Last month, I laid out the plan to publicly monitor and track the performance of the Individual Investor Fund, or "II Fund," or "Fund." Please refer to September's initial Fund performance for an introduction and overview of the Fund's goals and objectives. Additionally, this information is available on my profile.
Over the course of the previous five-and-a-half-week period, the Fund has underperformed the broad market's declining trend through the month of October. The Fund has been impacted by significant volatility from some of the holdings. Just under 50% of the Fund's holdings have declined between roughly eight to 34 percentage points, versus the other 50% displaying almost no change, and only one company has displayed a significant positive move. Detailed information regarding each company's performance is listed below in the Year-To-Date, or YTD, and Previous Month Performance, and Management Activities sections.
All of the information regarding the Fund's performance from month to month is compared by a percentage point basis. For example, if a stock is up 25% YTD in September, and then is up 20% in October, the stock has decreased by 5 percentage points. All market capitalizations are as of the last trading day for the month of October.
Current Holdings as of October 31, 2012
- Clean Harbors, Inc. (NYSE:CLH); market cap - $3.11 billion; industrial goods sector/waste management industry
- Discovery Communications, Inc. (NASDAQ:DISCA); market cap - $22.49 billion; services sector/CATV systems industry
- Kayak Software Corporation (NASDAQ:KYAK); market cap - $1.28 billion; technology sector/Internet information providers
- LinkedIn Corporation (NYSE:LNKD); market cap - $11.30 billion; technology sector/Internet information providers
- Laredo Petroleum Holdings, Inc. (NYSE:LPI); market cap - $2.60 billion; basic materials sector/independent oil & gas industry
- Liquidity Services, Inc. (NASDAQ:LQDT); market cap - $1.28 billion; services sector/catalog & mail order houses industry
- MercadoLibre, Inc. (NASDAQ:MELI); market cap - $3.71 billion; services sector/business services industry
- SAP AG (NYSE:SAP); market cap - $86.92 billion; technology sector/application software industry
- Scripps Networks Interactive, Inc. (NYSE:SNI); market cap - $9.05 billion; services sector/broadcasting TV industry
- TripAdvisor, Inc. (NASDAQ:TRIP); market cap - $4.31 billion; technology sector/Internet information providers industry
- Velti Plc (VELT); market cap - $473 million; technology sector/business software & services industry
- The WhiteWave Foods Company (NYSE:WWAV); market cap - $2.90 billion; consumer goods sector/dairy products industry
- Zipcar, Inc. (ZIP); market cap - $251 million; services sector/consumer services industry
YTD and Previous Month Performance as of October 31, 2012
- MELI - YTD 24.5%; previous month (1.2)
- VELT - YTD 19.3%; previous month (33.9)
- DISCA - YTD 17.8%; previous month (1.8)
- LNKD - YTD 15.9%; previous month (10.8)
- LQDT - YTD 14.6%; previous month (25.2)
- SAP - YTD 13.9%; previous month 0.0
- SNI - YTD 13.3%; previous month (1.5)
- CLH - YTD 12.7%; previous month 25.9
- KYAK - YTD 3.7%; previous month (1.0)
- WWAV - YTD (0.3%); previous month N/A
- LPI - YTD (4.3%); previous month (7.8)
- TRIP - YTD (6.6%); previous month N/A
- ZIP - YTD (26.1%); previous month (8.8)
Benchmark Comparison and Performance
The II Fund has returned 5.9% YTD. This performance is comprised primarily of unrealized gains representing roughly 85% of the return, and realized gains representing roughly 15% of the return. The overall fund performance has declined 8.1 percentage points from the previous month. Comparatively, the S&P 500 has returned 12.3%, a 3.8 percentage-point decline from the previous month, and the Russell 2500 has returned 11.8%, a 4.3 percentage-point decline from the previous month. The VMGMX fund has returned 10.8%, a 4.5 percentage-point decline from the previous month, and the FMCSX fund has returned 10.2%, a 6.8 percentage-point decline from the previous month.
Recent transactions where positions were sold only included MercadoLibre:
A portion of the MercadoLibre position was sold in September for a gain of 21.5%. Due to macroeconomic concerns and possible volatility during 2013, competitive threats from Amazon.com, Inc. (NASDAQ:AMZN), and a slowdown in the Brazilian economy, the decision to trim the position was justified. Cash is set aside for a re-entry opportunity in the event the stock breaks below the $75 level. Long-term prospects for the company remain positive. The company will be reassessed following its November 1st financial report.
Positions were added to Clean Harbors, Liquidity Services, and Zipcar in late September and in October:
Clean Harbors provided an entry opportunity due to a recent sell-off below the $50 level. The sell-off was triggered by a downgrade of the company based on operational and weather-related concerns. Clean Harbors has displayed strong free cash flow generation and excellent financial stability, as evidenced by the company's cash and current asset strength. Recently, the company has just announced that it will acquire Safety-Kleen (SK), which has driven the stock price significantly higher. Clean Harbors will provide its financial report on November 7th.
Liquidity Services has been volatile throughout the entire year of 2012. The stock recently dipped below its previous sell-off low point in July. Speculative publications have surfaced regarding insider stock sales and contractual relationships, adding to volatility. The company will experience significant profit growth for 2012, reflecting the Jacobs Trading acquisition. Legitimately, concerns remain for the company's growth prospects for next year. Execution and integration of the recent acquisition of GoIndustry DoveBid will be an important long-term driver for revenues and profits. This transition and integration is crucial for the company to continue to drive growth merging its existing operations, both domestically and internationally. The company will provide its financial report on November 29th.
Zipcar has continued to be the major laggard within the portfolio. Despite the company's current growing pains, the car-sharing global market is experiencing robust growth and rapid technological development. Zipcar's financial report will be provided on November 8th, and this will be an important opportunity to see whether Zipcar makes progress towards profits and cash flows. The company's market capitalization is very close to its equity book value, and any positive trends in fundamental performance and growth will allow for stock price appreciation. It will be vital for Zipcar to have the capacity to be profitable and maintain strong free cash flow to continue to make strategic acquisitions as the car-sharing market continues to develop. Zipcar is well-positioned for both international growth and technological developments with its operations in Europe and North America, and its equity stake in Wheelz, who just recently has entered the peer-to-peer car-sharing market in San Francisco.
All existing positions that had no buying or selling activity included Discovery, Scripps Networks, Velti, SAP, Kayak, and Laredo Petroleum:
Performance for Discovery and Scripps Networks has remained stable. Discovery's wealth of international content continues to provide opportunities for long-term stock price appreciation. The recent passing of Edward W. Scripps has yielded speculation of a buy-out of the Scripps Networks. Discovery has been mentioned, which would provide an excellent development within this portfolio, however, other suitors such as Walt Disney Co. (NYSE:DIS) and Time Warner, Inc. (NYSE:TWX) have also been mentioned as candidates. Both Discovery and Scripps Networks provide solid cash flow generation and growth prospects. Discovery and Scripps Networks will be reassessed after their respective financial reports November 6th and 1st of next month.
Velti continues to be highly volatile, and has lost a considerable amount of value from the previous monthly report. The stock has a high short interest percentage at just fewer than 37%. Risks abound, as large players such as Facebook, Inc. (NASDAQ:FB); Google, Inc. (NASDAQ:GOOG); and Apple, Inc. (NASDAQ:AAPL) lurk as potential threats, and a wide variety of fragmented smaller competitors have emerged. There is also uncertainty regarding the Augme Technologies, Inc. (AUGT.OB) lawsuit. On the positive side, Velti offers robust potential for revenue growth, especially in the Americas and United Kingdom markets. The company is entering an important reporting period over the next two quarters. Analyst estimates assume significant earnings and cash flow results. If Velti is able to reach and/or exceed analyst targets, the stock price should appreciate. Long term, the company offers considerable upside potential. Velti reports its financial results on November 13th.
SAP continues to produce solid growth each and every quarter, as evidenced by its recent financial report in October. The company has made significant social and cloud-related acquisitions over the past year, including Successfactors and Ariba. The continued demand for significant enterprise management and supply chain systems provides SAP with a unique opportunity to continue to leverage its legacy systems while at the same time develop innovative solutions such as customer relations management, or CRM, to provide long-term value for investors.
Kayak has displayed some volatility since it went public in late July. The company reports financial results on November 8th. Kayak provides an excellent growth opportunity within the online travel industry with its exposure to Internet-based and mobile application markets, and its potential for international growth as well. Kayak focuses on providing technologies to facilitate bookings through websites and mobile applications. Risks remain, including its dependence on Google Inc.'s ITA Software and the evolution of the online travel industry technologies in general. There are multiple revenue models between the major online businesses and smaller players, and future trends and developments will be important for each company's growth prospects.
Laredo Petroleum has seen its stock price decline primarily as a result of the disclosure of Warbug Pincus LLC selling roughly 14 million shares in mid-October. The transaction was specifically related to Warbug as a shareholder of Laredo. The final prospectus disclosed that upon completion of the transaction, Warbug would still maintain a roughly 70% majority ownership of Laredo. As an additional 1.875 million shares were sold, the prospectus majority ownership of Warbug should be revised to reflect a roughly 68% stake. Aside from this immaterial transaction, Laredo has provided lower guidance for the upcoming quarter's financial report due out on November 9th. The company has missed estimates the previous three quarters in a row and is on pace for a fourth consecutive shortcoming. However, Laredo does provide a solid opportunity for long-term growth with its proven oil properties and management team.
Newly added positions included LinkedIn, TripAdvisor, and WhiteWave:
LinkedIn provides a high risk, high reward opportunity. To date, LinkedIn has been very successful in building an Internet-based and mobile application international social employment market via its core revenue segments; Talent Solutions, Marketing Solutions, and Premium Subscriptions. LinkedIn trades at a high premium, and is not a stock for the faint of heart. The long-term potential is in the ability or opportunity for LinkedIn to impact traditional hiring markets such as staffing agencies. In the near-term, LinkedIn will need to continue to produce robust growth. Talent Solutions continue to be the company's fastest-growing revenue segment. The company will be reassessed following its November 1st financial report.
TripAdvisor is the second online travel industry-owned company in the portfolio. TripAdvisor offers a business model focused on travel user-generated content. The main difference between TripAdvisor and Priceline.com Inc. (NASDAQ:PCLN) or other similar operations is that TripAdvisor does not directly receive commissions for merchant bookings, but rather, primarily relies upon click-based advertising revenues. TripAdvisor is the leading travel site based on its travel-review content. Risks for TripAdvisor include Priceline and Expedia, Inc. (NASDAQ:EXPE) competing for travel user-generated content, among other items. TripAdvisor is positioned well to continue to provide long-term value as the online travel-review content market leader and will be reassessed following its November 1st financial report.
WhiteWave provides an opportunity to gain exposure to a portfolio of packaged food and beverage products with the potential for solid growth. Revenues have grown roughly 14% and net income has grown roughly 7% over the past four years. Over the past six months, the company has grown revenue by 13% and net income by 21%. Company products include plant-based foods and beverages, coffee creamers and beverages, and premium dairy, with products and sales to both North America and Europe.
The II Fund is currently holding a 29% cash allocation ratio, of which 10% is designated for MercadoLibre. The fund will be adding cash this year and next year. Significant economic uncertainties remain in the near term, and the fund will continue to position itself aggressively to take advantage of buying opportunities regarding existing positions.
Companies Being Considered
- Kinder Morgan Inc. (NYSE:KMI); market cap - $36.10 billion; basic materials sector/oil and gas pipelines industry
- Dr. Pepper Snapple Group Inc. (NYSE:DPS); market cap - $8.9 billion; consumer goods sector/beverages - soft drinks industry
Based on recent research and screening, two companies that will be considered for near-term additions to the portfolio include Kinder Morgan and Dr. Pepper Snapple Group. A majority of the current holdings of the portfolio provide for aggressive growth potential. Kinder Morgan has excellent exposure to natural gas distribution via its pipeline networks in North America, and Dr. Pepper Snapple Group provides a diverse set of products and production facilities, and could possibly be considered as an acquisition target. Kinder Morgan and Dr. Pepper Snapple Group would allow for fixed income opportunities, as well as further diversification into additional industries. A position may be entered into either of these companies in the near future.
- AMC Networks Inc. (NASDAQ:AMCX); market cap - $3.4 billion; services sector/CATV systems industry
- JB Hunt Transport Services, Inc. (NASDAQ:JBHT); market cap - $6.9 billion; services sector/trucking industry
- The McGraw Hill Companies, Inc. (MHP) (spin-off); market cap - TBD; services sector/publishing - books industry
- News Corp. (NASDAQ:NWS); (spin-off); market cap - TBD; services sector/entertainment diversified industry
- SINA Corporation (NASDAQ:SINA); market cap - $3.6 billion; technology sector/Internet software & services industry
- Sohu.com Inc. (NASDAQ:SOHU); market cap - $1.4 billion; technology sector/Internet information providers industry
These companies are being watched for potential consideration for the fund. AMC Networks provides an opportunity to gain additional content/media exposure for the fund. AMC's market valuation is low compared to its peers, risks include over-reliance on debt and recent stock price run-up. JB Hunt provides a great opportunity to get into the transportation and logistics area, and the company's stock price has slightly weakened. Both McGraw Hill and NWS offer interesting spin-off investment opportunities -- McGraw Hill with its educational services segment, and NWS with its entertainment segment. SINA and SOHU are varying examples of risky China plays with upside potential.
The next II Fund update and review will occur at month-end of November 2012.