The Good Business Portfolio: 2017 4th Quarter Earnings And Performance Review

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Includes: AA, ABC, ADP, AMT, ARNC, BA, DHR, DIS, DLR, EOS, FCX, GE, HD, HPQ, IR, JNJ, KHC, LB, MCD, MDLZ, MMM, MO, OHI, PEP, PM, TXN
by: William Stamm

Summary

The portfolio of good company businesses is performing 2.38% lower than the DOW average year to date of 1.03%, for a total loss of 1.35%.

The 25 businesses comprise 99% of the portfolio with the other 1% in cash, and the average total return over the DOW average for the 50-month test period is 47.14%.

The objective is to create a portfolio that is balanced, not income, not dividend growth, not bottom fishing, not value, but balanced among all styles of investing.

Of the 25 companies in the portfolio, 20 beat or were in line with the DOW average for total return, and 5 missed the total return over the test period of 50 months.

This article gives a review of the 2017 fourth-quarter earnings and 2018 YTD performance of the Good Business Portfolio (My IRA portfolio). Earnings data will be looked at for some of the top positions in the portfolio and recent changes to the portfolio.

Guidelines (Company selection)

The intent in the Good Business Portfolio guidelines is to create a portfolio that is a large cap balanced portfolio between the different styles of investing. Income investors take too much risk to get their high yields. Bottom-fishing investors get catfish. Value investors have to have the foresight to see the future. Over many years, I have codified 11 guidelines for company selection. These are guidelines and not rules. (For a complete set of guidelines, please see my article, "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review"). They are meant to be used as filters to get to a few companies on which further analysis can be done before adding them to the portfolio. So it's alright to break a guideline if the other guidelines indicate a Good Company Business. I'm sure this eliminates some really good companies, but it gets me a short list to work on. There are too many companies to even look at 10% of them.

You see from the portfolio below that I want a portfolio that is defensive, provides income and does not take significant risks. I limit the portfolio to 25 companies, as more than this is almost impossible to keep track of. I have 25 companies in the portfolio, so the portfolio does not have an open slot.

Portfolio Performance

The performance of the portfolio created by the guidelines has in most years beat the DOW average for over 25 years, giving me steady retirement income and growth. The table below shows the portfolio performance for 2012 through 2017 and YTD 2018.

Year

DOW Gain/Loss

Good Business

Beat Difference

Portfolio

2,012

8.70%

16.92%

8.22%

2,013

27.00%

39.70%

12.70%

2,014

6.04%

8.67%

2.63%

2,015

-2.29%

5.68%

7.97%

2,016

13.38%

8.68%

-4.70%

2,017

25.10%

21.28%

-3.82%

2018 YTD

1.03%

-1.35%

-2.38%

In a great year like 2013, the portfolio did fantastically. In a normal year like 2014, it beat the DOW by a fair amount. So far this year, the portfolio is behind by 2.38% total return below the DOW average gain of 1.03%, for a total portfolio loss of 1.35% which is not good, but this volatility will stop someday, and the company fundamentals will shine with ten months left in the year.

All 25 Companies In The Portfolio

The 25 companies and their percentage in the portfolio and total return over a 50-month test (starting Jan. 1, 2014, to 2018 YTD) period is shown in the table below. I chose this time frame since it included the great year of 2017 and other years that had fair and bad performance. The DOW baseline for this period is 51.91%, and each of the top six beat that baseline. The next 19 have five companies that did not beat the DOW baseline but still are great businesses. I limit the portfolio to 25 companies and generally let the winners grow until they reach 8%-9% of the portfolio, and then I trim the position. JNJ, BA, and HD are now in trim position, and I am pushing BA up to 14% of the portfolio. I start the companies at a base percentage of the portfolio of 1% and add to the position if they perform well during the next six months. At 4% of the portfolio, I stop buying and let the company percentage of the portfolio grow until it hits 8%, then it's time to trim.

DOW Baseline

51.91%

Company

Total Return

Difference

Percentage of Portfolio

Cumulative Total

50 Months

From Baseline

Percentage of Portfolio

Boeing (BA)

176.16%

124.25%

13.75%

13.75%

Home Depot (HD)

136.81%

84.90%

9.37%

23.13%

Enton Vance Enhanced Equity Income Fund II (EOS)

58.67%

6.75%

8.14%

31.27%

Johnson & Johnson (JNJ)

51.98%

0.06%

7.87%

39.14%

Altria Group Inc. (MO)

88.95%

37.03%

6.40%

45.54%

Walt Disney (DIS)

118.30%

66.39%

6.05%

51.58%

Philip Morris INTL INC. (PM)

36.64%

-15.27%

5.92%

57.51%

McDonald's Corp. (MCD)

91.23%

39.32%

5.43%

62.93%

Omega Health Inv. (OHI)

39.62%

-12.29%

5.62%

68.55%

Texas Instrument (TXN)

239.13%

187.21%

5.59%

74.14%

Automatic Data Processing (ADP)

107.74%

55.83%

4.91%

79.06%

Ingersal-Rand plc (IR)

222.75%

170.84%

4.20%

83.26%

L Brands Inc. (LB)

17.90%

-34.01%

3.20%

86.45%

General Electric (GE)

-22.69%

-74.60%

2.26%

88.71%

Digital Realty Trust (DLR)

127.70%

75.78%

1.79%

90.50%

Hewlett Packard (HPQ)

222.75%

170.84%

1.59%

92.09%

Freeport McMoRan (FCX)

-40.59%

-92.51%

1.42%

93.51%

Mondelez (MDLZ)

73.88%

21.97%

1.33%

94.84%

3M (MMM)

162.56%

110.65%

0.53%

95.37%

Kraft Heinz Corp. (KHC)

65.43%

13.52%

0.60%

95.98%

Amerisource Bergen (ABC)

127.68%

75.77%

0.90%

96.87%

Danaher Corp. (DHR)

110.41%

58.50%

0.88%

97.75%

PepSiCo Co. (PEP)

75.31%

23.39%

0.50%

98.25%

American Tower (AMT)

89.02%

37.10%

0.31%

98.56%

Arconic Inc. (ARNC)

**

**

0.70%

99.26%

** NA No long-term data

Average Above Dow

47.14%

The portfolio is in the process of selling LB and using covered calls to get a better price. One mistake I admit to making is, I hold a position too long when it starts to go bad. My first job out of college was with GE, and I loved working for them testing the LEM (Lunar Excursion Module), and GE has some great products, but the misleading accounting of the past is now taking its toll.

The graphic below shows the Dow average/100

Chart ^DJX data by YCharts

This is the full list of my 25 Good Businesses. I have written individual articles on all of these businesses, please see my full list of articles if you are interested.

Earnings Comments

For the fourth-quarter earnings season, the 25 portfolio companies did very well with a few laggards, 18 beat earnings estimates, four met estimates and three missed estimates a bit.

  • Boeing is the largest holding in the portfolio at 13.75%. Boeing is being pressed to 14% of the portfolio before trimming because of it being cash positive on 787 deferred plane costs at $571 million reported in the fourth-quarter earnings in January 2018, an increase from the third quarter. S&P CFRA raised its one-year target to $405. BA is a long-term buy and has a backlog of over seven years. So far this year, they are beating Airbus (OTCPK:EADSY) in orders and meeting Boeing's projected order estimate for the year. The third-quarter earnings were $2.72, beating the expected by $0.06, with revenue increasing 1.7% year over year, another good report. I am getting greedy with Boeing and have stopped trimming and will let it run for a few more quarters.
  • On 1/23/18, Johnson & Johnson's earnings were above expected at $1.74 compared to last year at $1.58 and expected at $1.72. Revenue beat expected revenue by $130 million, with total revenue up at $20.2 billion or up 11.5% Y/Y. The strong dollar is hurting JNJ, but they are still growing and have plenty of cash to buy companies and continue their growth. JNJ will be pressed to 9% of the portfolio because they're so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom lines. JNJ is not a trading stock but a hold forever. If you want a hold forever top-notch medical supply company with a growing 2.8% dividend (55 years of increases), JNJ is for you.
  • On 2/1/2018, Altria's earnings were $0.91, a lot more than the expected of $0.80 and compared to last year's $0.68. Hold and only sell when MO becomes too large a percentage of the portfolio. Revenue missed by $90M and e-cig will have to be watched to make up the difference in revenue going forward. Total revenue was $4.71 billion, down 0.4% year over year. Hold this defensive position for its 4% dividend and moderate growth.
  • On 2/20/2018, Home Depot earnings were expected at $1.61 and came in at $1.69 and compared to last year at $1.44, a great quarter. Revenue was up compared with an expectation of $240 million. Total revenue was $23.9 billion, up 7.6% Y/Y. Hold and only sell when HD becomes too large a percentage of the portfolio.
  • On 2/08/12018, Philip Morris's earnings were $1.32 compared to expected at $1.36 and last year at $1.210. Revenue beat by $140 million from the expected, with total revenue at $8.29 billion, up by 18.9% year over year. Hold for now and only sell when PM becomes too large a percentage of the portfolio. Exchange rates and the strong dollar are causing PM (a total international company) earnings to have a headwind, but they came through with fair earnings. They pay a 4.3% dividend and are in a defensive business with growth to come from smokeless products, which is strongly growing market share.
  • In the portfolio, only two companies are losing money over the 50-month test period - Freeport-McMoRan and General Electric.
  • FCX is recovering well and should be able to increase its cash flow each year. With copper recovering, it's a fair investment for more copper growth in the future. The Portfolio did buy some FCX when it got down to $4.00/share, their assets were worth much more than $4.00, so this move did reduce the loss, but FCX still needs more time as copper prices will rise over time. Right now FCX has gotten an extension to ship cooper for another year and is making progress on a final long-term deal to export copper concentrate with the Indonesian Government. With copper just over $3.02/Lb., FCX is a good speculation at the present price; the revenue should have increased by $1200 million in this quarter because of the increase in copper price. I have added a guideline to be careful of commodity companies as a result of the poor total return performance of Alcoa (AA) and Freeport-McMoRan. Another problem company is General Electric; the portfolio is losing money over the test period and is behind the DOW over the test period of 50 months.
  • On 1/24/2018, General Electric's earnings were at $0.27, compared to expected at $0.28 and last year at $0.46. Total revenue was $31.4 billion, down 5.1% year over year and missed by $2660 million. They are reorganizing which should help. They are almost all industrial now and have great products; time to grow the standard business. They have a new CEO so let's hope this can change the direction of GE. The new CEO is taking action, but it will take time to cut costs; hold for now and give the new CEO some time, I think there are no more cockroaches to come out of GE.

Recent Portfolio Changes

  • On February 23 decreased position in LB to 3.5% of the portfolio and will continue to sell off the position over the next three months and sell covered calls along the way to get a better price.
  • Have been moving the LB Feb 16 calls that were in the money, out and up to collect more premiums and to hold the shares. My LB Feb 50 calls expired out of the money, and more calls on LB will be written next week.
  • On January 31 trimmed Boeing (BA) from 13.1% of the portfolio to 12.8%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow. The fourth quarter earnings report was fantastic beating estimates by $0.15 at $3.04 (not including tax gain) and with future estimates all showing good growth for 2018. The decrease in deferred costs for the 787 was $581 Million for 36 planes shipped, which was good.
  • Wrote some L Brands (LB) May 18, strike 52.5 calls on the part of the holding. If the calls are in the money near exercise time, they will be moved up and out. I intend to sell L Brands sometime this year but am having too much fun selling covered calls.
  • On January 18 trimmed Boeing from 12.7% of the portfolio to 12.5%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow.
  • Wrote some L Brands February 16, strike 50.0 calls on the part of the holding. If the calls remain in the money near exercise time, they will be moved up and out.
  • Increased the position size of General Electric (GE) to 3.0% from 2.7% of the portfolio. GE has now become a value and income play. GE is a problem child at this point and will be held in the portfolio. You have to let the new CEO have some time to turn around this giant company.
  • On January 5 trimmed Boeing from 11.5% of the portfolio to 11.4%. I am greedy and am letting BA be much more a part of the portfolio.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top companies in The Good Business Portfolio are, Johnson and Johnson at 8% of the portfolio, Altria Group at 6.9% of the portfolio, Home Depot at 9.5% of portfolio and Boeing at 13.75% of the portfolio, therefore BA, HD, and Johnson & Johnson are now in trim position with Altria getting close.

JNJ will be pressed to 9% of the portfolio because they're so defensive in this post-Brexit world. Earnings in the last quarter beat on the top and bottom lines and Mr. Market did like the growth going forward. JNJ is not a trading stock but a hold forever; they are now a strong buy as the healthcare sector remains under pressure.

Conclusion

The 11 guidelines in the article give me a balanced portfolio of good companies that are large-cap and can grow their revenues, earnings, and dividends for years. They have the staying power to fix whatever goes wrong. In each case, the company has the size and good management to fix the problem. The portfolio has growth companies, defensive companies, income companies and companies with international exposure, giving it what I call balance. Of the 25 companies presently in the portfolio, five are underperforming the DOW average in total return. All five companies are being hurt by the strong dollar since they are multinational and have a portion of their income coming from foreign operations. The portfolio is 1.36% behind YTD with second quarter increases in earnings to be seen as the result of the corporate tax decrease. I intend to continue writing separate comparison articles on individual companies. If you would like me to do a review of one of my Good Business Companies or another company you like, please comment, and I will try to do it.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.

Disclosure: I am/we are long JNJ, HD, BA, MO, EOS, DIS, PM, LB, GE, MMM, MCD, ADP, OHI, IR, MDLZ, TXN, FCX, HPQ, KHC, ABC, DHR, PEP, AMT, DLR.

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.