A Pareto (80/20) Portfolio To Start The New Year

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Includes: AIOCF, CSCO, PBA, TPR
by: Michael Allison
Summary

Using the 80/20 principle to create an outperforming portfolio.

Outperforming the market and the average investor with fewer stock holdings.

Holding fewer stocks makes managing a portfolio much easier.

How many stocks is it necessary to hold in a portfolio in order to minimize risk and outperform the market and the average investor? What's your opinion?

Some of the contributors on SA hold 20, 30, 40 and even more than 50 stocks in their personal portfolios. I have no reason to criticize holding that many stocks in a personal portfolio, as that's something that is, well, personal. Nevertheless, I don't believe it's necessary to hold so many stocks in a portfolio in order to beat the market and most investor's returns.

In fact, I believe that any investor, by simply choosing the right stocks, could create an out-performing portfolio with as few as five to ten stocks. This is based on the Pareto, or 80/20 principle.

If you're not familiar with the Pareto principle, what it states is that 80% of the results, outputs, or rewards are generated from only 20% of the causing inputs or efforts. You can read much more about the Pareto principle and its history here.

Theoretically, this means that over a specific period of time, if you were holding 30 stocks in your portfolio, only about six of those stocks would have contributed to about 80% of the returns you enjoyed. Of course, this could be back-tested, which I would love to do but don't have the will or time for right now.

Now, many investors will immediately agree that a minority of their portfolio holdings contribute to a majority of their returns during a given time frame. But, they will argue, the reason for holding a larger number of stocks in one's portfolio is because no one can pick which stocks are going to perform the best over a given time period.

Although on the surface this argument seems to make sense, I am not presently convinced that this is true. So, with that in mind, I am going to use my own real money to find out if I can pick a few stocks and still outperform the overall market and even the average investor.

Following is my Pareto Portfolio holdings at the present time.

Stock Shares Buy Price

Price at

2014/12/24

Change
Avigilon Corp. (OTCPK:AIOCF) 290 23.4732C 17.25C -27%
Cisco (NASDAQ:CSCO) 125 26.2695U 28.30U +7.7%
Coach (COH) 100 35.3175U 36.97U +4.7%
Dream Office Reit T.D/UN 700 25.5122C 24.76C -3%
Pembina Pipelines (NYSE:PBA) 90 39.6206C 41.58C +5%

Following are brief overviews of each company.

Avigilon Corporation was founded in 2004. The company designs and manufactures high-definition video surveillance solutions. The company's systems protect and monitor various locations worldwide and their customers include major corporations, government institutions, stadiums, retail environments, casinos, transportation stations, and more.

Financial Highlights:

  • 2008 to 2013 CAGR of 102%
  • FY14 first nine months revenues of 191.9 million
  • FY14 first nine months adjusted EBITDA and net income of 35.3 million and 22.2 million respectively
  • FY14 projected revenues of 280 million
  • projected revenues of 500 million by end of FY2016
  • the company does not pay a dividend

Analysts Recommendations

Recommendation Trends This Month Previous Month
Strong Buy 1 1
Buy 8 9
Hold 0 0
Underperform 0 0
Sell 0 0

Cisco Systems was founded in 1984. The company designs, manufactures, and sells Internet Protocol (IP) based networking products and services related to the communications and information technology industry worldwide. It provides switching products and storage products, as well as offering service provider video infrastructure and collaboration products. Further, the company offers wireless products and provides technical support services and advanced services. The company serves businesses of various sizes, public institutions, telecommunications companies, other service providers, and individuals.

Financial Highlights (Source: Valuentum)

  • 3-year historical Revenue CAGR of 2.9% and 5-year projected of 3.4%.
  • 3-year historical EBITDA CAGR of 3.6% and 5-year projected of 7.4%.
  • 3-year historical Net Income CAGR of 6.6% and 5-year projected of 8.6%.
  • 3-year historical ROIC (without goodwill) is 56.4%, giving Cisco a ValueCreation rating of EXCELLENT.
  • current Dividend Yield of 2.69%

Analyst Recommendations

Recommendation Trends Current Month Previous Month
Strong Buy 10 9
Buy 16 16
Hold 11 11
Underperform 4 5
Sell 1 1

Coach was founded in 1941. The company provides luxury accessories and lifestyle collections for women and men in the U.S. and internationally. The company markets its products through a network of company-operated stores, including Internet in North America, and Coach-operated stores in and concession shop-in-shops in Japan, Mainland China, Hong Kong, Macau, Singapore, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, and Italy. It also sells its products to wholesale customers and distributors in approximately 35 countries.

Financial Highlights (Source: Valuentum)

  • 3-year historical Revenue CAGR 4.9% of and 5-year projected of 2.9%
  • 3-year historical EBITDA CAGR of (3.6%) and 5-year projected of 5.3%
  • 3-year historical Net Income CAGR of (3.9%) and 5-year projected of 5.6%
  • 3-year historical ROIC (without goodwill) of 106.7% giving Coach a ValueCreation rating of EXCELLENT.
  • current Dividend Yield of 3.65%

Analyst Recommendations

Recommendation Trends This Month Previous Month
Strong Buy 2 2
Buy 4 5
Hold 21 18
Underperform 4 4
Sell 1 1

Dream Office REIT (TSX:D.UN)

Dream Office REIT is an unincorporated, open-ended real estate investment trust. The firm owns a portfolio of high-quality, well-located and attractively-priced business premises. The company's portfolio comprises central business district and suburban office properties totaling approximately 24.7 million square feet of gross leasable area in major urban centers across Canada.

Financial Highlights

  • ttm Revenues of 757.26 million
  • ttm EBITDA of 428.15 million
  • ttm Diluted Earnings/Share of 1.95
  • Book Value per share of $35.27
  • ttm Dividend Yield of 9.05%

Analyst Recommendations

Ford Equity Research Buy N/A
TD Securities Buy $31.00 price target
CIBC World Markets Sector Perform $31.00 price target
National Bank Sector Perform $31.00 price target
Scotia Capital Sector Perform $31.75 price target
RBC Capital Sector Perform $30.00 price target

Pembina Pipeline Corporation

Pembina Pipeline Corporation was founded in 1997. The company provides transportation and midstream services for the energy industry in North America. It operates through four segments: Conventional Pipelines, Oil Sands and Heavy Oil, Gas Services, and Midstream. The Conventional Pipelines segment operates 8,200 kilometers pipeline network and related facilities that transport crude oil, natural gas liquids, and conventional oil and condensate in Alberta and British Columbia. The Oil Sands and Heavy Oil segment owns and operates Syncrude, Horizon, Nipisi, and Mitsue Pipelines, as well as the Cheecham Lateral, which transports synthetic crude oil to oil sands producers. This segment operates approximately 1,650 kilometers of pipeline. The Gas Services segment operates natural gas gathering and processing facilities, including 4 gas plants and 12 compressor stations, as well as operates gathering pipelines. The Midstream segment has interests in extraction and fractionation facilities; and provides terminalling and storage hub services.

Financial Highlights

  • ttm Revenues of 5.34 billion
  • ttm EBITDA of 879.06 million
  • ttm Net Income of 319.82 million
  • ttm Diluted Earnings/share of $1.00
  • ttm Dividend Yield of 4.30%

Analyst Recommendations

Company Recommendation 12-month Price Target
RBC Capital Outperform $51.00
TD Securities Buy $57.00
National Bank Outperform $55.00
CIBC World Markets Outperform $55.00
Scotia Capital Outperform $52.00
Haywood Securities Buy $57.00

There is only one rule I will follow regarding this portfolio. At no time can I exceed holding 10 stocks at one time.

Other than that, I can add to any of the current positions at any time, I can add new positions at any time and I can sell any portion of or all of a position at any time. The point is to see how well this portfolio will perform in 2015 against the overall market.

I will immediately update my readers of any additions to or changes I make to the portfolio. I'll also do a complete update of the portfolio's progress at the end of each month.

I'm very interested in seeing how this Pareto Portfolio is going to do and I've love to hear your comments, ideas, feedback too.

Disclosure: The author is long AIOCF, CSCO, COH, PBA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am also long on the Dream Office REIT, symbol D.UN on the TSX.