Lean Long-Term Growth Portfolio - July 2017 Update

Summary

• Through July 2017, the LLGP was up 11 percent.
• No new positions were added; averaged positions included Alaska Air, Costco, Hub Group, JM Smucker, Matson and Ulta.
• Rice Energy and Hanesbrands positions were liquidated for realized gains due to buyout appreciation and extended leverage risks.
• Gains were also realized for Daseke, Schneider National and Sprouts as positions were trimmed resulting from rapid stock price appreciation.

Overview

The Lean Long-Term Growth Portfolio (LLGP) was created in early February 2016. The objective of this portfolio is for long-term capital appreciation and will include both companies that pay dividends and those that do not. The projected dividend yield for 2017 is likely to fall below one percent as growth value are the focus of the portfolio. Over the long-term, yield may become a higher priority.

There are currently 50 individual stock holdings under management - a decline of two companies from the previous month. For some this may seem like too many, others may think it is too little. Management strategies utilize business and industry growth drivers from a variety of source information. The biggest challenge of managing around 50 companies is maintaining enough cash to grow all holdings consistently over time. A firm structure is in place to allow for this, but the reality is that overweight positions will sporadically occur as different industry-related cycles ebb and flow.

As some of you may know, I focus intently on transports. The substantial majority of this focus is freight-related, so airlines, airports, and transit services are not strongly covered. I also focus intently on industries for holdings within the portfolio. Overall, 130 or so companies have detailed databases tracking quarterly information. Additionally, most industries also have other pricing and demand trends, which are monitored.

Currently, only individual stocks are purchased. The primary objective is for long-term growth, however, value has become an increasing component of the portfolio. There are also strategies in place to manage overweight positions, which may be sold for short-term gains.

Motif is used for both ROTH IRA and Traditional IRA accounts. The primary benefits of Motif over some other brokerage services include the ability to build one's own portfolio as a motif which can be invested in by any amount for only $9.95, up to 30 companies; and to be able to purchase fractional shares with a trading commission of $4.95. The $4.95 trading fee is becoming more of a standard, but buying fractional shares still is not.

As of July 31, 2017, the fund held 50 companies including:

• Adobe Systems Incorporated (ADBE)
• Alaska Air Group (ALK)
• Amazon.com (AMZN)
• Arista Networks (ANET)
• Bunge Limited (BG)
• Cal-Maine Foods (CALM)
• Calavo Growers (CVGW)
• Canadian National (CNI)
• CF Industries Holdings (CF)
• Concho Resources (CXO)
• Costco Wholesale Corporation (COST)
• Danone (OTCQX:DANOY)
• Daseke, Inc. (DSKE)
• Deutsche Post DHL Group (OTCPK:DPSGY)
• DexCom (DXCM)
• FedEx Corporation (FDX)
• F5 Networks (FFIV)
• Fresh Del Monte Produce (FDP)
• Grupo Aeroportuario Del Pacifico (PAC)
• Hub Group (HUBG)
• International Paper (IP)
• JB Hunt Transport (JBHT)
• JD.com (JD)
• Kansas City Southern (KSU)
• Lamb Weston Holdings (LW)
• LINE Corporation (LN)
• Lockheed Martin (LMT)
• Matson, Inc. (MATX)
• McCormick & Company (MKC)
• Mercardolibre (MELI)
• Old Dominion Freight Lines (ODFL)
• Pioneer Natural Resource (PXD)
• Prologis, Inc. (PLD)
• Raytheon Company (RTN)
• Rice Midstream Partners (RMP)
• Republic Services (RSG)
• Sanderson Farms (SAFM)
• Schneider National (SNDR)
• Sprouts Farmers Market (SFM)
• The Boeing Company (BA)
• The Dow Chemical Company (DOW)
• The Greenbrier Companies (GBX)
• The Home Depot (HD)
• The J.M. Smucker Company (SJM)
• ULTA Beauty, Inc. (ULTA)
• Unilever (UL)
• US Foods Holdings (USFD)
• VF Corporation (VFC)
• Visa, Inc. (V)
• XPO Logistics (XPO)

Current Holdings Performance - Update

As of July 31, 2017, the table below provides the stock acquired and sell dates, average price, weighting, performance by current year and monthly change. All dividend payouts are included in the performance to illustrate total returns.

Source: Personal Database

Source: Personal Database

Source: Personal Database

Source: Personal Database

July was another busy month for increases in existing positions, and was the first month of the year where entire positions were liquidated and/or trimmed. Rice Energy and Hanesbrands both witnessed complete liquidations. A definitive agreement was recently announced by EQT Corporation (EQT) to acquire Rice Energy. The initial stock price reaction was poor, but the stock price has exceeded the buyout offer the past week. The Rice position was liquidated as a 32 percent gain was realized.

Hanesbrands was liquidated as the portfolio will maintain retail exposure through Costco, Home Depot, Sprouts, VF Corporation and Ulta. Hanesbrands was initially acquired as the company had been sold off strongly. After reassessing the company's fundamentals, it was determined that the leverage position was higher than desired for a core long-term holding.

As no new positions were added during July, the shift has turned to a defensive one. The ripple effects from the Amazon purchase of Whole Foods Market (WFM) have continued as Amazon has been focusing on makeup and other beauty products. Ulta has witnessed severe weakness as the company's stock price has plummeted from $310 per share to below $250. Costco has also remained weak.

On the transports side, airlines have experienced strong sell-off pressure as each airline reported stable to stronger results than expected. Alaska Air is a core holding and the position was averaged on weakness. Both Hub Group and Matson also have experienced strong selling pressure of late. Hub Group was a result of its earnings miss, while Matson has been facing multiple market challenges. However, both companies are core holdings and were averaged as near-term catalysts are also on the horizon.

The liquidations, trimmed positions and averaging has led to stable and moderately improved performance of 11 percent for the first seven months of the year. This has been a strong accomplishment as transports have weakened over the past couple of weeks.

Including liquidate positions, 34 of the 52 holdings were positive for the month of July, 65 percent of the total. New additions and increasing transaction expenses have weighed on performance, but over the next few years, active management fees will decline. Leading overweight positions were as follows:

• Calavo Growers 6.3 percent
• Sprouts 4.7 percent
• Hub Group 4.7 percent
• Matson 4.1 percent
• Schneider National 4 percent
• Unilever 4 percent
• LINE 3.9 percent

Of these positions, Hub Group and Matson remained the laggards. As both companies have weakened to near 52-week lows, the portfolio has become aggressive with averaging positions. Hub Group is set up to return above $50 per share over the next year, and Matson is poised to eclipse the $35 per share level in the near-term as well. Each company has potential catalysts in the near-term; improving freight rates for surface transportation for Hub Group, and improving logistics and certain market segment volumes and freight rates for Matson.

Overall, performance has been very solid with 37 of the 52 holdings (71 percent) having positive total returns since a position was taken. Some of these companies have been held for less than one year, with the longest period being 18 months. For total return performance, leaders and laggards were as follows:

Leaders

• Boeing 93.7 percent
• JD.com 73.3 percent
• XPO 68.8 percent
• Grupo Aeroportuario del Pacific 54.8 percent
• Amazon.com 51.7 percent
• Republic Services 36.6 percent
• Calavo Growers 33.2 percent
• Rice Energy 31 percent
• Unilever 28.1 percent
• DHL Group 27.2 percent
• Sanderson Farms 26.5 percent
• Daseke 26.3 percent
• Visa 23.3 percent
• Kansas City Southern 22.6 percent
• VF Corporation 21.5 percent

Laggards

• Hub Group -10.5 percent
• Pioneer Natural Resources -9.7 percent
• Matson -8.1 percent
• F5 Networks -6.8 percent
• Arista Networks -3.6 percent
• Alaska Air -3.5 percent
• Rice Midstream Partners -3.2 percent
• Bunge -3.1 percent
• Home Depot -3.1 percent
• Danone -2.4 percent
• Concho Resources -2.2 percent
• Costco -1.5 percent

Freight holdings, as a percent of the total, decreased by 3 percentage point to 31 percent. This was partly driven by the trimmed positions for Daseke and Schneider National. It was also driven by the increased positions outside of transports, and modest performance of the additions to existing transport positions versus non-transports.

Most transports in the LLGP are categorized within the consumer discretionary sector. As a result of July's moves, this sector remained flat, while consumer staples and industrials improved by 1 percentage point. The liquidation of Rice Energy contributed to the 2 percentage point decline for energy.

Large cap holdings increased strongly by 6 percentage points to 49 percent of the LLGP's total. The mid cap composition declined by 5 percentage points to 37 percent, offset by a 1 percentage point increase in the small cap. Fifty percent of the LLGP's portfolio capitalization is now split between mid- and small-cap versus large cap.

The percentage of U.S.-based holdings remained flat during July at 85 percent. Asia and Europe geographic locations fluctuated modestly reversing last month's performance. These results were driven by relative monthly performance as no actions were taken for either geography.

The combination of added companies, as well as the portfolios overall performance, led to a 2 percentage-point decline in equity growth only holdings. This was largely a factor of the liquidation and trimming of Rice Energy and Daseke. Additional purchases for the month also contributed to dividend paying core holdings.

Benchmark Comparison and LLGP Historical Performance

Through July, the LLGP has returned 11 percent. A handful of companies have paid dividends, but the current yield remains at 0.4 percent. Through July, only the NASDAQ and the Fidelity Contrafund (FCNTX) have performed better than the LLGP. Despite the improving relative performance, he Dow Jones (^DJI), SPY, NASDAQ Transportation (^TRAN) index and Vanguard indices all have caught up.

Based on the portfolio's current 50 holdings, there is a fairly close balance between growth and value, and large and mid/small cap composition. Due to this fact, the LLGP has also now been benchmarked against 1,738 mutual funds, via Morningstar's fund category performance total returns. Through July, the LLGP 647th or in the 63rd percentile. This was a decline from the 86th percentile out of 1,743 mutual funds last month.

While 11 percent is a solid return for the year, the portfolio has lagged its peers over the previous month. Weakness has been a challenge for some of the higher weighted holdings. But the long-term focus remains the top priority and in the event near-term catalysts materialize sooner than later, the LLGP could quickly climb the ladder towards the top.

The month of July witnessed a 0.9 percentage point improvement. For the year, five of the seven months have now been positive. The portfolio's strongest results during the year have peaked at 12.5 percent. This level was achieved a little over a week ago, but results were hampered by earnings results, and select retail weakness.

All expense ratio information is computed by a weighted average basis (WAB). The WAB is simply the transaction fees incurred, divided by the average of each of the LLGP's closing-day value. The original objective was to maintain the expense ratio near 0.5 percent, this level has obviously been exceeded due to the initial inception and build-up of holdings in the portfolio.

Through July, the expense ratio was at 1.2 percent. The month of June witnessed 14 transactions which continues to add up. I am not concerned about an expense ratio over the long-term., as I recognize that over time, this will decline due to the increasing growth of the WAB. For example, next year's expense ratio based upon a maximum cash in-flow scenario will possibly be less than 0.5 percent.

The dividend YOC is another area that will simply take a little bit of time to pay dividends, pun intended. Originally, I was optimistic that the YOC would be closer to the 1 percent level, but as the portfolio has increased its total unit cost, the yield has been diminished. For 2018, the estimated 1.2 percent YOC remains.

Conclusion

I am very content with the 11 percent performance to date. The portfolio has broken the 12 percent level consistently over the past three months now. If near-term catalysts can emerge for some of the higher-weighted positions, the LLGP may witness an acceleration of performance.

The recent gross domestic product (GDP) numbers were solid. Inflation remains tempered, although it has improved in 2017 versus last year. As demand is poised to increase for transports during the peak shipping season, the threat of tightening capacity may serve as a driver for further growth.

There are select companies within the LLGP of which I am also focused on consolidation being a potential strong upside catalyst. Unfortunately, this is highly speculative as no clear leads are in place. The LLGP is well on track to achieve double-digit returns during its first full year of performance.

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.

Disclosure: I am/we are long AMZN. 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.