Heading Into 2018 - With Cautious Optimism

by: Confounded Interest

Tax cuts and potential repatriation provide hope of rallies continuation.

Artificially low interest rates must rise and political risks warrant caution.

3 certainties in an uncertain market.

A look at my portfolio stance for 2018.

This is my first article on SA, a site that has bullied itself into my daily routine for over 3 years now. Background - I began investing at the ripe ole age of 12 (now 36) with a $250 investment in American Fundamental Investors Fund after I unfortunately let my broker talk me out of investing in Microsoft Corp. (MSFT) (no, I am not salty about that at all!). I am an investment junkie, checking quotes and financial news at a somewhat compulsive / obsessive rate, yearning for news of the latest takeover, earnings report or phase II trial results.

Yet I am primarily a long term, value based investor which seems to be a rarity in today's market and also quite contradictory to my daily habits. If the check valve in my brain (built in the tech crash of 1999 -2000) ever fails I am destined to become an avid day trader, likely risking or losing the assets I have worked so hard to build.

In 13 days the calendar will read 2018 and I would like to explore my portfolio stance and assumptions with the SA community.

In 2018 there are many things that "could" happen but only a few that are relatively certain.

1) Interest rates will rise.

The fed has kept rates extremely low now for as long as I can remember, it is but a fleeting memory of 5% CD's and 10% auto loans. This must change and the fed knows it. I am all but certain the fed will continue to tighten in a slow but methodical way. This has a few side effects, banks are likely to continue to over perform whilst the real estate market may be reaching a temporary top. Utilities may also under perform, though I still see some value in a few Dominion Energy (D), Southern Company, Inc (SO) & perhaps PG&E Corp (PCG) to name a few.

2) Tax cuts ("the greatest, most bestest and massive you have ever seen")

Love 'em or hate em, tax cuts are likely to be passed before the new year, dropping corporate rates down to 21% and adding roughly 3% to most peoples paycheck via individual cuts. Tax cuts usually do boost individual spending temporarily so I would expect a slight bump to consumer discretionary names such as Starbucks Corp. (SBUX), The Walt Disney Company (DIS) & Nike, Inc. (NKE). The corporate rate cuts will obviously help the highest taxed, see link- Highest taxed Companies 2017 - Lots of health care, tech and energy companies on this list.

3) Political uncertainty and potential for crisis

This is the surest of any of my 3 certainties, political drama is likely going to explode beyond what we have seen in 2017 next year! Mid term elections are going to be insane as the Muller probe looks to be in high gear just as the House & Congress seem to be looking for a reason to shut it down. If either the Mueller probe succeeds or the Congress / House shut it down, hide yo kids, hide yo wife, hide yo dog and buy gold & gun stocks if you are not a long term investor because there will be an absolute albeit temporary panic on wall street. Not to mention the potential for a North Korea miscalculation or a war for strictly for political diversion which sadly seems like a real possibility.

Get ready for conspiracy theories you never thought possible to emerge and some very funny and mostly false memes to explode throughout all of your social media feeds.

So, how do these near certainties affect my stance to my portfolio?

I am defensively optimistic... This well known term that I have just made up encompasses a feeling that I believe the near decade long bull market while overvalued has another year to go but with the potential for complete annihilation sewn into it.

This feeling has me weighted heavily in Tech, Consumer Staples, Energy & Pharma as I feel these sectors allow a reasonably high ceiling during a continued rally with a relatively high floor in a political disaster scenario.

Before I reveal my 2018 portfolio, let me give you some context as to how I structure my holdings. I keep a basket of between 40 & 50 stocks in my main account and think of it as my own personal mutual fund. Some of my holdings I may never sell as I search for a solid foundation to my portfolio knowing that historically roughly 15% of my holdings "should" produce at least 5% yearly returns or at minimum preserve capital regardless of the prevailing winds. In my 2018 portfolio I have increased this safe space to around 25%

I also hold roughly 15% of my assets in a separate account of 10-12 well researched, very high growth / very high risk holdings that I will detail in further articles and I believe satisfy my dice throwing, risk taking nature without jeopardizing to much capital. This very high risk portion has generally tracked my safe foundation percentage however in 2018 it will remain at 15%.

I am prone to invest my remaining assets in companies riding large macro trends, some of these trends are not recent but still have significant legs specifically in the "old" tech space where valuations and balance sheets appear attractive and not frothy, Amazon.com, Inc. (AMZN) being one exception I have made valuation wise.

Without further adieu, here is a breakdown by sector of my current holdings in my primary investment account.

Tech - Corning, Inc. (GLW), International Business Machines Corp. (IBM), Apple Inc. (AAPL), Cisco Systems, Inc. (CSCO), Microsoft Corp., Facebook (FB), Qualcomm, Inc. (QCOM), Oracle Corp (ORCL), Alphabet Inc. (GOOG), Amazon.com Inc. - 24.63%

Consumer Staples- Walmart Stores, Inc. (WMT), Unilever PLC (UL), The Coca Cola Company (KO), Diageo PLC (DEO), J.M. Smuckers Company (SJM), General Mills, Inc. (GIS), Philip Morris International, Inc. (PM), Kimberly Clark Corp. (KMB) - 16.86%

Pharma- Bayer A. G. ADR (OTCPK:BAYRY), Gilead Sciences, Inc. (GILD), Celgene Corp. (CELG), Johnson & Johnson (JNJ) - 8.37%

Small Cap Biotech- Genocea Biosciences (GNCA), Versartis, Inc. (VSAR-OLD), Halozyme Therapeutics (HALO), Acadia Pharmaceuticals (ACAD) - 8.13%

Energy - Marathon Oil Corp. (MRO), Conoco Phillips (COP), Cheniere Energy, Inc.(LNG) - 7.89%

Consumer Discretionary- Lowe's Companies, Inc. (LOW), Starbucks Corp, The Walt Disney Company, Nike Inc. - 7.10%

Industrial- Union Pacific Corp. (UNP), General Electric Company (GE), United Technologies Corp (UTX) - 5.41%

Financial- Crown Castle International Corp. (CCI), Citigroup, Inc. (C), Wells Fargo & Co (WFC) - 5.13%

Materials- Randgold Resources Limited. (GOLD), Agrium , Inc. (AGU) - 4.55%

Communications- AT &T Inc. (T), Verizon Communications (VZ) - 4.48%

Utilities- Dominion Energy (D), Southern Company (SO) - 3.16%

Cash - 4.29%

As I have noted, I positioned my tech holdings in companies that have extremely strong balance sheets, which in theory should bolster the floor in these stocks if catastrophe hits.

I also have invested in a wide range of staples including internationally based / focused UL, PM & DEO to spread the risk in this historically safe low beta sector.

Pharma & Energy holdings also seek to spread the risk across different sub sectors of the energy & pharma industries with companies that have strong balance sheets.

Consumer Discretionary I am mainly focused on companies that I believe will benefit from a small raise in each person and parents paycheck from the tax package as it stands along with companies I believe to be less affected by the "Amazon effect".

Industrial holdings I am sadly least confident in, I am unconvinced that an industrial revolution will emerge from the current GDP growth which I view as tech driven and historically have held between 10-12% in this sector, GE is responsible for considerable self butt kicking in 2017 but at $17 I am tempted to double down for the long haul.

Financial stocks are also below my historical norm, this is mainly due to bad timing on my part, I am waiting for a chance to add more to this sector and may before the end of the year however I find myself buying tech & staples each time appropriate funds are available.

My Materials, Communications & Utilities stocks I have purchased I may never sell, they provide a pillar to the foundation of my portfolio and my current plan is to DRIP them for decades to come.

Small Cap Bio Tech is a sector I took a beating on this year with VSAR & GNCA specifically. I am taking a page out of George Costanzas playbook and will go down with the ship if these both go belly up in 2018. Frankly I do not need to take the losses this year for tax purposes so freeing a few thousand in remaining capital does not outweigh the opportunity cost if both companies manage to hit last second fade away's at the buzzer.

I know the dance with small bio's, I have won some and lost some... But nothing takes that sting away from seeing your total portfolio down 10% on an up day!

I plan on doing follow up articles on many of the stocks in my 2018 portfolio, please let me know your preferences in the comments section.

Overall 2017 was a very good year for my portfolio even with my biotech disasters, and hopefully it was to yours as well!

Disclosure: I am/we are long GLW, IBM, QCOM, APPL, CSCO, FB, GOOG, AMZN, ORCL, WMT, UL, KO, DEO, SJM, GIS, PM, KMB, BAYRY, GILD, CELG, JNJ, GNCA, VSAR, HALO, ACAD, MRO, COP, LNG, LOW, SBUX, DIS, NKE, UNP, GE, UTX, CCI, C, WFC, GOLD, AGU, T, VZ, SO, D. 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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