The Acquirer's Portfolio - Large Cap Q2 Update

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Includes: FCAU, LPX, MU, TARO, TECK, TX, VALE, VIAB, VIVAX
by: Ryan Boselo
Summary

The Acquirer’s Multiple Large Cap Portfolio (AMLC) returns 9.18% during the 6 months ending 5/4/18.

AMLC outperformed its benchmark, VIVAX, and the S&P 500 by 7.80% and 6.35%, respectively.

The portfolio has a Beta of 1.12, a forward dividend yield of 1.50%, and an average P/E of 14.67.

In early November 2017, I wrote an article on Seeking Alpha summarizing Tobias Carlisle’s Acquirer’s Multiple portfolio strategies. My intention was to test whether this strategy was viable for retail investors seeking a concentrated approach to value investing. Based on the portfolio’s performance over the first 6 months, I am sticking with my opinion that the Acquirer’s Multiple screens provide a deep value investor with the opportunity to earn outsized returns while limiting downside risk.

As a recap of my previous article, the Acquirer's Multiple utilizes a value approach to investing that is similar to Joel Greenblatt's - but inverted. In essence, the screen highlights companies that are deeply undervalued compared to their operating earnings and its calculation is as follows:

Enterprise Value / Operating Earnings.
The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up."(2)

This is a “set it and forget it for one-year" strategy that will be rebalanced every year around the date of initial purchase. The performance of the individual equities in the portfolio will dictate when to buy, sell, or hold a position.

The portfolio was funded with a $100k bankroll on 11/6/17, and the funds were dispersed evenly across the top 20 large-cap names listed on the stock screener available at acquirersmultiple.com. Moving forward, the allocation and number of equities in the portfolio may vary. However, the portfolio will likely never be more concentrated than 10 positions.

The objective of this portfolio is to outperform the Vanguard Value Index Fund (VIVAX) by a low single-digit percentage. For comparison's sake, VIVAX has returned 9.34% per year over the past 15 years. Based on AMLC’s 7.80% outperformance during its first 6 months, I expect some reversion to occur during the second half of 2018.

As of 5/4/18, the initial $100k was worth $109,182 (after trading costs), up 9.18%. If I had invested in VIVAX over that period, I would be up only 1.38%, and the portfolio would be worth approximately $8k less, or $101,382. Alternatively, if I chose to invest in the S&P 500 over that period, I would have fared slightly better than VIVAX, up 2.83%, or $102,830.

Last 6 Months

Value of $100K invested on 11/6/17

Acquirer's Multiple - Large Cap.

9.18%

$109,182

Vanguard Value Index Fund - VIVAX

1.38%

$101,382

S&P 500

2.83%

$102,830

The AMLC portfolio has paid out dividends totaling $764.49 over the past 6 months and has a forward dividend yield of 1.50%, or $1,634.61 paid annually. I have decided to hold the dividends in cash until it is time to reallocate the funds at the end of the year.

As you can see from the prior 6 months' returns, the AMLC portfolio is doing quite well - even outperforming my initial expectations! While this may be great news, this strategy only makes sense if you plan to follow it for at least 10 years (the longer the better), and focusing on short-term performance does more harm than good. This is the main reason why I plan on only providing updates 2-4 times per year.

Portfolio Gainers

There have been some interesting movers and shakers in the portfolio that I would like to highlight. Let’s look at the biggest gainers from the previous 6 months.

Company

6-month return

Ternium SA

37.34%

Vale SA

33.71%

Fiat Chrysler Automobiles

26.42%

Viacom Inc.

25.27%

Teck Resources Limited

20.46%

Ternium S.A. ADR (TX)

Sector: Basic Materials > Industry: Iron, Steel Mills & Foundries

Much of the gain attributed to TX over the past 12-18 months has been from a better-than-expected steel market. This, in combination with TX’s strong fundamentals, has boosted its stock price over 37% during the past 6 months and is currently the portfolio’s biggest gainer.

Vale S.A. ADR (VALE)

Sector: Basic Materials > Industry: Iron Ore Mining

Vale S.A. is a global producer of iron ore, key raw materials for steelmaking, and producer of nickel, which is used to produce stainless steel and metal alloys. Over the past two quarters, Vale has benefited from an improved sales mix of Ferrous Minerals and Base Metals, and the company stated in its Q1 slide earnings call that record sales volume for a first quarter is attributed to the flexibility of Vale’s supply chain. Vale is up 33.71% over the previous 6 months with a consensus analyst estimate of $15.62.

Fiat Chrysler Automobiles N.V. (FCAU)

Industry: Auto & Truck Manufacturing

Fiat Chrysler Automobiles is an automotive company engaged in designing, engineering, manufacturing, distributing and selling vehicles, components, and production systems. The company is currently shifting its focus to higher-margin SUVs and is loosening its focus on fleet sales. Additionally, the company is planning on a spin-off of its parts business which will lead to a net positive for its stock price. FCAU is up 26.42% over the past 6 months and will likely continue to outperform.

Viacom Inc. CI B (VIAB)

Sector: Cyclical Consumer Goods & Services > Industry: Entertainment Production

Viacom Inc. offers global media brands that create television programs, motion pictures, short-form content, applications, games, consumer products, social media experiences and other entertainment content in more than 180 countries. Led by its strong TV networks (BET and MTV) and revitalized film segment (Paramount Pictures), Viacom is poised to continue to deliver strong fundamentals. VIAB is up more than 25% over the previous 6 months.

Teck Resources Ltd. CI B (TECK)

Sector: Basic Materials > Industry: Integrated Mining

Teck Resources Limited is engaged in the business of exploring, acquiring, developing, and producing natural resources. The company operates through five segments: steelmaking coal, copper, zinc, energy, and corporate. In addition, the company explores for copper, zinc, and gold. As noted in the Q1 conference call, prices for these key commodities remain strong which have continued to serve as a tailwind for the stock price. TECK is up more than 20% over the past 6 months.

Additional Companies

There have been a few interesting companies that have appeared in the Large Cap. Screen over the past 6 months that I would like to discuss in a little more detail. I am currently only using the Acquirer’s Multiple screens as a quantitative filter, and I do not plan on investing in any of these companies before the end of the year. However, all three are showing signs of being compelling value investing opportunities.

Micron Technology Inc. (MU)

Sector: Technology > Industry: Semiconductor – Memory Chips

Micron Technology, Inc. is engaged in semiconductor systems. The company’s portfolio of memory technologies includes dynamic random-access memory (DRAM), (NAND) Flash, and NOR Flash solid-state drives, modules, multi-chip packages and other system solutions. The company's memory solutions enable computing, consumer, enterprise storage, networking, mobile, embedded, and automotive applications. The company markets its products through internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers (OEMs) and retailers located around the world.(1) Micron Technology Inc.’s stock price is up 65.15% over the past year.

Taro Pharmaceutical Industries Ltd. (TARO)

Sector: Healthcare > Industry: Drug Related Products

Taro Pharmaceutical Industries Ltd. develops, manufactures, and markets prescription (Rx) and over-the-counter (OTC) pharmaceutical products, primarily in the United States, Canada, and Israel. Taro also develops and manufactures active pharmaceutical ingredients (APIs), primarily for use in its finished dosage form products. The company's primary areas of focus include semi-solids formulations, such as creams and ointments, and other dosage forms, such as liquids, capsules, and tablets, primarily in the dermatological and topical, cardiovascular, neuropsychiatric and anti-inflammatory therapeutic categories.(1) TARO’s stock price is down 7.24% over the past year.

Louisiana-Pacific Corporation (LPX)

Sector: Industrial Goods > Industry: Lumber, Wood Production

Louisiana-Pacific Corporation is a manufacturer of building products. The Company operates in four segments, which include North America Oriented Strand Board, Siding, and Engineered Wood Products. Its other products category includes its remaining timber and timberlands, and other minor products, services and closed operations. The company operates in the United States, Canada, Chile, and Brazil. It also markets and sells its products in light industrial and commercial construction. Its customers include wholesale distribution companies, two-step distributors, building materials professional dealers, retail home centers and shed producers.(1) LPX’s stock price is up 18.59% over the past year.

Conclusion

The Acquirer’s Multiple portfolio screens provide a deep value investor with the opportunity to earn outsized returns while limiting downside risk due to the asymmetric return profiles of the underlying securities and the assumption that equities mean revert.

For more information on the portfolio and to stay up to date with my posts, consider subscribing to my feed.

If you have any questions on the Acquirer’s Multiple screens, please refer to Tobias’ FAQ section. If you are interested in investing in this strategy I recommend looking up acquirersmultiple.com to learn more.

Data

Acquirer_s_Portfolio_Analysis.xlsx

Work Cited

Reuters.com

Acquirersmultiple.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.