The R.I.P. Portfolio: Q3 2016 Update

by: WG Investment Research

Being overweight financials, especially BAC, contributed to the portfolio's outperformance for the quarter.

I added AAPL and CSCO and plan to further build these positions in the quarters ahead.

I will provide my thoughts on the recently activity for the portfolio and my expectations for the remainder of 2016.

The Retire In Peace portfolio, or the R.I.P. portfolio for short, was first introduced to the SA community in December 2015. In the first article, I explained that quarterly updates were going to be provided due to the fact that these holdings are the companies that I write about here on SA.

This portfolio is being shared to allow my followers to track the performance of the stocks that I write about in addition to allowing everyone to see what adjustments are made on a quarterly basis. At the end of the day, I hope that allowing the SA community to see the quarterly adjustments made to the portfolio (specifically the purchases and sales) will lead to constructive discussion about the companies that are considered my "core holdings." I learn on a daily basis from others on SA so these updates will also be a benefit to me.

This is a real portfolio with real money, and it is being built with retirement in mind so I have 30+ years to make adjustments. As such, the monthly/quarterly volatility is not a major concern.

Lastly, this is not my family's main retirement portfolio, but it is a portfolio that will greatly contribute to a stress free and relaxing retirement.

Full Disclosure: The core holdings (please see linked article for a listing of the core holdings along with the short-term and long-term catalysts that have been identified for each holding) are not necessarily the shares that I plan to hold for the next 30 years, but instead the shares that I would like to hold for that period of time. I will closely monitor these holdings and will trim, add to, or eliminate positions if the company's story drastically changes.

Strategy For the R.I.P. Portfolio

This is a long-term portfolio that will enjoy many years of compounding, so I plan to invest largely in high quality and well-established companies. I will, however, speculate with ~5% of the portfolio (the "Other" category) on companies that have the potential to create outsized gains over the next three-to-five years.

Missing out on short-term gains or having paper losses are not my main concerns, but instead, I plan to stay committed to my long-term strategy of utilizing a bottoms-up investing philosophy to select companies that I plan to hold for many years.

I have established the following allocation goals and ranges for the portfolio:

Industry Goal Allocations Acceptable Range
Industrials 20% 15-25%
Healthcare 10% 5-15%
Financials 20% 15-30%*
Insurance 10% 5-15%
Technology 10% 5-15%
Telecom Services 5% 3-7%
Media 5% 3-7%
Basic Materials 5% 3-7%
Conservative Allocation Fund 5% 3-7%
Consumer Defensive 5% 3-7%
Other 5% 3-7%

*My expertise (educational background and work experience) is in the financial industry so I will allocate more to this category from time-to-time. However, I plan to keep the overall allocation below 30% and the individual company positions within this category below 20%.

I plan to contribute between $500 and $1,000 of new capital per month to the portfolio, and I do not plan to maintain a cash position. As such, I will put the new capital to work each and every month, without regard to the performance of the overall market.

Finally, my goal is to beat the benchmark, the SPDR S&P 500 ETF (NYSEARCA:SPY), by at least 1% on an annual basis in order to accomplish my long-term goal of retiring in peace.

Q3 2016 Update

Below you will find the portfolio and its performance, the third quarter of 2016 activity, as well as my thoughts on each sale and purchase that occurred during the quarter.

Price at Beg Value at Activity Quarterly Quarterly Current Unrealized Portfolio Yield Current Annual
Company Ticker # of shares 9/30/2016 7/1/2016 Purchases (Sales) Unrealized G/L Realized G/L Value Gain (Loss) Weighting On Cost Yield Income
General Electric (NYSE:GE) 383.53 $29.62 $11,990 - (629) - $11,360 $2,443 17% 4.0% 3.1% $353
AT&T (NYSE:T) 107.80 40.61 4,607 - (229) - 4,378 1,307 7% 6.7% 4.7% 207
Franklin Income (MUTF:FKINX) 2332.97 2.25 4,971 - 278 - 5,249 415 8% 5.8% 5.3% 280
Walt Disney (NYSE:DIS) 26.85 92.86 2,607 - (114) - 2,493 562 4% 2.0% 1.5% 38
Bank of America (NYSE:BAC) 600.88 15.65 7,936 - 1,468 - 9,404 50 14% 1.9% 1.9% 180
Bank of America Warrants BACWSA 303.00 4.62 1,757 (971) 613 63 1,400 (588) 2% 0.0% 0.0% -
Citigroup (NYSE:C) 48.37 47.23 2,046 - 238 - 2,285 (139) 4% 1.3% 1.4% 31
KeyCorp (NYSE:KEY) 149.37 12.17 1,139 467 212 - 1,818 95 3% 3.3% 3.1% 57
Dow Chemical (NYSE:DOW) 49.52 51.83 1,504 1,033 29 - 2,566 62 4% 3.6% 3.6% 91
Synchrony Financial (NYSE:SYF) 77.37 28.00 1,947 - 220 - 2,166 413 3% 2.3% 1.9% 40
LendingClub (NYSE:LC) 200.00 6.18 1,591 (978) 623 87 1,236 188 2% 0.0% 0.0% -
Kroger (NYSE:KR) 22.21 29.62 814 - (156) - 658 (260) 1% 1.2% 1.6% 11
Johnson & Johnson (NYSE:JNJ) 23.65 118.13 2,850 - (56) - 2,794 651 4% 3.5% 2.7% 76
Pfizer (NYSE:PFE) 88.01 33.87 3,073 - (92) - 2,981 391 5% 4.1% 3.5% 106
American International Group (NYSE:AIG) 69.10 59.34 2,736 1,011 353 - 4,100 152 6% 2.2% 2.2% 88
AIG warrants AIGWS 60.00 21.20 1,121 - 151 - 1,272 (169) 2% 0.0% 0.0% -
Metlife (NYSE:MET) 49.91 44.43 1,970 - 248 - 2,217 281 3% 4.1% 3.6% 80
Xinyuan Real Estate (NYSE:XIN) 198.77 6.32 960 - 296 - 1,256 522 2% 10.8% 6.3% 80
Apple (NASDAQ:AAPL) 15.00 113.05 860 608 227 - 1,696 212 3% 2.3% 2.0% 34
Twitter (NYSE:TWTR) 67.00 23.05 1,133 - 411 - 1,544 504 2% 0.0% 0.0% -
CISCO (NASDAQ:CSCO) 65.00 31.72 - 2,044 17 - 2,062 17 3% 3.3% 3.3% 68
Previous Holdings -- -- -- -- -- -- - -- - -- -- -- --
$57,611 $3,215 4,110 151 $64,935 $7,111 100% 3.1% 2.8% $1,819
Industry/Portfolio Companies Value Portfolio Weighting Goal Weighting Over (Under)
Industrials - GE, $11,360.31 17% 20% -3%
Healthcare - JNJ, PFE 5,774.72 9% 10% -1%
Financials - BAC*, C, KEY 14,905.93 23% 20% 3%
Insurance - AIG*, MET 7,589.90 12% 10% 2%
Technology - TWTR, AAPL, CSCO 5,301.90 8% 10% -2%
Telecom Services - T 4,377.79 7% 5% 2%
Media - DIS 2,492.90 4% 5% -1%
Basic Materials - DOW 2,566.41 4% 5% -1%
Conservative Allocation - FKINX 5,249.19 8% 5% 3%
Consumer Defensive - KR, SYF** 2,824.14 4% 5% -1%
Real Estate - XIN 1,256.23 2% 5% -1%
Credit Services - LC 1,236.00 2%
*AIG and BAC warrants included in value and weighting
**Direct consumer play --read articles on profile for more info

Sales -

(1) LendingClub - I reduced my stake and took a small gain during the quarter. LC is a speculative bet on the long-term prospects of the peer-to-peer lending industry. I plan to hold the remaining position until [a] the company is acquired or [b] shares reach a price that I consider to be overvalued.

(2) Bank of America A Warrants - BAC is still a core holding but I wanted to bring my exposure to the bank to a more reasonable level. I still hold a small warrant position and I have no plans to sell any other warrants (or stock) --i.e. I will be converting the remaining warrants to common shares at some point in the future.

Purchases -

(1) KeyCorp - I added a few additional KEY shares but I now consider my holding in this regional bank as a full position. KeyCorp closed the First Niagara acquisition, which is expected to be accretive to earnings in the range of 5% by 2018. This position will go as the financials go but there is a lot to like about KeyCorp.

(2) Apple and Cisco - (New Positions) Both of the companies were added as long-term income plays, but, in my opinion, these companies could experience exceptional revenue/earnings growth in the years ahead. Apple has shown that it is capable of materially growing its services revenue and the company is trading at a very attractive valuation. Cisco is also trading at an attractive valuation and the growth potential that this company has in the internet of things ("IoT") industry is very promising. I plan to add to both of these position in the second half of 2016, if the opportunity presents itself.

AAPL Dividend Yield (<a href=

AAPL Dividend Yield (TTM) data by YCharts

(3) American International Group - This global insurer was first added to the portfolio as a catch-up trade and a play on a rising interest rate environment, but it is now a core holding. Management announced earlier in the year that AIG would be returning $25b of capital to shareholders over the next two years, and the insurer has already spent $6.9b on buybacks in 2016. Shares are still attractively valued plus an interest rate hike at some point in 2016 would turn out to be a positive catalyst, so I consider AIG a long-term buy below $60/share.

(4) Dow Chemical - This is still a small (but growing) position in the portfolio, but I plan to continue to add DOW shares if the stock stays around the $50 range. My initial purchase was made after the mega-merger with DuPont (NYSE:DD) was announced, because I believe that a tremendous amount of shareholder value will be unlocked if merger is approved.

The merger is the reason why I initially started a position, but there are other factors that make DOW an attractive long-term investment at today's price. DOW shares are attractively valued (~14x 2016E earnings) and the company is currently paying an above-average dividend (3.60%).

Portfolio Performance for Q3 2016, YTD, and since the portfolio was first introduced to SA (December 4, 2015)

Return (Q3'16) Return (YTD) Return (Intro) Return (on Cost)
7.0% 3.4% 1.6% 12.7%
This period YTD Since Intro Since Intro
Beg. Balance $57,611 $53,191 $52,610 Cost Basis $46,042
Contributions 3,214 9,854 11,555 Contributions 11,555
Unrealized G/L 4,110 1,890 770 Realized G/L 228
Ending Balance $64,935 $64,935 $64,935 Unrealized G/L 7,111
Portfolio Bal. $64,935
Dividend Inc. $433 $1,147 $1,258
Realized G/L 151 231 228 Dividend Income $1,258

The portfolio performed well in Q3 2016, which was largely a result of the price appreciation of the financial holdings (BAC, C, LC, AIG and MET). The portfolio is overweight companies with a financial focus (banks and insurers) and this contributed to the outperformance for Q3 2016, but the weighting also negatively impacted the portfolio's performance in the first three months of 2016. The YTD performance of the R.I.P. Portfolio has come down to a tale of two quarters, as the portfolio was down ~5%, or ~$2,500, in Q1 2016 but was up ~7%, or ~$4,000, in Q3 2016.

The main contributors to this performance are the two largest holdings --General Electric and Bank of America (stock and A warrants). General Electric has greatly outperformed the market over the last few years but 2016 is a different story, as GE shares are down ~4% while the SPY is up ~7% over the same period of time.

(Source: Nasdaq)

I am still up big on my long-term investment in this large conglomerate and I fully anticipate for GE to outperform the market over the next few years. I have written plenty of GE articles over the last quarter, so please see my profile for further thoughts on the company.

Bank of America is my two largest position and it has caused a tremendous amount of volatility for the R.I.P. portfolio over the last three quarters. For example, BAC's stock price shot up to ~$18 in December 2015 but has dipped below $12.50 at two different times in 2016.

BAC Chart

BAC data by YCharts

This is another company that I have written about a lot over the last quarter, but, at the end of the day, I believe that BAC is a solid long-term investment that will greatly outperform the market over the next three-to-five years.

The portfolio's projected annual dividend income of $1,819 is significantly higher than the projected income of $1,570 at Q2 2016 and this is largely a result of the dividend increases identified in the "Noteworthy Quarterly News" section below and the dividend increases noted during Q2 2016. Another factor that is coming into play is the fact that I reduced my holdings of LendingClub and BAC A warrants (both do not pay a dividend) and added new positions in higher dividend paying companies (i.e. CSCO and AAPL).

Noteworthy Quarterly News:

  • Synchrony Financial initiated its first quarterly dividend of $0.13 and the board authorized a buyback plan of $952m for the four quarters ending June 30, 2017.
  • KeyCorp received regulatory approval for the First Niagara (NASDAQ:FNFG) merger, and the merger is now expected to close around August 1, 2016.
  • Xinyuan Real Estate raised its quarterly dividend from $0.05/share to $0.10/share. The company also announced that it would be closing on $300m of senior notes at an interest rate slightly above 8%, which is significantly below the ~13% that the company has been paying for similar debt. In "Xinyuan Real Estate: The Impact of The New Debt, By The Numbers", I discussed how impactful this would be for this Chinese Real Estate company.
  • Johnson and Johnson agreed to purchase Abbott Laboratories' (NYSE:ABT) Medical Optics unit for $4.325b in cash, which is a unit that generated ~$1.1b of revenue in fiscal 2015.
  • General Electric acquired two additive manufacturing companies for ~$1.4b, which are expected to greatly benefit the company's cost structure for years to come (see my thoughts on these acquisitions in this article).
  • Twitter has been rumored to be a potential acquisition target by the likes of Disney, Microsoft, Salesforce (NYSE:CRM), Alphabet (NASDAQ:GOOG) and more. The most recent rumor is that Alphabet retained Lazard Ltd to evaluate a bid for Twitter. Personally, I believe that Twitter is making some major changes (i.e. live streaming) that will put the company into a position to create shareholder value so I will be okay with or without the company being acquired. I plan to just sit back and enjoy the ride.

Looking Ahead --Its Not About Tomorrow, Its About 10 Years From Now

I plan to stay committed to my long-term investment strategy of purchasing high quality companies that are trading at attractive valuations, but I will be getting more defensive for the remainder of 2016 by focusing on adding blue chip companies to the portfolio. The main reason for wanting to get defensive is the fact that the market is trading at a rich valuation, but I also anticipate downward pressure from other factors (i.e. macro concerns, financial market concerns, presidential election uncertainty, etc.).

Below are the companies that I have been looking into and plan to start a new position in, or add to an existing position, on any market pullbacks:

Watch List - (1) Honeywell (NYSE:HON), (2) Dow Chemical, (3) Microsoft (NASDAQ:MSFT), (4) Verizon (NYSE:VZ), (5) Kroger, (6) Disney, and (7) Pfizer.


I look forward to reading (and responding to) everyone's thoughts on this portfolio, as I believe that sometimes the best investment advice is constructive criticism. I try to contribute ~$1,000/month to this portfolio, but sometimes it is a little more or a little less. I will attempt to provide quarterly updates but I may miss some quarters.

Please let me know if you would like for me to incorporate any additional analysis within these updates. Lastly, I will still write about these companies on a regular basis so stay tuned.

If you found this article to be informative and would like to hear more about these companies, please consider hitting the "Follow" button above.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long GE, T, FKINX, DIS, BAC, C, KEY, DOW, SYF, LC, KR, JNJ, PFE, AIG, MET. 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.