Allow me to present the Brunch, Craft Beer, and Investing Portfolio: my Roth IRA named after a few hobbies of mine. If you would like to read a little more about myself and my goals, check out the introductory article: Brunch, Craft Beer, and Investing: A Millennial's Portfolio. If you would like to see how I performed the previous quarter, check out my 3Q article: Brunch, Craft Beer, and Investing: A Busy Quarter. If you don't care to check out my other articles, I'll give a brief synopsis.
If you came looking for a portfolio made up of beer and restaurant stocks, I'm sorry to disappoint you. My portfolio has nothing to do with brunch or craft beer. I'm still holding out for a brunch ETF, though. The end of 2017 makes the portfolio 2.5 years old - 1.5 years since I began monitoring it and actively investing. I hope reviewing my portfolio inspires other Millennials to invest actively, to perform the necessary due diligence and keep up with market events, and that it keeps me grounded in my strategy.
If you've been here before, I'll not bore you with more background. Before I address the trades, I'll mention that 4Q began the tax reform deliberation, and its ultimate passage. Previously, I stated that its failure was a concern for the Bull Market, so it seems we've cleared that hurdle. In 4Q, I continued my rotation into fundamental-based decisions with a focus on cash and debt, and accumulated a nice cash position myself.
Here's the current portfolio makeup:
Over one year, I've managed a 2017 return of 27.2%, compared to the Nasdaq of 30.1% and the S&P of 22.6%. These returns have me considering a Nasdaq index fund (ONEQ).
Buys & Sells
MKS Instruments (MKSI) was purchased during the end-of-November tech sell-off, shortly after the Flynn testimony news on 12/1. I had been following MKSI for awhile, and was waiting for an opportunity to buy. Given the broader market valuation, I was looking for a relative deal; however, I wanted a tech stock that had been unreasonably punished. I looked at the MACD, RSI, and historical PEG of my watchlist, and MKSI was one of a few that signaled the slowing of a sell-off, being oversold, and having a lower PEG than historical norms. MKSI has cash to cover its debt, earnings growth of >250%, a comfortable net margin, and comfortable payout ratio that shows commitment to shareholders. A strategy of mine is to buy components of the supply chain for in-demand markets. MKSI produces process control and analysis equipment, components, and software for a diverse range of markets including defense, gas composition, and environmental. Historically, it has performed quite in-line with Applied Materials (AMAT) and correlated with Lam Research (LRCX). Those have great fundamentals, too.
HIVE Blockchain Technologies (OTCPK:PRELF) is a speculative play in a Canadian company that mines mainly Ethereum. In an attempt to seize some momentum, I thought I'd initiate a tiny position - just to see what happens.
Micron Technologies (MU) was a deviation from my strategy of buying supply-chain-related companies. On the heels of a stellar earnings report and great guidance, I figured I'd jump on-board the momentum train during the recent tech sell-off. As I've mentioned in past articles, I'm not familiar enough with individual semi companies to buy them. However, Micron's margins are comfortable, leverage is minimal, and the cash position is appealing. Substantial earnings growth was convincing, and the memory growth potential with AI is immense.
Westrock, Inc. (WRK) was originally purchased as a play on e-commerce growth. After all, everything I've ordered online has always arrived in some form of paper product. Given the more perfectly-competitive nature of the paper/packaging market and rising interest rates, I became nervous about its leverage position. The added value of its 2015 acquisition apparent in its 3Q ER makes the leverage less concerning if accretive long-term. Still, it's ROIC is below my portofolio's and my other holdings, so it's dividend was nice, but not exceptional.
Lam Research (LRCX) was originally purchased as a play on the growth in semiconductors. In order to make them, you need the proper equipment. In this space, I acknowledged that it may be less perfectly-competitive than other industries - that Lam may actually provide a superior product or business for its customers. While Lam holds a higher P/E than its peers, my decision to sell ultimately came from a thorough analysis of the industry provided by Robert Castellano. His demonstration of the industry cycle was compelling and I wanted to protect myself from a reversion to the mean.
Accenture (ACN) was purchased for its sector dominance, some international exposure, and broad demand in an ever-changing business landscape. My selling it mostly regards timing, as it did not experience much sell off recently and continues to trend upward. I wanted to secure a gain. Given the moderate uncertainty of politics and the Fed going into 2018, I wanted to secure a gain and improve my capital position to take advantage of any volatility. I had a solid gain in Accenture, and it's PEG was only moving higher - on top of declining diluted EPS growth and a declining ROIC, despite both still being at favorable levels. I'm watching Cognizant Technology Solutions (CTSH) for a peer with better characteristics.
McKesson (MCK) became a large holding after doubling-down post-3Q earnings, actually, my largest holding by cost. I sold half of my position slightly above cost on its rebound in order to reduce exposure. This was prior to the Washington Post/60 Minutes story. I try to maintain some ethics in my investments, so the investigative report and repeat failures are quite concerning to me. As a shareholder, I want to hear about changes the company will make to prevent this sort of issue from happening again before deciding how to handle my remaining position. McKesson's size makes it uniquely positioned to have a very positive effect on such a widespread problem. I would hope management has the conscience to enact reform prior to any proxy action.
Before I give my outlook, a forward-looking comment on a couple dividends in my portfolio: I'll be halting dividend reinvestment in OHI and MCK. The former due to data from my own research, and subsequently from Beyond Saving, which negates my original investment thesis. The latter due to my lack of confidence in management to exercise corporate ethics and control internal problems related to the Opioid epidemic.
For the last couple years, politics has proven to be the major source of market volatility. Tax reform, while positively inferred, has questionable economic effects historically. Gale and Samwick provide empirical evidence for such uncertainty despite positive intentions and beliefs. This may be due to the minimally adjusting nature of past tax reforms, or that the increased deficit spending eventually has politicians calling for a more balanced budget resulting in reduced stimulative/economically stifling policies. The "Fiscal Bang for Buck" chart from Moody's suggests reform may have uninteresting implications in the long-term, economically speaking (1+ years). Either way, I'd presume consumer/investor confidence and CapEx spending will remain strong, which is encouraging for the bull market unless that expectation is priced in. Such a timeline also fits with historic correlation of presidential terms and economic lulls (chart below). However, a change of party in midterms may reduce the likelihood of economically stifling policies, pushing to assurance of deficit spending and economic stimulus into the next presidential term. On the plus side, the government has finally demonstrated its ability to be meaningfully productive, in a legislative sense. Post-tax-reform agenda will likely result in further volatility now that there is some confidence that meaningful legislation can actually pass.
The Fed has a new captain! As I've mentioned previously, its unwind of expansionary policy should be watched carefully. Monetary easing is itself relaxing around the globe. A detailed analysis can be found in Heisenberg's article. The circumstances certainly deserve more than just this blurb on the subject; however, Heisenberg does a great job explaining it, and I've bored you with my portfolio long enough.
I will continue to look at labor for long-term, economic stability - specifically, a reduction in unemployment or increased rates to spur saving. As unemployment stagnates, it becomes more likely that we have reached full-employment of those that firms want to/can employ - not for lack of jobs. This could be due to many issues, including a lack of mobility, increased job gaps, and/or drugs. Nonetheless, a prolonged, skilled-labor shortage and wage inflation will result in unmet demand, price inflation, and an increase in income inequality. Firms will be pressured to find cheaper labor to meet demand, which may be found outside of the country or with technology.
This encourages me to keep watching CapEx spending, as the market should continue up as long as businesses believe it makes sense to invest in themselves. Fluctuations due to tax reform may be seen, but it will become harder to justify long-term if a labor shortage persists (supply can't be increased) and prices must rise to cover employee wages. In this instance, CapEx may result in the replacement of skilled-labor with technology, as firms find more sustainable methods to maximize current production capacity.
I will include insight from Investment Pancake in future investment research. Going forward, I will look to position my portfolio to take advantage of any volatility. Some anchor picks I'm looking at are Texas Instruments (TXN), Clorox (CLX), and Rollins, Inc. (ROL). Some growth-oriented picks are Cognizant Technology Solutions (CTSH), Cognex (CGNX), and Tencent (OTCPK:TCEHY). My more speculative play would be some Graphene exposure and/or developmental biotech, potentially Spark Therapeutics (ONCE).
Thanks for reading!
Disclosure: I am/we are long ALB, AMZN, BMY, CARA, FB, FNSR, GLW, GOOG, JNJ, MCK, MKSI, MU, OHI, PRELF, SUPN.
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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.