The R.I.P. Portfolio: Q1 2018 Update

|
Includes: AAPL, ACN, AMGN, BABA, BAC, BHF, BHGE, BRK.B, C, CAH, CLDR, CRL, CSCO, DIS, DWDP, FKINX, GE, GM, HON, INTC, JNJ, KEY, KR, MET, MRK, PFE, PG, PRU, SFTBY, SPY, SYF, T, TGT, TWTR, TWX, UA, UTX, VZ, WNC
by: WG Investment Research
Summary

This real-money portfolio was first introduced to the Seeking Alpha community in December 2015 and it outperformed its benchmark in each of the last two years.

The portfolio has, however, underperformed its benchmark over the last 6-8 months in large part due to the downfall of General Electric.

The financial holdings were again the top performers for the portfolio, with Bank Of America being the biggest contributor.

The portfolio's projected income for 2018 is up almost 50% YoY.

The Retire In Peace portfolio, or R.I.P. portfolio, was first introduced to the Seeking Alpha ("SA") community in December 2015 and I have published quarterly articles that captured the activity and performance of the portfolio since that point in time. The companies that I write about on SA are largely the holdings of the R.I.P. portfolio, so the main purpose for the quarterly articles is to allow for my SA followers to track the performance of the stocks that I write about on this platform.

However, I am also interested in hearing from the entire SA community about these stock holdings because I learn valuable lessons from the insights that are provided on this platform. Therefore, I hope that these quarterly updates lead to constructive discussions about the companies that I consider core holdings.

The core holdings - see linked article above for a listing of the core holdings, in addition to each company's identified short- and long-term catalysts - are not necessarily the companies that I plan to hold for the next 30 years; but instead, they are the companies that I would like to hold for that period of time (i.e., buy-to-hold strategy). I will closely monitor these holdings and will trim, add to, or eliminate positions if a company's "story" materially changes.

The R.I.P. Portfolio's Goals And Strategy

I am building this portfolio with retirement in mind, so I have 30-plus years to invest and make adjustments; therefore, the quarterly volatility is not a major concern. These funds will stay in the market for the foreseeable future, so the portfolio will have the luxury of compounding for many years.

Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." -Albert Einstein.

It is also important to note that this is a real-money portfolio. The R.I.P. portfolio is made of five different accounts: a Roth IRA, a Traditional IRA, and three taxable brokerage accounts. This is not my family's main retirement assets, but it is a portfolio that I hope will greatly contribute to a stress-free and relaxing retirement.

The Goals and Strategy section was last updated in January 2018.

Main Investments (i.e., core holdings) - The companies that are considered core holdings should have established management teams that have proven track records of creating value. Furthermore, the companies should have competitive moats and be above-average operators within the respective industries. The core holdings are mainly large cap companies that are widely held by the financial community and this is by design.

Goals & Strategy - The portfolio seeks primarily long-term capital appreciation by investing mainly in equity securities of high-quality companies that have already shown the ability to produce sustainable earnings growth.

The portfolio aims to beat the benchmark, the SPDR S&P 500 ETF (SPY), by at least 1% on an annual basis.

Missing out on short-term gains and/or having paper losses are not my main concerns, because I plan to stay committed to my long-term strategy of utilizing a bottoms-up investing philosophy to select companies that I plan to hold for many years.

The portfolio has the following allocation targets and acceptable ranges:

Industry Target Allocations Acceptable Range
Industrials/Conglomerates 15% 10-20%
Healthcare 10% 5-15%
Financials 15% 10-25%
Insurance 5% 3-7%
Technology 15% 10-20%
Communication Services 15% 10-20%
Basic Materials 5% 3-7%
Conservative Allocation Fund 5% 3-7%
Consumer 10% 5-15%
Other* 5% 0-10%

*The Other category comprises of speculative investments in companies that have the potential to create outsized gains over the next three to five years (what I like to refer to as "investing in seedlings"). The investments within this category could eventually become longer ranged holdings if after further analysis it is determined that the companies indeed have the attributes that I look for.

Contributions - I plan to contribute between $1,000 and $2,500 of new capital per month to the portfolio and I typically put the new capital to work each and every month, regardless of the performance of the broader market.

Q1 2018 Update

Below you will find the portfolio and its performance, and the activity for the first quarter of 2018.

Price at Beg Value at Activity Quarterly Quarterly Current Portfolio Yield Current Annual
Company Ticker # of shares 3/31/2018 1/1/2018 Purchases (Sales) Unrealized G/L Realized G/L Value Weighting On Cost Yield Income
General Electric (GE) 339.124 $13.48 $8,826 ($2,644) ($1,611) ($1,079) $4,571 4% 2.1% 3.6% $163
Baker Hughes (BHGE) 25.00 27.77 791 - (97) - 694 1% 1.8% 2.4% 17
Honeywell (HON) 37.13 144.51 5,665 - (300) - 5,365 5% 2.7% 2.1% 111
Berkshire Hathaway (BRK.B) 9.00 199.48 - 1,805 (9) - 1,795 2% 0.0% 0.0% -
United Technologies (UTX) 17.09 125.82 - 2,119 31 - 2,150 2% 2.3% 2.2% 48
AT&T (T) 116.41 35.65 4,469 - (319) - 4,150 4% 7.6% 5.6% 233
Time Warner (TWX) 20.00 94.58 - 1,917 (26) - 1,892 2% 1.7% 1.7% 32
Verizon (VZ) 107.74 47.82 5,123 453 (424) 78 5,152 5% 5.0% 4.9% 254
Franklin Income (FKINX) 2519.76 2.29 5,922 - (151) - 5,770 5% 6.3% 5.2% 302
Walt Disney (DIS) 27.44 100.44 2,928 - (172) - 2,756 2% 2.4% 1.7% 46
Bank of America (BAC) 414.10 29.99 12,175 - 244 - 12,419 11% 3.1% 1.6% 199
Bank of America Warrants BACWSA 0.00 17.56 2,687 (2,813) 127 1,833 - 0% 0.0% 0.0% -
Citigroup (C) 49.42 67.50 3,662 - (326) - 3,336 3% 2.6% 1.9% 63
KeyCorp (KEY) 78.68 19.55 1,579 - (41) - 1,538 1% 3.8% 2.1% 33
DowDuPont (DWDP) 103.02 63.71 6,800 488 (724) - 6,563 6% 2.6% 2.4% 157
Synchrony Financial (SYF) 99.75 33.53 3,836 - (491) - 3,345 3% 2.6% 1.8% 60
Target (TGT) 9.29 69.43 602 - 43 - 645 1% 4.4% 3.6% 23
Kroger (KR) 113.53 23.94 3,106 - (388) - 2,718 2% 1.8% 2.1% 57
Johnson & Johnson (JNJ) 38.66 128.15 3,412 1,998 (456) - 4,954 4% 3.1% 2.6% 130
Amgen Inc. (AMGN) 8.23 170.48 1,057 154 192 21 1,403 1% 3.0% 3.1% 43
Pfizer (PFE) 135.59 35.49 4,866 - (54) - 4,812 4% 4.6% 3.8% 184
Merck (MRK) 19.14 54.47 957 112 (25) (1) 1,043 1% 3.5% 3.5% 37
Charles River Labs (CRL) 11.00 106.74 1,204 - (30) - 1,174 1% 0.0% 0.0% -
Cardinal Health (CAH) 6.12 62.68 372 - 11 - 384 0% 2.6% 3.0% 11
AIG warrants AIGWS 118.00 16.40 3,243 (1,466) 158 283 1,935 2% 0.0% 0.0%
Metlife (MET) 52.27 45.89 2,621 - (222) - 2,399 2% 4.8% 3.5% 84
Prudential Financial (PRU) 2.20 103.55 - 229 (1) (9) 228 0% 3.6% 3.5% 8
Brighthouse Financial (BHF) 4.00 51.40 235 - (29) - 206 0% 0.0% 0.0% -
Apple (AAPL) 17.52 167.78 2,606 344 (10) (17) 2,940 3% 2.4% 1.5% 44
Twitter (TWTR) 111.00 29.01 2,665 - 555 - 3,220 3% 0.0% 0.0% -
Cisco (CSCO) 146.60 42.89 5,578 - 709 - 6,288 5% 5.2% 3.1% 194
Intel (INTC) 76.06 52.08 3,491 - 470 - 3,961 3% 3.4% 2.3% 91
SoftBank (OTCPK:SFTBY) 12.00 37.39 - 499 (51) - 449 0% 0.0% 0.0% -
Cloudera (CLDR) 2.00 21.58 33 - 10 - 43 0% 0.0% 0.0% -
Accenture plc (ACN) 5.10 153.50 780 - 2 - 782 1% 2.4% 1.7% 14
General Motors (GM) 80.45 36.34 3,154 62 (293) 14 2,923 3% 4.7% 4.2% 122
Procter & Gamble (PG) 7.00 79.28 - 563 (8) - 555 0% 3.4% 3.5% 19
Alibaba (BABA) 1.00 183.54 172 - 11 - 184 0% 0.0% 0.0% -
Wabash National Corp. (WNC) 43.00 20.81 933 - (38) - 895 1% 1.6% 1.4% 13
Under Armour (UA) 104.00 14.35 1,212 154 126 - 1,492 1% 0.0% 0.0% -
Other -- -- -- 4,135 3,586 (483) (58) 7,239 6% 1.8% 1.9% 140
CASH -- -- -- 5 90 -- -- 96 0% -- -- --
-- -- -- -- -- -- -- -- -- -- -- -- --
$110,901 $7,650 ($4,088) $1,064 $114,463 100% 3.1% 2.6% $2,931
Industry/Portfolio Companies Value Portfolio Weighting Goal Weighting Over (Under)
Industrials/Conglomerates - GE, HON, BHI, WNC, BRK.B, SFTBY, UTX $15,920.08 14% 15% -1%
Healthcare - JNJ, PFE, AMGN, CAH, MRK, CRL 13,768.96 12% 10% 2%
Financials - BAC*, C, KEY 17,292.84 15% 15% 0%
Insurance - AIG*, MET, BHF, PRU 4,767.75 4% 5% -1%
Technology - AAPL, CSCO, INTC, ACN, CLDR 14,013.45 12% 15% -3%
Communication Services - T, VZ, DIS, TWTR, TWX 17,169.41 15% 15% 0%
Basic Materials - DWDP 6,563.28 6% 5% 1%
Conservative Allocation - FKINX 5,770.25 5% 5% 0%
Consumer - KR, GM, TGT, UA, BABA, PG, SYF** 11,861.95 10% 10% 0%
Other - XIN, RHE, KMG, FSI, MTZ, AVD, GPRE, TDOC, KTOS, TSLA 7,238.65 6% 5% 1%
Cash 95.90 0% 0% 0%

*AIG TARP warrants are included in value and weighting

**Direct consumer play - read articles on profile for more info

Sales & Purchases - There was an uptick in trading activity this past quarter because I started trading in-and-out of dividend-paying stocks in order to capture additional income.

See information below for details on how I am positioning the portfolio for the future.

Current Makeup Of Portfolio

Below is a graphic from Morningstar that captures a high-level snapshot of the R.I.P. portfolio as of the period end.

Source: Morningstar

Full Disclosure: The AIG Tarp warrants are not included in this Morningstar analysis.

I do not want to spend too much time here but there is one data point that should be highlighted: the holdings of the R.I.P. portfolio are attractively valued when compared to the S&P 500 on a price-to-prospective earnings basis but, in the same breath, the companies also have lower-than-average ROA and ROE ratios. The portfolio is highly levered to cyclical companies and, as expected, Large Cap value makes up almost 50% of the portfolio.

Portfolio Performance for Q1 2018 and since the portfolio was first introduced to SA community (December 4, 2015)

Return (Q1'18) Return (Intro) Return On Invested Capital (Review)
-3.6% 22.3% 34.0%
This period Since Intro Since Intro
Beg. Balance $110,901 $52,610 Initial Value $46,042
Contributions 7,650 45,115 Contributions 45,115
Unrealized G/L (4,088) 16,737 Realized G/L 4,173
Ending Balance $114,463 $114,463 Unrealized G/L 19,133
Portfolio Bal. $114,463
Dividend Inc. $839 $4,322
Realized G/L 1,064 4,173 Dividend Income $4,322

Full Disclosure: The American Association of Individual Investors, or AAii, prescribed calculation (The Beginning Vs. the End) was used for calculating the portfolio's return for each period-end.

The realized gains (losses) recognized for the quarter were: $2,135 gain in a retirement account and a $1,071 loss in a brokerage account.

From an income standpoint, the portfolio's annual dividend income has grown significantly since 2016 (portfolio was first introduced in December 2015).

Note: Q2-Q4 2018 and Full-year 2018 are projections.

The portfolio's dividend income was $839 for Q1 2018, which is slightly higher than the previous quarter ($726 in Q4 2017) but significantly higher YoY ($537 in Q1 2017). Furthermore, the portfolio's projected dividend income for 2018 is almost 50% higher than the income received in 2017, and this is even after factoring in General Electric's steep dividend cut. Lastly, it should be noted that I do not have a specific income goal for the portfolio, but I have purposefully focused on investing in high-quality dividend paying stocks since late-2015.

The recent performance of the portfolio through Q1 2018 is nothing to brag about (and that is putting it lightly), as the portfolio has officially fallen behind its benchmark for the first time since Q3 2016.

The portfolio's poor performance was largely a result of the overweight General Electric position blowing up in my face, a point that I will cover in more detail below, but the outperformance over the last two years was a direct result of the investments that were made in the Financial, Technology and Communication Services sectors (see the "Looking Ahead" section below for additional thoughts on the positioning of the portfolio):

During the most recent quarter, the top performers and underperformers for the portfolio were: Performers - [1] Cisco, [2] Twitter, and [3] Intel; Underperformers - [1] General Electric, [2] DowDuPont, and [3] Xinyuan.

I will now spend a few minutes talking about the top performer (Cisco) and underperformer (General Electric) over the last quarter, which are companies that make up 4% and 5%, respectively, of the invested assets. Let's start with the bad - that is, General Electric. This industrial conglomerate used to make up well over 15% of my portfolio and to put it bluntly, the investment blew up in my face. I learned two things from this experience: [i] no matter how much conviction you have in a stock/company, any one position should never make up too much of your portfolio and [ii] when you are wrong, you need to admit it and keep it moving.

The mistake of holding onto my overweight GE position for too long, especially when I saw the bearish story starting to play out, cost me dearly and made me really think about my risk parameters and capital allocation targets. This is actually the reason why I took some capital off of the table with Bank Of America and invested it elsewhere.

To this day, I believe that GE has enough good businesses that should allow for the current management team to eventually put the company in a position to turn things around. As such, I plan to hold onto my GE shares and ride out the storm.

Cisco, on the other hand, has been a company that only recently saw its stock price start to break out. This technology company will be a big beneficiary of the recent tax reform bill and management took no time rewarding the shareholders that have stayed the course (see "Noteworthy Quarterly News" section below).

Cisco is indeed a capital return story but the company has a lot more going for it than just dividends and buybacks. To this point, as I described in "CSCO: I'm Buying The Story", the company's transition to more of a recurring revenue model is already bearing fruit and, in my opinion, Cisco has several businesses that have great long-term prospects.

Noteworthy Quarterly News:

General News

[1] General Electric recently elected three new members to its board, with each of the members adding much needed expertise. GE brought in two people that have extensive experience restructuring large companies, in addition to adding an accounting expert. This should be welcomed news for a company that cannot seem to get out of its own way.

[2] The AT&T-Time Warner trial is officially underway and pundit predictions are all over the place. I personally do not think that the government has a good case but it is hard telling which way this trial may end up. However, in my opinion, the investment thesis for AT&T will play out whether or not the company is successful in acquiring Time Warner's assets.

Buybacks And/Or Dividend News:

[1] Intel increased its quarterly dividend by 10% (from $0.27 to $0.30), which makes the forward dividend yield 2.3% based on today's price.

[2] Cisco increased its quarterly dividend by 14% (from $0.29 to $0.33), which makes the forward dividend yield 2.9% based on today's price. In addition, the company increased its buyback program by $25B which brings the total authorization to $31B (no termination date was identified).

[3] Accenture increased its semi-annual dividend by 10% (from $ to $1.33), which makes the forward dividend yield 1.6% based on today's price.

Merger, Acquisitions and Disposals:

[1] In another attempt to streamline operations, General Electric announced that the company agreed to a deal to sell some overseas Lighting operations. The deal specifics were not announced but more details should be coming out sometime soon.

Looking Ahead - It's Not About Tomorrow, It's About 10 Years From Now

In a broader context, I have been (and will continue to) position the R.I.P. portfolio to capitalize on three major trends: [i] the digitalization megatrend, which includes autonomous cars and the Internet Of Things industry, [ii] a rising interest rate environment, and [iii] the changing media space, which includes how companies will be structured and how content will be consumed by/distributed to customers.

The following companies in my stock universe are the ones that I see being the biggest beneficiaries of these trends: [1] Digitalization - Cisco, Intel, Apple, Accenture, General Electric, Honeywell, GM, AT&T, and Verizon; [2] Rising Rates - Bank of America, Citigroup, KeyBank, AIG, PRU and MetLife; and, [3] Media Shift - Disney, Twitter, Time Warner, AT&T, and Verizon.

More recently, I have also been factoring in expectations for the business environment to improve over the next few years, as the current administration appears committed to creating a business-friendly environment. The widely anticipated tax reform bill passed in late-2017 and it significantly lowered the corporate tax rate, which will have a material impact on earnings. For example, analysts have already started to increase their S&P 500 EPS estimates for full-year 2018.

Source: FactSet Report, March 29, 2018

As shown, analysts have increased EPS estimates for the S&P 500 by 7.1% (to $157.77 from $147.24) over the first three months of 2018.

Additionally, I fully expect for the new administration to roll back some of the burdensome regulatory requirements, i.e., Dodd-Frank and SIFI, or at least limit new rules from being implemented, so the big banks and insurance companies will benefit from an improving backdrop.

For more details about this portfolio and how it is structured to benefit from tomorrow's economy, please consider joining the Going Long With W.G. subscription service.

Final Thoughts

I look forward to reading (and responding to) everyone's thoughts on this portfolio because I believe that the best investment advice is hearing opposing viewpoints and responding to constructive criticism. I try to contribute at least $1,000 per quarter to this portfolio, but sometimes it will be a little more or a little less. I will attempt to provide updates on at least a quarterly basis but I may miss a quarter or two over a 12-month span (I have not missed a quarter since late-2015 so hopefully this streak will continue in 2018).

For full disclosure, I plan to still write about these companies on a regular basis so stay tuned. And lastly, I always have these two quotes in mind whenever I make an investment decision:

Peter Lynch - "Behind every stock is a company. Find out what it's doing."

Warren Buffett - "Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant."

Disclosure: I am/we are long GE, BHGE, HON, BRK.B, UTX, T, TWX, VZ, FKINX, DIS, BAC, C, KEY, DWDP, SYF, TGT, KR, JNJ, AMGN, PFE, CRL, CAH, AIG, MET, PRU, BHF, XIN, AAPL, TWTR, CSCO, INTC, SFTBY, CLDR, ACN, GM, PG, BABA, RHE, KMG, WNC, UA, MTZ, FSI, GPRE, TDOC, AVD, KTOS, TSLA. 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 discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.