The Good Business Portfolio: 2016 4th Quarter Earnings And Performance Review

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Includes: AA, ABC, ADP, ARNC, BA, CAB, DHR, DIS, DLR, EOS, FCX, GE, HD, HOG, HPQ, IR, JNJ, KHC, MCD, MDLZ, MO, OHI, PEP, PM, TXN
by: William Stamm

Summary

The portfolio of good company businesses is doing 0.97% better than the DOW average year to date of 5.36% for a total gain of 6.33%.

The 24 businesses comprise 99% of the portfolio with the other 1% cash and the average total return over the DOW average for the 49.5 month test period is 21.37%.

The objective of the portfolio is to create a portfolio that is balanced, not income, not dividend growth, not bottom fishing, not value, but balanced among all styles of investing.

Of the 24 companies in the portfolio 20 beat or were in line with the DOW average for total return and 4 missed the total return over the test period of 49.5 months.

This article gives a review of the 2016 fourth-quarter earnings and 2017 YTD performance of the Good Business Portfolio. Earnings data will be looked at for some of the top positions in the portfolio and for major changes.

Guidelines (Company selection)

The intent in the Good Business Portfolio guidelines is to create a portfolio that is a large cap balanced portfolio between the different styles of investing. Income investors take too much risk to get their high yields. Bottom-fishing investors get cat fish. Value investors have to have a foresight to see the future. These are guidelines and not rules. (For a complete set of guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review" ). They are meant to be used as filters to get to a few companies on which further analysis can be done before adding the company to the portfolio. So it's alright to break a guideline if the other guidelines indicate a Good Company Business. I'm sure this eliminates some really good companies, but it gets me a short list to work on. There are too many companies to even look at 10% of them.

You see from the portfolio below that I want a portfolio that is defensive, provides income and does not take significant risks. I limit the portfolio to 25 companies, as more than this is almost impossible to keep track of. I have 24 companies in the portfolio so the portfolio has one open slot.

Portfolio Performance

The performance of the portfolio created by the guidelines have year in and year out beat the DOW average for over 24 years giving me a steady retirement income and growth. The table below shows the portfolio performance for 2012 through 2016 and YTD of 2017.

Year

DOW Gain/Loss

Good Business

Beat Difference

Portfolio

2,012

8.70%

16.92%

8.22%

2,013

27.00%

39.70%

12.70%

2,014

6.04%

8.67%

2.63%

2,015

-2.29%

5.68%

7.97%

2,016

13.38%

8.68%

-4.70%

2017 YTD

5.36%

6.33%

0.97%

In a great year like 2013 the portfolio did fantastic. In a normal year like 2014 it beat the DOW by a fair amount. So far this year the portfolio is ahead by 0.97% total return Above the Dow average gain of 5.36% for a portfolio gain of 6.33% which is above my yearly requirement of 5%. The election took its toll on my high dividend companies but this has evened out as the fundamentals come back into play.

All 24 Companies In The Portfolio

The 24 companies and their percentage in the portfolio and total return over a 49.5 month test (starting Jan 1 2013 to 2017 YTD) period is shown in the table below. I chose this time frame since it included the great year of 2013, and other years that had fair and bad performance. The DOW baseline for this period is 58.91% and each of the top six easily beat that baseline. The next 18 have four companies that did not beat the DOW baseline but still are great businesses. I limit the portfolio to 25 companies and let the winners grow until they reach 8% - 9% of the portfolio and then I trim the position. JNJ, BA, HD and MO are now in trim position. I start the companies at a base percentage of the portfolio of 1% and add to the position if they perform well during the next six months. At 4% of the portfolio I stop buying and let the company percentage of the portfolio grow until it hits 8% then it's time to trim. In the portfolio only one company is actually losing money over the 49.5 month test period - Freeport-McMoRan Inc. (FCX), with copper recovering it's a fair investment for more copper growth in the future. The Portfolio did buy some FCX when it got down to $4.00/share, there assets were worth much more than $4.00, so this move did reduce the loss, but FCX still needs more time as copper prices will rise over time. Right now the problem with FCX is getting a deal to export copper concentrate with the existing statement of work. I have added a guideline to be careful of commodity companies as a result of the poor total return performance of Alcoa (NYSE:AA) and Freeport-McMoRan.

This is my full list of my 24 Good Businesses. I have written individual articles on some of these businesses, please see my full list of articles if you are interested.

Dow Baseline 58.91%

Company

Total Return

Difference

Percentage of Portfolio

Cumulative Total

49.5 Months

From Baseline

Percentage of Portfolio

Boeing (BA)

138.44%

79.53%

9.81%

9.81%

Altria Group Inc. (MO)

153.24%

94.33%

8.13%

17.94%

Johnson & Johnson (JNJ)

87.78%

28.87%

8.05%

26.00%

Home Depot (HD)

143.36%

84.45%

8.05%

34.05%

Enton Vance Enhanced Equity Income Fund II (EOS)

65.75%

6.84%

6.95%

41.00%

Walt Disney (DIS)

122.52%

63.61%

6.94%

47.94%

Philip Morris INTL INC. (PM)

44.47%

-14.44%

6.55%

54.49%

Omega Health Inv. (OHI)

73.09%

14.18%

5.40%

59.89%

General Electric (GE)

61.21%

2.30%

5.06%

64.95%

Automatic Data Processing (ADP)

89.05%

30.14%

4.74%

69.68%

Mc Donald's Corp. (MCD)

60.56%

1.65%

4.72%

74.40%

Harley Davidson Inc. (HOG)

28.10%

-30.81%

4.42%

78.82%

Ingersal-Rand plc (IR)

150.71%

91.80%

4.14%

82.96%

Texas Instrument (TXN)

142.74%

83.83%

3.93%

86.88%

L Brands Inc.

30.78%

-28.13%

3.70%

90.59%

Mondelez (MDLZ)

79.03%

20.12%

1.48%

92.07%

Hewlett Packard (HPQ)

150.71%

91.80%

1.28%

93.35%

Freeport McMoran (FCX)

-48.04%

-106.95%

1.09%

94.44%

Digital Realty Trust (DLR)

78.18%

19.27%

1.04%

95.48%

Kraft Heinz Corp. (KHC)

124.38%

65.47%

0.90%

96.38%

Amerisource Bergen (ABC)

119.88%

60.97%

0.91%

97.29%

Danaher Corp. (DHR)

90.95%

32.04%

0.83%

98.13%

PepsiCo (PEP)

76.13%

17.22%

0.53%

98.66%

Spare Open Slot

0.00%

0.00%

0.00%

98.66%

Arconic Inc. (ARNC)

**

**

0.90%

99.56%

** NA No long term data

Average Above Dow

21.37%

Recent Portfolio Changes and Earnings Comments

For the fourth quarter's earnings season the 24 portfolio companies did reasonably well with a few laggards, 16 beat earnings estimate, 2 meet estimates and 6 missed estimates a bit.

On 2/2/17 Philip Morris earnings were $1.10 compared to expected at $1.12 and last year at $0.81. Rev was up by $300 Million from the expected with total revenue at $6.97 Billion up by 9.1% year over year. Hold for now and only sell when PM becomes too large a percentage of the portfolio. Exchange rates and the strong dollar are causing PM (a total international company) earnings to have a headwind but they came through with fair earnings. They increased their dividend by $0.02/quarter and have a high pay out ration of 96%. Mr. Market liked the report.

JNJ 1/24/17 Johnson & Johnson earnings were above expected at $1.58 compared to last year at $1.44 and expected at $1.56. Revenue missed expected revenue by $170 Million with total revenue up at $18.1 Billion or up 1.7% Y/Y. The strong dollar is hurting JNJ but they are still growing and have plenty of cash to buy companies and continue their growth. JNJ will be pressed to 9% of the portfolio because it's so defensive in this post BREXIT world. Earnings in the last quarter beat on the top and bottom line. JNJ is not a trading stock but a hold forever, it is now a strong buy as the healthcare sector is under pressure.

Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on 787 deferred plane costs at $251 Million in the fourth quarter a $64 Million increase from the third quarter. The fourth quarter earnings were good with Boeing beating the estimate by $0.14 at $2.47. S&P Capital IQ also raised its one year target to $191. BA is a long term buy and has a backlog of over 7 years.

On 2/1 Altria earnings were $0.68 more than the expected of $0.67 and compared to last year at $0.67. Hold and only sell when MO becomes too large a percentage of the portfolio. Revenue was up by $70M and e-cig will have to be watched. Total revenue was $4.73 Billion flat Year over Year. Hold this defensive position for its 4% dividend and moderate growth. MO is getting a bounce from the sale of its share in the beer industry (miller SAB SA).

On 2/21 Home Depot Earnings were expected at $1.33 and came in at $1.44 and compared to last year at $1.17, a good quarter. Revenue was up compared with expected at $410 Million. Hold and only sell when HD becomes too large a percentage of the portfolio. Total revenue was $22.2 Billion up 5.8% Y/Y.

Added to position of Digital Reality Trust now at 1.04% of the portfolio. I feel the computer industry facilities business has nowhere to go but up and DLR pays an above average dividend. I wrote an article on Digital Reality Trust in September of this year if you are interested.

Sold Cabela's (CAB) they have received a bid of $65.50 cash for their shares, which to me is a fair price. The last earnings report was not good and it was time to take a good profit while I can in case the deal did not go through. The deal has yet to be done and CAB price is way down at $47, indicating they deal may not happen, I am glad I got out of the way at around $62.

Increased Omega Healthcare Investors (OHI) from 4.8% of the portfolio to 5.4% of the portfolio, I needed a little more income and OHI will give that to the portfolio. The portfolio has filled a previous open portfolio slot with PepsiCo and may be followed by Kellogg (K) to fill the present open slot.

Sold some covered calls on Harley Davidson, sold March 17, 57.5's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently at the strike price and I will move the calls up and out if this situation is the same closer to expiration. I will eventually sell the HOG position since sales have become stagnant and the stock price is high because of take over rumors.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson is 8.1% of the portfolio, Altria Group Inc. is 8.1% of the portfolio, Home Depot is 8.1% of portfolio and Boeing is 9.8% of the portfolio, therefore JNJ, MO, HD and BA are now in trim position.

Conclusion

The 11 guidelines in the article give me a balanced portfolio of good companies that are large cap and can grow their revenues, earnings, and dividends for years. They have the staying power to fix what ever goes wrong. In each case the company has the size and good management to fix the problem. The portfolio has growth companies, defensive companies, income companies and companies with international exposure giving it what I call balance. Of the 24 companies presently in the portfolio four are underperforming the DOW average in total return. All four companies are being hurt by the strong dollar since they are multi-national and have a portion of their income coming from foreign operations. The portfolio is a little ahead YTD with more to come if the President gets his way with low corporate taxes. It is my intention to write separate comparison articles on individual companies. If you would like me to do a review of one of my Good Business Companies please comment and I will try to do it.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long JNJ, HD, BA, MO, EOS, DIS, PM, LB, GE, HOG, MCD, ADP, OHI, IR, MDLZ, TXN, FCX, HPQ, KHC, ABC, DHR, PEP,.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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