The Good Business Portfolio: 2018 1st Quarter Earnings And Performance Review

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Includes: BA, FCX, GE, HD, JNJ, LB, MO, OHI, PM
by: William Stamm

Summary

The portfolio of good company businesses is performing 1.02% lower than the DOW average year to date of negative 0.21%, for a total loss of 1.23%.

The 24 businesses comprise 99% of the portfolio with the other 1% in cash, and the average total return over the DOW average for the 52-month test period is 23.62%.

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 24 companies in the portfolio, earnings of 22 beat or were in line with their 1st quarter earnings estimates, and 2 missed the earnings estimate.

This article gives a review of the 2018 first-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 of 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 24 companies in the portfolio, so the portfolio does 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

-0.21%

-1.23%

-1.02%

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 1.02% total return below the DOW average loss of 0.21%, for a total portfolio loss of 1.23% which is not good, but this volatility will stop someday, and the company fundamentals will shine within the next seven months left in the year.

All 24 Companies In The Portfolio

The 24 companies and their percentage in the portfolio and total return over a 52-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 50.06%, and 16 of the positions easily beat that baseline. The other eight are 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. EOS, 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

50.06%

Company

Total Return

Difference

Percentage of Portfolio

53 Months

From Baseline

Cumulative Total Percentage of Portfolio

Boeing (BA)

177.25%

127.20%

13.94%

13.94%

Home Depot (HD)

143.32%

93.26%

9.74%

23.67%

Eaton Vance Enhanced Equity Income Fund II (EOS)

72.42%

22.36%

8.79%

32.46%

Johnson & Johnson (JNJ)

44.20%

-5.86%

7.49%

39.95%

Omega Health Inv. (OHI)

61.43%

11.37%

6.88%

46.83%

Walt Disney (DIS)

46.44%

-3.61%

5.93%

52.76%

Altria Group Inc. (MO)

73.94%

23.88%

5.83%

58.60%

Texas Instrument (TXN)

158.37%

108.32%

5.87%

64.47%

Automatic Data Processing (ADP)

97.53%

47.47%

5.67%

70.14%

McDonalds Corp. (MCD)

95.46%

45.40%

5.60%

75.73%

Philip Morris INTL INC. (PM)

9.73%

-40.33%

4.61%

80.34%

Ingersal-Rand plc (IR)

56.19%

6.14%

4.30%

84.65%

Digital Realty Trust (DLR)

147.14%

97.08%

2.96%

87.61%

General Electric (GE)

-21.56%

-71.62%

2.30%

89.91%

Spare

0.00%

89.91%

Hewlett Packard (HPQ)

205.31%

155.25%

1.52%

91.43%

Freeport McMoRan (FCX)

-44.06%

-94.12%

1.80%

93.23%

Mondelez (MDLZ)

59.63%

9.58%

1.22%

94.45%

3M (MMM)

55.15%

5.09%

1.36%

95.81%

Kraft Heinz Corp. (KHC)

48.51%

-1.55%

0.54%

96.34%

Amerisource Bergen (ABC)

27.71%

-22.34%

0.81%

97.16%

Danaher Corp. (DHR)

75.30%

25.25%

0.92%

98.08%

Pepsico Co. (PEP)

37.42%

-12.63%

0.46%

98.55%

Anerican Tower (AMT)

91.30%

41.24%

0.63%

99.18%

Arconic Inc. (ARNC)

**

**

0.52%

99.70%

** NA No long-term data

Average Above Dow

23.62%

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 DOW average did really well in 2017 and is marking time in 2018 but earnings are increasing and money is being returned to the shareholders.

Chart ^DJX data by YCharts

The above is the full list of my 24 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 24 portfolio companies did very well with a few laggards, 20 beat earnings estimates, two met estimates and two missed estimates a bit.

  • Boeing is the largest holding in the portfolio at 13.94%. 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 a bit behind Boeing's projected delivery estimate for the year. The first-quarter earnings (released 4/25/2018) were $3.64, beating the expected by $1.00 and higher than last year at $2.01, with revenue increasing 6.6% 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 4/17/18, Johnson & Johnson's earnings were above expected at $2.06 compared to last year at $1.83 and expected at $2.01. Revenue beat expected revenue by $30 million, with total revenue up at $20.01 billion or up 12.6% 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, but Mr. Market does not like JNJ right now. 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 (56 years of increases), JNJ is for you.
  • On 4/26/2018, Altria's earnings were $0.95, beating expected of $0.92 and compared to last year's $0.73. Hold and only sell when MO becomes too large a percentage of the portfolio. Revenue beat by $30M and e-cig will have to be watched to make up the difference in revenue going forward when the FDA approves it. Total revenue was $4.67 billion, up 1.7% year over year. Hold this defensive position for its 4.1% dividend and moderate growth. The stock is down in response to the poor recent performance of PM, which is not justified.
  • On 5/15/2018, Home Depot earnings were expected at $2.06 and came in at $2.08 and compared to last year at $1.67, a great quarter Y/Y. Revenue was up compared with expected by $270 million. Total revenue was $24.95 billion, up 4.4% Y/Y. Hold and only trim when HD becomes too large a percentage of the portfolio, which is now.
  • On 4/19/12018, Philip Morris's earnings were $1.00 compared to expected at $0.90 and last year at $0.98. Revenue missed by $100 million from the expected, with total revenue at $6.89 billion, up by 13.7% year over year. Hold for now and only trim 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 4.8% dividend and are in a defensive business with growth to come from smokeless products, which had weak growth this quarter but will go up when the FDA approves their smokeless products in the United States.
  • In the portfolio, only two companies are losing money over the 52-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. The sale of Rio Tinto's share in the Grasberg operation should help in meeting the requirement of the Indonesian Government. With copper just over $3.07/Lb., FCX is good speculation at the present price; the revenue should have increased by $800 million in this quarter because of the increase in copper price Y/Y. 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.
  • The Another problem company is General Electric; the portfolio is losing money and is behind the DOW over the test period of 52 months. On 4/20/2018, General Electric's earnings were at $0.16, compared to expected at $0.13 and last year at $0.21. Total revenue was $25.66 billion, up 6.6% year over year and beat expected revenue by $1440 million. They are reorganizing which should help if you are patient. 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 more time, I think there are no more cockroaches to come out of GE.

Recent Portfolio Changes

I was considering selling the small position in Kraft Heinz Corp. (KHC) that is 0.5% of the portfolio because of its bad performance, and I have better companies for investment. The last earnings showed growth, so I will wait another quarter to see if this continues.

  • On May 14th, I trimmed the position of Eaton Vance Enhanced Equity Income Fund II (EOS) from 9.2% of the portfolio to 8.9%. I still like EOS and don't want to overweight this fund which is high in technology companies.
  • On March 29 increased position of American Tower (AMT) to 0.8% of the portfolio, I will continue adding to this position as cash is available.
  • On March 29 sold entire position of L Brands (LB), it does not look good for the company going forward.
  • On March 23 increased position of Freeport-McMoRan (FCX) to 2.4% of the portfolio and will add to this position as cash is available.
  • On March 20 increased position of Freeport-McMoRan to 2.2% of the portfolio and will add to this position as cash is available.
  • On March 16 increased position of Digital Reality Trust (DLR) to 2.4% of the portfolio. I want to get this company to a full position of 4%.
  • On March 1 increased position in AMT to 0.9% of the portfolio and will continue to add when cash is available.

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 & Johnson 7.5% of the portfolio, Home Depot 9.77% of portfolio, Omega Health Investors 6.88% of the portfolio and Boeing is 13.94% of the portfolio, therefore BA and Home Depot are now in trim position with Johnson & Johnson and Omega Health Investors getting close.

Boeing is going to be pressed to 14% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter of 2017 saw deferred costs on the 787 go down $530 Million a big jump from the first quarter. The 787 deferred costs continue to go down each quarter increasing the cash flow which Boeing says will be returned to the shareholders via buybacks and dividends. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expected at $2.64. I can't bring myself to trim any more Boeing.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did not like it. JNJ has announced a dividend increase to $0.90/Qtr. which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure. Take this recent drop to pick up a great company in the medical products field.

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 24 companies presently in the portfolio, seven are underperforming the DOW average in total return. All seven 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 1.02% behind the DOW average YTD with increases in earnings expected in the second quarter for almost all of the portfolio companies. So with seven months to go the portfolio is slightly behind the DOW but not enough to worry about. I intend to continue writing separate comparison articles on individual companies. I have written articles on all of the companies in the portfolio and others, and you can read them in my list of previous articles if you are interested. If you would like me to do a review of a 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, GE, MMM, MCD, ADP, OHI, IR, MDLZ, TXN, FCX, HPQ, KHC, ABC, DHR, PEP, AMT, ARNC, 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.