I introduced the "Conservative Total Return" or CTR portfolio in August 2014 and try to provide monthly updates. The volatility of the market delayed writing by a week. However, after taken my lumps, and tweaking the portfolio, I actually feel better about the holdings (than in recent months). The general philosophy of my 'picking' method has allowed me to cumulatively beat, since 1999, the S&P 500 by a healthy margin. As the market has "evolved", so have the holdings. While the investments in the CTR are conservative, the portfolio is dynamic (as is the market and its "favorites").
Every single stock owned in July and held into August is down. After reviewing the metrics, forecasts, and upsides I feel good to great about each position. The upside potential of holdings are material (average forward PE is only 9.6x), dividends for most of the portfolio are a very strong (I get paid if I have to wait) average of 3.7%. General Electric (NYSE:GE), which I believe in, is probably the most vulnerable to being swapped out due to being nearly fully valued. That being said, I am reluctant to exit a stock that is on the verge of executing on management's strategy (industrial focuses, "smart factory" and Alstom synergies).
Since the last update, I added to existing positions in Apple (NASDAQ:AAPL) and International Business Machines (NYSE:IBM). I sold Harley Davidson ((NYSE:HOG) $58.95) for a nice profit, not because I dislike HOG, but because macro changes in China and the emerging markets made me a little less confident about near-term sales. Fortunately, this decision was made prior to the market swoon. I also added three positions to the portfolio, in 1) an attempt to diversify (the recommendation of a number of readers) and 2) take advantage of two great companies with material upside potential. The additions were Goodyear Tire (NYSE:GT), Sinclair Broadcasting (NASDAQ:SBGI) and Tupperware (NYSE:TUP). GT is geographically diversified, operationally strong, has a very strong position in the growing US market and is really cheap. SBGI holds leading positions in local broadcast stations throughout the United States and is well positioned to grow through 1) enhanced retransmission fees, 2) cost savings and consolidations, 3) sale/valuation of excess spectrum and 4) the projected doubling of political advertising for the 2016 election cycle. I lamented not buying SBGI after great earnings, when the stock tanked in the downdraft of cable-oriented worries, and pulled the trigger when the stock hit recent lows. TUP was acquired because it offers a stable and logical growth plan supported by macro-demographic trends. The stock pays a huge 5%+ dividend and will benefit from any combination of currency improvement and market execution. Notwithstanding the short-term, this stock should perform well over an extended period as the middle class in emerging markets is growing.
Even though I modify my positions, I do not trade on a whim. Therefore, while I may "swap" positions in the near future, the trades will be made more on long-term merit and less on temporary market anomalies. I continue to be interested in increasing financial exposure, but do not want to buy more JPMorgan (NYSE:JPM) due to a good sized position, but am more concerned about foreign exposure from the other bank I have been stalking - Citigroup (NYSE:C).
The Conservative Total Return Philosophy
The essence of the CTR method is to combine a strong value bias with flexibility, opportunism and an ability to assimilate and respond to new information. The core philosophy will always be the same; however, as the economic cycle grows older, identifying the appropriate time to "harvest" becomes increasingly important. In assessing the prospects for all of the portfolio members, I feel good that the risk-reward dynamic is positive and, on a risk-adjusted basis, market beating (taking into account the strong value provided by dividends). Feedback from readers has been a partial motivator in my broadening my market segment exposure.
The Individual Stocks
The core stocks in the portfolio are (alphabetically): American Airlines (NASDAQ:AAL), AAPL, Blackstone (NYSE:BX), Discover Financial Services (NYSE:DFS), Ford (NYSE:F), GE, General Motors (NYSE:GM), GT, IBM, JPM, KKR & Co (NYSE:KKR), Siemens (OTCPK:SIEGY), SBGI and TUP.
Source: Yahoo! and TDAmeritrade
As the above chart confirms, my positions have a strong bias toward dividends, reasonable valuation and a moderate (in most cases) PEG. Below are comments summarizing my interest in the equity. The chart also contains the appropriate metrics (valuation, fair value, potential gain). As you can also see, the positions held since the last report are all down (HOG, the only position sold, was sold for a nice profit).
Apple (AAPL)- AAPL did not thrill during Q2 earnings and was further hit during the market downturn. Atypically in recent times, AAPL has room to run with catalysts being 1) new/exciting products introduced during a recently announced early September meeting, 2) continued confidence on iPhone sales and 3) any positive feeling from payments or the watch (both have been either ignored or derided).
Blackstone - BX was sold and re-bought. It is best of breed, well-funded and poised to profit from market distress and volatility (especially in energy and China). The harvest of US residential is viewed by the author as a positive.
Discover Financial - DFS should be worth more. The stock has had some execution challenges but is still cheap and poised to benefit from a growing US economy (and the gas tax cut, which got a 'jolt' with the recent drop in gas prices).
Ford - F is doing very well. The F150 is a hit. Yes China is slowing, but Europe is recovering and the US economy continues to do well. While not quite as cheap as General Motors , F offers nice appreciation potential and is a good "partner" to GM in the portfolio. The 'market' must stop hating the autos for F to realize 'fair value'.
General Electric - The recent pullback made GE a better value, however, it is the most 'fully valued' of the portfolio holdings. I believe catalysts include a weaker dollar, conclusion of the Alstom deal and longer term include Alstom synergies and the merging of industry and technology (Predix/Brilliant Factory initiative).
Goodyear Tire - A new holding. Basically a well-managed company, diversified that is benefiting from an improving US and European economy (more cars, cheaper gas = more miles driven = faster tire replacement).
General Motors - Even more than F, GM is the stock everyone loves to hate. GM is down 20% since the last portfolio update. Looking at the numbers, the risk/reward looks very favorable. As with F, China is concerning, but solid progress in Europe and the US should continue. Low gas prices for the foreseeable future put a backstop on highly profitable truck and SUV sales. I believe analysts are too focused on China (less than 10% of profits last quarter) and not focused enough on profitability.
Harley Davidson - Sold at a profit. Concerns over China and a bump in price combined to create an environment where I exited at a nice profit. Still love this iconic brand.
International Business Machines - IBM continues to disappoint, including a weak second quarter. However, limited China exposure, the US dollar weakening and management continuing to make progress combined with a 3.5% dividend leaves me optimistic about better performance over the next few quarters.
JPMorgan - JPM is my favorite bank to own. The stock pulled way back and is in a strong position to regain $70 and perhaps hit $80 after the market stabilizes and the Fed increases rates (now most likely +/- Q1 2016).
Siemens - Continues to be a play on recovering Europe and a weak US dollar. After GE and Honeywell (NYSE:HON) have performed and appreciated, SIEGY remains a "show me" laggard. It may take a while, but SIEGY should deliver appropriate total returns through the investment period.
Sinclair Broadcasting - A stock I owned a couple of years ago and am excited to own again. The Company owns TV stations in major markets. Local TV, offering local programming like news, is not subject to the same cord-cutting pressures as an ESPN. The Company owns valuable spectrum, is rationalizing recent acquisitions and will recognize huge profit increases from a record 2016 election season. Independent observers expect advertising to double from the 2012 cycle, with the share devoted to television +/- constant with the previous cycle (social media gains at the expense of direct mail).
Tupperware - The Company is well managed and simply is focused on expanding distribution to its core emerging market markets. The emerging markets have a long, strong secular trend of an expanding middle class. TUP will ride that wave for many years. Short-term, a weakening US dollar the successful execution of some management expansion initiatives will grow the stock. The monster 5%+ dividend is sustainable and allows investors to get paid to wait.
In my opinion, the positions provide an increasingly diverse balance of innate conservatism, multiple and earnings driven appreciation potential and exposure to a more mature stock market. The recent market drops creates buying opportunities and additional reward given the risk (reduced by the lower stock prices). Please keep in mind that my portfolio also consists of actively managed real estate, index funds (international, emerging markets and domestic) and bond proxies. This is shared for readers who previously thought the noted stocks were 100% of my investments and lacked diversity (if that were the case, I would agree). The CTR is a portfolio of stocks that in my opinion are conservative (strong reward vs. risk bias) and well positioned to outperform with below-average risk. I own all of the stocks in the CTR (I also own other positions which I consider speculative or otherwise inappropriate to recommend).
I appreciate any feedback on individual securities and recommendations on equities to add to the CTR.
This article reflects the personal opinions of the author and should not be relied upon or used as a basis in making an investment decision. Investors should always do their own due diligence prior to making an investment decision.
Disclosure: I am/we are long AAPL, AAL, BX, KKR, SBGI, GE, GM, F, FT, IBM, DFS, SIEGY, JPM.
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 discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.