while both companies sell a "box", it is the software that is the secret sauce.  This is quite evident in the very high GM for both companies (64 for CSCO and 75 for NATI).

Disclosure:  Long CSCO and NATI