Lean Long-Term Growth Portfolio - Year-End 2017 Update

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Includes: ADBE, ALK, AMT, AMZN, ANET, BA, BG, CALM, CELG, CF, CNI, COST, CVGW, CXO, DANOY, DPSGY, DSKE, DWDP, DXCM, FDP, FDX, FFIV, FNKCX, GBX, HBI, HD, HRL, HUBG, JBHT, JD, KSU, LDVIX, LMT, LN, LTL, LW, MATX, MKC, NVDA, ODFL, PAC, PANW, PLD, PXD, RMP, ROKU, RSG, RTN, SAFM, SFM, SJM, SNDR, SQ, SWCH, TRTN, UL, ULTA, USFD, V, VFC, WAB, XPO
by: James Sands

Summary

For 2017, the LLGP finished with a 21.5 percent return, beating the SPY, and finishing in the 60th percentile against its over 1,700 mutual funds benchmark.

Four new positions were added in December including Nvidia, Roku, Square and Triton International.

No positions were liquidated during the month.

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. 2017 finished with 0.9 percent dividend yield, with the expectation for 2018 to marginally improve. Over the long term, yield may become a higher priority.

There are currently 46 individual stock holdings under management – with four new positions added during December. As the portfolio is still in its early stages, management strategies are still looking to find the “sweet spot” for the number of holdings. Somewhere around fifty, give or take ten companies is probably where things will fluctuate over time.

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. Discounted cash flow models are also incorporated. All of this information, among many other details and daily access is available via the Marketplace service, Transports In Focus.

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 has been used recently for both Traditional and Roth IRA accounts. However, Merill Edge accounts have been opened and all positions have been transferred. The primary benefit is 30 free trades per month, which should more than satisfy the need. Had transaction costs not been an impact during 2017, performance would have been near the 80th percentile.

As of December 31, 2017, the fund held 46 companies including:

  • Adobe Systems Incorporated (ADBE)
  • Alaska Air Group (ALK)
  • American Tower Corporation (AMT)
  • Arista Networks (ANET)
  • Bunge Limited (BG)
  • Cal-Maine Foods (CALM)
  • Calavo Growers (CVGW)
  • Canadian National (CNI)
  • Celgene Corporation (CELG)
  • Concho Resources (CXO)
  • Costco Wholesale Corporation (COST)
  • Deutsche Post DHL Group (OTCPK:DPSGY)
  • DowDuPont (DWDP)
  • FedEx Corporation (FDX)
  • Fresh Del Monte Produce (FDP)
  • Grupo Aeroportuario del Pacifico (PAC)
  • Hormel Foods (HRL)
  • Hub Group (HUBG)
  • JB Hunt Transport (JBHT)
  • Kansas City Southern (KSU)
  • Lamb Weston Holdings (LW)
  • Lockheed Martin (LMT)
  • Matson, Inc. (MATX)
  • McCormick & Company (MKC)
  • Nvidia Corporation (NVDA)
  • Palo Alto Networks (PANW)
  • Pioneer Natural Resource (PXD)
  • Prologis, Inc. (PLD)
  • Raytheon Company (RTN)
  • Rice Midstream Partners (RMP)
  • Republic Services (RSG)
  • Roku, Inc. (ROKU)
  • Sanderson Farms (SAFM)
  • Schneider National (SNDR)
  • Square, Inc. (SQ)
  • Switch Inc. (SWCH)
  • The Boeing Company (BA)
  • The Greenbrier Companies (GBX)
  • The Home Depot (HD)
  • Triton International (TRTN)
  • ULTA Beauty, Inc. (ULTA)
  • Unilever (UL)
  • US Foods Holdings (USFD)
  • V.F. Corporation (VFC)
  • Visa, Inc. (V)
  • XPO Logistics (XPO)

While 2017 was a very strong year for performance, finishing in the 60th percentile among over 1,700 professionally managed mutual funds is nothing to be content with. The primary lesson learned for the year was that diversification is good, and while bias and cash management are always challenging, most of the over 60 positions taken in 2017 were good plays for the year.

Holdings Performance – Update

As of December 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. Companies owned during the year, but previously sold are still included so short-term gains are transparent. Overall performance is based upon unrealized/realized gains from 61 total companies, which have been owned at some point during 2017.

Source: Transports In Focus

Source: Transports In Focus

Source: Transports In Focus

Source: Personal Database

Lessons Learned

The biggest takeaway from this past year is the challenge of maintaining cash while actively managing all positions. As an example, some of the top performing positions in the portfolio had less weighting than some of the worse performers. While I am confident that an aggressive defensive stance will pay off over the long term, the ability to infuse cash consistently across 46 holdings on an annual basis is not going to happen.

As a result of cash management, some positions were sold outright. This is not ideal as most of these stocks performed quite well over the course of 2017. Prime examples included CF Industries (CF), Old Dominion Freight Lines (ODFL), and Amazon (AMZN) among others. For instances like Amazon and Line Corporation (LN), bias and an inability to clearly manage positions was the primary cause for liquidation. I am content to no longer own Amazon despite leaving some money on the table. I am very content to no longer own Line as visibility was not readily available.

Other companies such as CF Industries and Old Dominion were companies I would have liked to have held, but were unfortunate casualties of cash management struggles. Other positions which were sold, including DexCom (DXCM) F5 Networks (FFIV), Hanesbrands (HBI), Sprouts Farmers Market (SFM), J.M. Smucker Company (SJM) and Daseke (DSKE) all had justifiable reasons based upon management strategies.

The real question is from what was sold, will any of these stocks be considered during 2018 for re-entry? The biggest heartburn for 2017 was Old Dominion. My exposure to transports led me to feel I had adequate coverage in the less-than-truckload (LTL) space, but in hindsight, I should have held the company. If an opportunity presents itself, I will reconsider entering another position. Other companies which may see a return to the LLGP at some point in 2018 include CF Industries, Danone (OTCQX:DANOY) and JD.com (JD).

Top 10 Holdings

The top ten holdings within the LLGP reflected nearly 50.6 percent of the total based upon the closing investment value (including dividends paid) as of December 31, 2017. As a proportion of the total holdings, the top ten was at nearly 22 percent. From a management perspective, the top ten holdings based upon weighted percentage may decline in the near term, especially during 2018 if investment theses play out.

  • Ulta: 7.6 percent
  • Calavo Growers: 6.4 percent
  • Hub Group: 6.1 percent
  • Matson: 6 percent
  • Alaska Air Group: 5.2 percent
  • XPO: 4.8 percent
  • Switch: 4.2 percent
  • Pioneer Natural Resources: 3.5 percent
  • Costco: 3.4 percent
  • DowDuPont: 3.4 percent

Total Return Snapshot

Overall, performance has remained solid with 50 of the 61 companies owned during 2017 (82 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 22 months. For total return performance, leaders and laggards were as follows:

Leaders (30 companies, or 49 percent at or greater than 20 percent)

  • Boeing: 136.8 percent – 20-month duration
  • XPO: 124.8 percent – 18-month duration
  • Calavo Growers: 53.1 percent – 16-month duration
  • Arista Networks: 51.1 percent – 6-month duration
  • Lamb Weston: 49.9 percent – 12-month duration
  • Amazon.com: 48 percent – 19-month duration (total gains realized)
  • DHL Group: 46.4 percent – 21-month duration
  • JD.com: 46.4 percent – 9-month duration (total gains realized)
  • V.F. Corporation: 45.1 percent – 11-month duration
  • Republic Services: 44.3 percent – 19-month duration
  • Grupo Aeroportuario del Pacific: 43 percent – 11-month duration
  • Visa: 41.6 percent – 11-month duration
  • JB Hunt: 35.3 percent – 22-month duration
  • Sanderson Farms: 33.3 percent – 15-month duration
  • FedEx: 31.8 percent – 12-month duration
  • Raytheon: 31.2 percent – 12-month duration
  • Rice Energy: 31 percent – 7-month duration (total gains realized)
  • Schneider National: 29.6 percent – 8-month duration
  • Adobe: 29.1 percent – 7-month duration
  • Unilever: 26.9 percent – 19-month duration
  • Lockheed Martin: 26.2 percent – 12-month duration
  • Hub Group: 25.9 percent – 8-month duration
  • Daseke: 25.9 percent – 4-month duration (total gains realized)
  • Roku: 25.1 percent – 1-month duration
  • Kansas City Southern: 24.1 percent – 13-month duration
  • Canadian National: 23 percent – 22-month duration
  • Home Depot: 22.5 percent – 6-month duration
  • US Foods: 21.8 percent – 18-month duration
  • Prologis: 20 percent – 10-month duration
  • Greenbrier Companies: 19.7 percent – 20-month duration

Laggards (1 company or 2 percent at or worse than -10 percent; 5 companies or 8 percent at worse than -5 percent)

  • DexCom: -30.1 percent – 9-month duration (total losses realized)
  • Alaska Air: -7.1 percent – 9-month duration
  • Bunge: -6.5 percent – 6-month duration
  • F5 Networks: -6.5 percent – 4-month duration (total losses realized)
  • Celgene: -5.7 percent – 2-month duration
  • Switch: -4.1 percent – 2-month duration
  • Fresh Del Monte: -3.1 percent – 7-month duration
  • Line: -3.1 percent – 13-month duration (total losses realized)
  • J.M. Smucker: -2.4 percent – 8-month duration (total losses realized)

Freight holdings, as a percent of the total, increased by one percentage point to 34 percent by year-end. Only Triton International reflected a new freight-based position in December. As transports rallied broadly versus broader market indices, the LLGP benefited and exposure increased. As we head into 2018, I expect transports to continue to lead broader markets higher, especially for freight industry sectors.

Most transports in the LLGP are categorized within the consumer discretionary sector. As mentioned above, transports rallied strongly to end the year. Consumer staples and financials declined at the expense of discretionary and technology sectors, while all other sectors remained flat. Part of the impact for technology gains resulted from additions of Nvidia, Roku and Square in December.

Large cap holdings declined by 1 percentage point to 57 percent of the LLGP’s total. The small cap composition increased by 1 percentage point, and the mid cap composition remained flat. These adjustments were driven mostly by the addition of Roku, and appreciation from the Switch position. The LLGP continues to split closely between large and mid cap blend styles.

The percentage of U.S.-based holdings was flat at 94 percent. All other geographies also remained the same. Mexico and Canada continue to be marginal, Asia and Latin America exposure is no longer part of the portfolio due to recent liquidations. Direct investment exposure for the Asia region will be revisited during 2018. It should be noted that geography is based upon corporate headquarters.

The increase in equity growth only holdings was primarily driven by the added positions for Nvidia, Roku and Square, which do not pay any dividends.

Benchmark Comparison and LLGP Historical Performance

For 2017, the LLGP has returned 21.5 percent. The current yield ended the year at 0.9 percent. Through December, the LLGP has now surpassed most benchmarks, with the exceptions being the Dow Jones, NASDAQ, Fidelity Contrafund and NASDAQ Transportation indices.

Based on the portfolio’s current 46 holdings, there still remains a fairly close balance between growth and value, and large and mid/small cap compositions. However, composition has recently drifted closer to a large cap blend. The LLGP continues to be benchmarked against over 1,750 mutual funds, via Morningstar’s fund category performance total returns. Through December, the LLGP ranked 722nd or in the 60th percentile. This was a modest increase from the previous month’s 52nd percentile ranking. Performance has been as follows since monitoring the larger peer group:

  • June 86th percentile
  • July 63rd percentile
  • August 41st percentile
  • September 82nd percentile
  • October 30th percentile
  • November 52nd percentile
  • December 60th percentile

The top performer to date remains the Leland Thompson Reuters Venture Capital Index (LDVIX) up 52.7 percent. The worst performer was the Frank Value C fund (FNKCX) at -3.4 percent. The average return for 2017 out of the mutual fund peer group was at 19.9 percent, while the median was at 20.7 percent.

After using the larger benchmark for the past seven months, it remains clear that the number of holdings in the LLGP is likely to contribute to volatile fluctuations. This will remain to be especially true from the fact that the top 10 holdings reflected nearly 51 percent of the total investment value, and 22 percent of the total holdings.

The month of December witnessed a 3.4 percentage point increase. For the year, eight of the twelve months were positive. Prospects remain bright for 2018 for transports, as well as other overweighted positions. For transports and consumer staples, further consolidation will continue to play out, while retail should get a boost during the first quarter from fourth quarter holiday shopping.

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.

For 2017, the expense ratio finished at 1.6 percent, surpassing all of last year’s transaction costs. As mentioned earlier, the Motif accounts have been closed and all holdings have been transitioned to a Merrill Edge account where 30 monthly free trades will be available. From this point forward into 2018, there will no longer be any expense ratio, unless the allotted free trade amount is exceeded.

The dividend yield-on-cost (YOC) is an area that will continue to adjust over the near term. As an example, some companies with overweight positions, which pay dividends, may see some trimming. This may reduce the YOC. The 0.9 percent yield was satisfactory for 2017. For 2018, the dividend YOC is estimated at 1.1 percent.

Conclusion

2017 was a good year and a 21.5 percent return is for the LLGP was a positive achievement. Finishing in the 60th percentile from the benchmark was also positive, but nothing to boast about. With no transaction fees, and the long bull market still chugging along, further buys will likely be undertaken with smaller investment proportions. This will help spread cash across holdings and preserve cash longer to be prepared for volatility and the next correction/recession.

I remain optimistic that 2018 will provide further positive gain potential for the LLGP. I am looking for transports and energy and commodity sectors to lead the portfolio to its third consecutive year of positive gains. Some of my top picks to lead performance include top ten positions such as Ulta, Calavo Growers, Matson and Alaska Air.

Disclosure: I am/we are long ADBE, ALK, AMT, ANET, BA, BG, CALM, CELG, CVGW, CNI, CXO, COST, DPSGY, DWDP, FDX, FDP, GBX, PAC, HD, HRL, HUBG, JBHT, KSU, LMT, MATX, MKC, NVDA, PANW, PXD, PLD, RMP, RSG, RTN, ROKU, SAFM, SNDR, SQ, SWCH, TRTN, UL, ULTA, USFD, V, VFC, XPO.

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.

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