My objective as an investor (like many others) is to beat one of the market index benchmarks over time. If I can't achieve that, I may as well just buy the index. To be included in my market-beating portfolio, a company has to pass several tests:
1) They must have a product or service that will be in demand in the future.
2) They must have a demonstrated history of success (revenue growth, margin improvement) and be on solid financial footing today (i.e., a manageable debt load and strong cash flow generation).
3) I must be able to purchase their stock for a reasonable price.
If I can verify each of these things, I then look at how that company deploys their free cash flow to enrich their shareholders. After all, not all great businesses make great investments. To be a great investment, money must be returned to shareholders. Companies can enrich shareholders by:
A) Paying dividends
B) Buying back stock
C) Paying down debt
D) Making acquisitions
It's best when the company does all these things, but it's not a deal breaker if they don't do all at the same time. It's also certainly possible that a company that initially met my expectations breaks down in one of these regards, which in some cases leads me to reduce or liquidate my position.
Now that I have been publishing on SA for over a year, I thought now would be an appropriate time to test my portfolio against my chosen benchmark, the S&P 500. Because I don't typically bandy recommendations about with a “buy,” “STRONG BUY,” or “EVEN BATMAN WOULD OWN THIS” for the stocks I write about, I had to select simple, equal, and objective criteria for how I would measure my results. The criteria are as follows:
If my article is substantially about a given stock, promotes it as an attractive investment, and a long position is stated, then a $1000 position is assumed to be entered into on date of publish (average between high and low price on that day).
Any future articles published on the same stock where I openly suggest the buy thesis remaining intact at then current trading levels, $500 is added to the position on date of publish.
If later on my investment thesis changes and I published an article that brought up concerns about a given company then the position is reduced by half. Once my stated long position is absent, that means the position was liquidated, all actions happening on date of publish (average between high and low price).
I chose these criteria to reflect what your results could be had you taken action according to my published research.
The table below shows my total return results, measured against the S&P, using a dollar cost averaging strategy.
|Bought:||Added To:||Reduced/sold:|| |
|Dividends||Total Return $/%|
|American Outdoor Brands Company (NASDAQ:AOBC)|| |
7/30/17 $20.60; 8/02/17 $20.99
|Peoples Utah Bancorp (NASDAQ:PUB)|| |
|Carter's, Inc. (NYSE:CRI)|| |
|First Solar (NASDAQ:FSLR)|| |
|Tyson (NYSE:TSN)|| |
|Hormel (NYSE:HRL)|| |
|TJX Maxx Companies (NYSE:TJX)|| |
|Ventas (NYSE:VTR)|| |
|Welltower (NYSE:WELL)|| |
|Medical Properties Trust (NYSE:MPW)|| |
|National Health Investors (NYSE:NHI)|| |
|Physicians Realty Trust (NYSE:DOC)|| |
|Ross Stores (NASDAQ:ROST)|| |
|AAON, Inc. (NASDAQ:AAON)|| |
|S&P (SPY)|| |
($1,000 a month)
Kevin Mackie SA portfolio total return: 15.52%
S&P total return: 8.23%
The S&P 500 return is based on the SPY ETF. I used this calculator. I started with an initial investment of $1000 into SPY on Feb. 2017 to match the start date of my portfolio. Then, I used a simple dollar cost average input with $1000 added to the investment every month thereafter through this month (June 2018). This closely approximates my activity of buying, as can be seen from the table.
Clearly, my returns are far superior, and this in spite of the fact that the calculator for the SPY ETF reinvests dividends, whereas I did not roll my dividends or the proceeds from the sale of AOBC into future investments, thus forfeiting any compounding power. Therefore, I had $1059 plus incremental dividends sitting in cash in my portfolio for much of the period under observation (my sold position in AOBC).
Now, in the spirit of full transparency, my actual results in my personal portfolio are not as good as the returns from my SA portfolio. The lesson here is that I should adopt the simple methodology that was in play for this comparison. My biggest errors were:
In my personal portfolio, I sold out of some positions too early and missed out on decent gains (I exited FSLR at about $42). Buy and hold is a powerful concept.
I have a position in some stocks that I have not written an article about, and they have been big losers. The lesson here is that I should only ever buy a stock that I haven't formed a durable enough investment thesis concerning, and done due diligence to the extent of having my research published on an investment website. If I don't know a stock well enough to write about it and have it approved for publishing by editors that probably know a lot more about stocks than I do, I shouldn't buy. For me, I have really taken it on the nose with KR, GILD, and VWO.
I should equal weight my portfolio, at least when initially outlaying the cash. While I might be smart enough to pick mostly winning stocks, I am not smart enough to know among those winners who will win the most. One of my largest positions is in VTR, which as can be seen in the table is one of my laggards. On the other side, one of my smallest positions is in PUB, which is far and away the best investment decision I have ever made. I can trust myself and my processes enough to have confidence in my selections, but what I cannot trust is my capacity to know at the outset which one to weight most heavily. Equal weight for me is wise, at least when making an initial investment. However, I am finding that I do have good judgement when it comes down to adding to a position that has retraced. My returns in the table above were juiced by adding to PUB, CRI, and TJX. In real life, I did actually add to those positions. My average cost was brought up, but I was confident that the position was worthy to add to as more information was gathered over time and my investment thesis strengthened. The exception here was TSN, which I have added to but the stock hasn't resurged. But I added to it relatively recently, and I have conviction that TSN is going to go back up within the next few months. I am not worried about the short term loss.
My plan going forward is to simplify my processes to match the methodology used here. To briefly summarize, that means that I: 1) buy and hold 2) don't buy a stock that I don't know well enough and have enough conviction in to write an article about and 3) equal weight my initial investments and let time teach me which positions to add to.
American Outdoor Brands Company: I initially bought AOBC because their return ratios were stellar and the revenue and net income growth over a ten-year period was really good. They sell guns and because I have a unique look into how ingrained guns are in American life (I am in the army, my brother is a police officer, and my brother-in-law is a corrections officer), I thought that the underlying economics of the business were sound. The fact that the share price had retreated substantially off of all-time highs appealed to my value leanings.
They also have been reducing shares outstanding respectably since 2013. However, after taking a long hard look under the hood at their inventory piling up and potential margin contraction due to heavy rebate activity, I exited the position. The stock went from $20 to now trade around $12. There is A LOT to learn from what has happened to AOBC recently. It is an incredible case study of what to do when you see inventory going up sharply even though the business appears to be humming along just fine. Please read my articles on AOBC in sequence to see how the story plays out.
Peoples Utah Bancorp: PUB is a community bank holding company centered in Utah. I am a customer of PUB and my mother works there. Being therefore well acquainted with their business culture and growth, I decided to enter a position. They have performed phenomenally since then. They continue to beat expectations. Both organic growth and acquisition activity is strong, on the back of superb loan underwriting.
Their net interest, which is the spread between what they pay on deposits and what they make on loans, was 4.76% in 2017, which is the highest I have seen at a bank. (Zions bank (ZION) and Wells Fargo (WFC) are at 3.45% and 2.87% respectively, for comparison).
Every time I think they are getting over-valued the stock price shoots up again. By all backward looking metrics, they are indeed over-valued. But the growth runway is long and strong for them, blurring the line of over-valuation using forward looking criteria. PUB is thinly covered on SA (I am the only one that has written about them). It flies under the radar, which has helped it stay immune from larger movements in the financial sector.
Carter's, Inc.: CRI makes and sells baby clothes all over the world. I bought them because the economics of their product are super stable: babies need clothes. They are the biggest and most popular baby apparel company in the world. The financials are great with low debt, high return ratios, a history of strong growth, and well-laid plans for the future. Dividend growth has been great, and I trust their capital deployment as they buy back stock opportunistically and invest in growing markets. Please read my series of articles on Carter's.
First Solar: I bought first solar because I was convinced of the economics of green energy and I liked that they had such low leverage when compared to peers. They had been operating profitably for quite a while, which also made them stand out against competitors. They also differentiate themselves by producing solar panels made from CdTe technology instead of silicon (c-Si) like everyone else. That technology has benefits that gives them an edge in certain scenarios. See my article for more on that.
They also were trading super cheap, and a recovery felt imminent once sector headwinds subsided. While First Solar has done little to directly return cash to shareholders (no buybacks or dividend), I made an exception for the special situation.
Tyson: I invested in Tyson because they were undervalued by all traditional metrics. They sell chicken, pork, and beef products, which sets them apart from their competitors like Sanderson Farms (NASDAQ:SAFM) or Pilgrim's Pride (NYSE:PPC) who only sell chicken. This insulates them from some commodity risk. They also sell more value added products than peers, which stabilize margins and makes them trade a bit less like a commodity business.
Tyson has retreated considerably off all-time highs way up at $86 back down to the low $70's. Their dividend growth history and future looks very promising. In a few decades, Tyson is going to have the same scale as General Mills (GIS) and or Kraft (KHC). See my series here for why I am confident in Tyson.
Hormel: I was drawn to HRL due to their dividend King status. This means that they have paid an dividend that has grown every year for 50 years. The fact that they have done this without the yield nary going north of 3% or the payout ratio going above 50% in the past decade is near miraculous. You might think that this means they have only raised the dividend by tiny bits every year, but you would be wrong. The dividend has grown at a compound annual rate of 15% over the past decade.
I was fortunate enough to grab shares around $31, and trading now ~$36 the value gap has closed some. They continue to face headwinds that has caused some to say things like 'This isn't your grandfather's Hormel'. Well, I think that is a good thing. I don't want them to stay stodgy and be my grandfathers Hormel.
I want them to adapt with the times. That means growing pains. Such is the current state. But I think HRL will get through the recent slow-down in growth and be just fine. They are making decent acquisitions and doing so without going into severe debt or issuing new equity. Read here for a more thorough breakdown of their business segments and future potential.
TJX Maxx Companies: TJX operates off-price retail stores that sells a huge variety of goods. They have a great business model of buying surplus inventory off of high quality merchandisers and then selling those wares in a 'treasure hunt' experience. They have a strong domestic presence and a growing international presence, to include Europe and Australia. Their dividend growth has been awesome, payout ratio stays low, they routinely buyback stock, and management is excited about the future.
When I first bought them and when I added to the position, they were a lot cheaper than where they trade now. They keep cracking out all times highs. While that may mean no margin of safety today, I think a decade down the road an investment in TJX will be fine. Read these two articles to get to know TJX better.
Ventas: Ventas is an owner/operator of senior care properties to include senior living centers, medical office buildings, life science centers, and the like. I bought them because of the anticipated demographic wave of aging baby boomers, and VTR has their hands in the entire spectrum of senior care and has a well diversified portfolio. My opinion about those demographics has tempered considerably, as has my opinion of VTR in general. But I hang on because of the strong yield and the cost of capital advantage VTR has to accumulate more properties in an industry that is still highly fragmented.
Welltower: WELL is also involved in the ownership and operation of senior care properties. Their portfolio is less diverse than VTR, but I think the quality of their holdings is better than VTR as demonstrated objectively by the operating results of their respective RIDEA assets. Click here to learn more about RIDEA if you don't yet know much about it. WELL has a strong history of measured growth and good returns to shareholders. The yield is strong.
Medical Properties Trust: MPW owns hospitals in the US and Europe under triple-net leases. I bought them because WELL and VTR don't have much exposure to hospitals, so I wanted to round out my healthcare holdings. Their yield was also north of 7%, which had considerable appeal.
National Health Investors: This is my favorite healthcare REIT. Their G&A expenses are FAR below their peers, and they have been able to acquire properties with very high returns without issuing tons of new equity like VTR and WELL does. I think they are brilliantly managed and do more with less resources. Unlike VTR and WELL, they have chosen not to dip their toe into RIDEA, which I think is smart. They have triple-net leases only.
Physicians Realty Trust: I bought DOC because their occupancy was outstanding and I think the properties they are acquiring will benefit most from an aging population. They focus on medical office buildings which do outpatient care only. Outpatient care is the future of healthcare. As technology improves, there is much less need to admit people for treatment.
All indicators are showing a movement towards outpatient care, and DOC is poised to benefit strongly. DOC is tied with WELL for my second favorite healthcare REIT. Please click this link to access an article that discusses my entire healthcare portfolio. This article is my most viewed to date, and I feel has a lot of relevant information.
Ross Stores: Ross Stores are basically the exact same business model as TJX. The biggest difference is that ROST tends to offer more clothes than TJX, and they also don't spend as much maintaining their properties. This is good because it is cheaper, but bad because their stores aren't as clean and up to date as TJX stores. Other than that, they also sell off-price merchandise.
I bought them when their share price went down after giving full year 2018 guidance that the street wasn't blown away by. They have since recovered, giving me a nice quick gain. They are a quality company with ambitious plans to grow store count. That coupled with a nicely growing dividend and buybacks make for a great investment. Check out this article for more detail.
AAON: AAON is my most recent purchase. They engineer, manufacture, and sell high quality heating, ventilation, air conditioning, and refrigeration systems. They focus on custom work instead of mass production like all their peers. Shares have gone way down recently as AAON has run into margin trouble, but all the things that are dragging on margins are temporary issues that have little to do with the fundamentals of the business. Outside factors are reducing profitability.
Once those factors go away (which may take until 2019), the share price will perk up. They have had a nicely growing dividend and recently announced a share buyback program. This is a David and Goliath stock. AAON is tiny compared to peers like Lennox (LII), Carrier, and Trane. Yet, they are slowly growing market share and serve a niche that no one else really touches: semi-custom and custom work using the very best technology and materials. Here are a couple articles talking about both AAON and their direct peers.
I hope you have both enjoyed and learned something from this introspection and comparison. It was both educational and encouraging to me. While I am thrilled to know that I can beat the market by picking superior stocks, it will take vigilance and discipline to bring my actual portfolio in line with my SA portfolio. I am confident in my methodology, following the seven factors mentioned at the beginning of the article. I will also add that I have become far more selective over time.
I realize that there are literally thousands of publicly traded companies. Like Warren Buffett says, there are no called strikes. I can wait for a company to pop up that strictly fits my investment criteria. That being said, if you are aware of any companies that fit my criteria, please let me know!! It was from comments on one of my other articles that I was made aware of TJX and ROST.
Those have been hugely lucrative for me. Finally, I know that a single year isn't enough of a stretch to start boasting about my abilities. I need at least 5 years of outperformance to prove myself. But so far I am happy with both what I have achieved and learned, and what possibilities are open to me. Join me a year from now to see how I compare to the S&P after 2 years.
Disclosure: I am/we are long CRI.
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.