In the past, I have provided a high-level overview section of the Lean Long-Term Growth Portfolio (LLGP). Moving forward, the list below provides investors with the basics of the portfolio:
- LLGP inception date, February 2016.
- 49 holdings under active management.
- Benchmakred against 1,800-plus mutual fund peers.
- Estimated yield at 1.3 percent for 2018.
- Zero-cost transactions via MerrillEdge.
2018 has gotten off to a quick start for equities. The last few days of January, however, have seen increasing volatility, as the markets continue to digest impacts from an increasing interest rate scenario. Naysayers continue to focus on the economy being stretched thin. But if history has taught us anything, it is that increasing interest rates, while increasing volatility have often led to higher market highs. Additionally, inflation and accelerated economic growth have often gone hand-in-hand.
For the remainder of 2018, volatility may become more pronounced, but economic trends are pointing towards accelerated growth. This will translate to improved prices for many industries and stronger top-line growth and profits. The tipping point is on the horizon, and we will indeed eventually witness a substantial correction/recession. But this year is on track to sustain positive momentum.
From an active management perspective, there are several core large holdings which are poised to see strong realized gains at some point. Adding new positions and increasing positions in existing holdings will see a more measured pace. Building some cash will be a focus during 2018, but the core objective will be optimizing equity appreciation for the year.
As of January 31, 2018, the fund held 49 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)
- Danone (OTCQX:DANOY)
- 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)
- JD.com (JD)
- 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)
- Spin Master Corp. (OTC:SNMSF)
- 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)
- VF Corporation (VFC)
- Visa, Inc. (V)
- XPO Logistics (XPO)
Holdings Performance – Update
As of January 31, 2018, 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. Overall performance is based upon unrealized/realized gains from 49 total companies, which have been owned at some point during 2018.
Source: Personal Database
Last year’s active management was very aggressive. This has led to some overweight positions as will be discussed more below. 2018 is a year where certain thesis are anticipated to play out leading to some rebalancing. Nonetheless, a defensive approach will remain for holdings displaying continued weakness.
This has led to early position additions for both Alaska Air and Switch, Inc. Alaska Air continues to face volatile swings from the market’s uncertainty regarding post-integration operations. The stock is the worst performer to start the year among its airline peers. I will continue to modestly add to the position as it dips below the $65 level, adding more below $60. My stance remains that Alaska Air and Southwest Airlines (LUV) are the top airline stocks to own period. Service is best in class and cost structures over the long-term will continue to win out.
For Switch, some patience may be required although the stock could gain some momentum towards the $20 level later in the year. Over the next couple of years, I do believe that this stock price will be poised to head towards the mid-$20s level. At some point, the combination of superior product and service domestically, as well as international growth potential will begin to accelerate financial performance.
DHL Group is looking like it will once again offer investors a discount at the beginning of the year. For this reason, I added more to the existing position on the last day of January. Based on my model, I see DHL Group’s relative valuation towards the high-$50s, offering investors strong appreciation potential, north of 20 percent.
E-commerce has stung me pretty well, as I sold my positions in Amazon (AMZN) and Mercadolibre (MELI) last year for gains. Based on risk-reward profiles, I re-entered a position in JD, which will serve as a core long-term holding. I also added Danone back opportunistically. There are around seven or so companies in the LLGP which have been fluctuating close to addition levels – I update posts regularly on my Marketplace service as these opportunities evolve.
Top 10 Holdings
The top ten holdings within the LLGP reflected approximately. 50.4 percent of the total based upon the closing investment value (including dividends paid) as of January 31, 2018. As a proportion of the total holdings, the top ten was at nearly 20 percent. From a management perspective, the top ten holdings based upon weighted percentage may decline during 2018 if investment thesis’ play out.
- Ulta 7.2 percent
- Matson 6.6 percent
- Calavo Growers 6.3 percent
- Hub Group 5.8 percent
- Alaska Air Group 5.5 percent
- XPO 4.7 percent
- Switch 3.8 percent
- Pioneer Natural Resources 3.5 percent
- Bunge 3.5 percent
- DowDuPont 3.5 percent
Total Return Snapshot
Overall, performance has remained solid with 43 of the 49 companies owned during 2018 (88 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 23 months. For total return performance, leaders and laggards were as follows:
Leaders (30 companies, or 61 percent at or greater than 20 percent)
- Boeing 183.1 percent – 21-month duration
- XPO 130.3 percent – 19-month duration
- Arista Networks 71.1 percent – 7-month duration
- Calavo Growers 57.6 percent – 17-month duration
- VF Corporation 57.4 percent – 12-month duration
- Lamb Weston 55.2 percent – 13-month duration
- Visa 54.2 percent – 12-month duration
- Republic Services 47.5 percent – 20-month duration
- JD.com 46.4 percent – 13-month duration
- DHL Group 45.5 percent – 22-month duration
- Grupo Aeroportuario del Pacific 45.5 percent – 12-month duration
- Adobe 42.2 percent – 8-month duration
- Raytheon 41.6 percent – 13-month duration
- JB Hunt 41.1 percent – 23-month duration
- FedEx 38.4 percent – 13-month duration
- Lockheed Martin 35.1 percent – 13-month duration
- Square 33.9 percent – 1-month duration
- Kansas City Southern 32.8 percent – 14-month duration
- Schneider National 31.6 percent – 9-month duration
- Unilever 28.6 percent – 20-month duration
- Home Depot 28.1 percent – 7-month duration
- Nvidia 27.7 percent – 1-month duration
- Sanderson Farms 27 percent – 16-month duration
- Hub Group 26.3 percent – 9-month duration
- Matson 22.8 percent – 23-month duration
- US Foods 22.5 percent – 19-month duration
- McCormick & Company 21.9 percent – 13-month duration
- Costco 21.8 percent – 8-month duration
- Prologis 21.8 percent – 11-month duration
- Canadian National 21 percent – 23-month duration
Laggards (2 companies or 4 percent at or worse than -10 percent; 3 companies or 6 percent at worse than -5 percent)
- Switch -13.8 percent – 3-month duration
- Alaska Air -13.1 percent – 10-month duration
- Celgene -8.5 percent – 3-month duration
- Fresh Del Monte -3.8 percent – 8-month duration
- Roku -1.9 percent – 1-month duration
- Rice Midstream Partners -0.8 percent – 11-month duration
Freight holdings, as a percent of the total, declined by one percentage point to 33 percent. All recent additions to the portfolio constituted companies outside of the freight sector. Despite improving performance from select freight companies such as Matson, overall performance led to a decline.
Most transports in the LLGP are categorized within the consumer discretionary sector. The consumer discretionary sector increased by 5 percentage points in January. This was led by declines of 3 and 2 percentage points for consumer staples and industrials. The majority of the position additions during January were within the consumer discretionary sector. Weakness in other sectors also contributed, examples including Sanderson Farms and Greenbrier Companies.
Large cap holdings increased by 1 percentage point to 58 percent of the LLGP’s total. The small cap composition was flat, and the mid cap composition declined by 1 percentage point. Large cap equities continue to perform strongly. The LLGP remains near a 60-40 split between large and mid cap blend styles.
The percentage of U.S.-based holdings declined by 1 percentage point to 93 percent of the total. All other geographies from the previous month remained the same. The re-entry to owning JD led to the Asia geography being included once again. Expectations for a substantial portion of U.S. held equities remains for the foreseeable future.
Despite additions in January, equity growth only holdings remained flat, with the mix at nearly 70-30.
Benchmark Comparison and LLGP Historical Performance
As of January 2018, the LLGP has returned 2.8 percent. The current yield ended the year at 0.9 percent. Through January, the LLGP has lagged most general benchmarks, with the exceptions being the SPDR S&P Transportation ETF (XTN) and S&P Mid Cap 400 Index (^MID). Most other broader indices have performed in the 4 to 6 percent range to start the year with exceptions being the Fidelity Contrafund (FCNTX) and NASDAQ (IXIC).
Based on the portfolio’s current 49 holdings, there still remains a fairly close balance between growth and value, and large and mid/small cap compositions. However, composition has remained closer to a large cap blend. The LLGP continues to be benchmarked against over 1,850 mutual funds, via Morningstar’s fund category performance total returns. Through January, the LLGP ranked 1,722nd or in the 8th percentile. This reflected the worst performance since creating and monitoring this benchmark last June.
The two orange lines depict the annual performance target of achieving the 75th percentile ranking, and the minimum goal of exceeding the 50th percentile ranking. For 2017, the LLGP finished in the 60th percentile, beating the minimum threshold, but falling short of the performance target. Volatility is to be expected, but January’s very slow start is uninspiring. The good news is that there are still 11 months remaining to improve.
The top performing mutual fund in the peer group as of January was remains the Leland Thompson Reuters Venture Capital Index (LDVIX) up 16.8 percent. The worst performer was CGM Realty (CGMRX) at -0.3 percent. The average return as of January out of the mutual fund peer group was at 4.9 percent, while the median was at 5.1 percent.
The month of January witnessed a 2.8 percentage point increase, an improvement of greater than 350 percent from last year. Despite the slow start, the January result was stronger than seven of last year’s twelve months. Overweight positions are positioned to lead to robust results if anticipated catalysts play out in 2018.
The dividend yield-on-cost (YOC) was up marginally for January at nearly three one-hundredths of a percent. Most of the monthly dividend information will not be comparable to 2017 as cost basis have changed. For 2018, the dividend YOC is estimated at 1.3 percent.
After coming off of a very strong year for performance, 2018 is off to a very slow start with January’s results up 2.8 percent. This is evident against both the general benchmark and the over 1,850 mutual fund peers. Companies weighing on performance have included Alaska Air, Canadian National, Hub Group, Greenbrier Companies, Hormel, Rice Midstream Partners, Sanderson Farms, Switch and Ulta.
I remain optimistic that 2018 will provide further positive gain potential for the LLGP. Earnings season is upon us and I am looking for big results for both Hub Group and Ulta; I also remain optimistic for Switch to improve throughout the year. Companies including Bunge and Matson have already turned the table, and Calavo Growers has remained stable. If the majority of the top ten holdings perform well, another big year may be in store.
Disclosure: I am/we are long ADBE, ALK, AMT, ANET, BA, BG, CALM, CELG, CVGW, CNI, CXO, COST, DANOY, DPSGY, DWDP, FDX, FDP, GBX, PAC, HD, HRL, HUBG, JBHT, JD, KSU, LMT, LW, MATX, MKC, NVDA, PANW, PXD, PLD, RMP, RSG, RTN, ROKU, SAFM, SNDR, SNMSF, 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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