The Good Business Portfolio: 2018 4th Quarter Earnings And Performance Review

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Includes: ADP, AMT, ARNC, BA, DHR, DIS, DLR, EOS, FCX, GE, HD, HPQ, IR, JNJ, LMT, MCD, MO, O, OHI, PEP, PM, SLP, TXN, V
by: William Stamm
Summary

The portfolio of good company businesses is performing 2.96% better than the DOW average year to date of 11.57%, for a portfolio total gain of 14.53%.

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 50-month test period is 19.54%.

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 21 beat or meet their 4 th quarter earnings estimates, and 3 missed the earnings estimate.

This article gives a review of the 2018 fourth-quarter earnings and 2019 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 are not rules. For a complete set of guidelines, please see my article, "The Good Business Portfolio: Update to Guidelines, August 2018". 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 all right 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 26 years, giving me steady retirement income and growth. The table below shows the portfolio performance for 2012 through 2018 and 2019 YTD.

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%

2,018

-5.63%

-4.33%

1.30%

2019 YTD

11.57%

14.53%

2.96%

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 ahead by 2.96% total return above the DOW average gain of 11.57%, for a total portfolio gain of 14.53% which is good with ten months to go in the year. The present volatility will stop someday, and the company fundamentals will continue to shine this year and years to come for the portfolio of good businesses.

Companies in the Portfolio

The 24 companies and their percentage in the portfolio and total return over a 50-month test (starting Jan. 1, 2015, to 2019 YTD) period is shown in the table below. This time frame was chosen since it included the great year of 2017 and other years that had fair and bad performance. The DOW baseline for this period is 45.02%, and 21 of the positions easily beat that baseline. The other three are companies that did not beat the DOW baseline are still 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, JNJ, and HD are now in trim position, and I am pushing BA up to 16% 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

45.02%

Company

Total Return

Difference

Percentage of Portfolio

Cumulative Total

50 Months

From Baseline

Percentage of Portfolio

Boeing (BA)

217.80%

172.77%

15.88%

15.88%

Home Depot (HD)

88.87%

43.84%

8.79%

24.67%

Johnson & Johnson (JNJ)

43.05%

-1.97%

8.03%

32.69%

Eaton Vance Enhanced Equity Income Fund II (EOS)

55.11%

10.09%

8.06%

40.75%

Omega Health Inv. (OHI)

7.23%

-37.79%

7.78%

48.53%

Walt Disney (DIS)

32.80%

-12.22%

6.34%

54.87%

Automatic Data Processing (ADP)

94.22%

49.20%

6.26%

61.13%

Mc Donald's Corp. (MCD)

113.96%

68.94%

6.00%

67.13%

Altria Group Inc. (MO)

24.55%

-20.47%

5.10%

72.22%

Texas Instrument (TXN)

117.61%

72.59%

5.25%

77.47%

Philip Morris INTL INC. (PM)

25.59%

-19.44%

4.71%

82.18%

Ingersoll-Rand plc (IR)

76.53%

31.50%

4.77%

86.95%

Digital Realty Trust (DLR)

90.13%

45.11%

3.43%

90.38%

General Electric (GE)

-50.05%

-95.07%

1.56%

91.95%

Hewlett Packard (HPQ)

12.04%

-32.98%

1.26%

93.21%

Freeport McMoRan (FCX)

-34.74%

-79.77%

1.27%

94.47%

Spare

0.00%

94.47%

Realty Investors (O)

93.48%

48.46%

0.51%

94.98%

Lockheed Martin (LMT)

129.13%

84.10%

0.66%

95.64%

Simulation Plus (SLP)

**

**

0.36%

96.00%

Visa (V)

82.41%

37.39%

0.32%

96.32%

Danaher Corp. (DHR)

97.56%

52.53%

1.09%

97.42%

PepsiCo Co. (PEP)

35.32%

-9.70%

0.51%

97.92%

American Tower (AMT)

87.28%

42.26%

0.76%

98.69%

Arconic Inc. (ARNC)

**

**

0.51%

99.19%

** NA No long term data

Average Above

19.54%

DOW

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). GE has some great products, but the misleading accounting of the past is now taking its toll. GE will be good over time, but the new management (Mr. Culp) needs time, about a year more to see the gains from the reorganization of GE's companies. He has already reduced the debt by $21 Billion with the deal with Danaher Corp, completed in February 2019.

The graphic below shows the Dow average/100 (DIA) for the past five years, a fair chart with nice gains as the United States economy is growing again with better-increasing growth.

Chart Data by

YCharts

The above is the full list of my 24 Good Businesses positions. 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 well with 18 beating earnings estimates, 3 matching estimates and 3 below estimates. GE, FCX and SLP missed estimates. GE has much-hidden value, and at the present price, it's a buy for the deep value investor. FCX is a pure copper play and will go up when the China trade deal in concluded. SLP is in the right business of developing tools that will speed up testing of new drugs.

Boeing is the largest holding in the portfolio at 15.88%. Boeing is being pressed to 16% of the portfolio before trimming because of it being cash positive on 787 deferred plane costs at $772 million reported in the fourth-quarter earnings in January 2019, an increase from the third quarter. S&P CFRA has a one-year target of $500. 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. Earnings and cash flow are strong and increasing. The fourth-quarter earnings (released 1/30/2019) were $5.48, beating the expected by $0.91 and higher than last year of $3.06, with revenue increasing 14.3% year over year, another great report. I am getting greedy with Boeing and have let it get to 16% of the portfolio, where I trimmed last week to keep it under 16% of the portfolio.

On 1/22/19, Johnson & Johnson's earnings were above expected at $1.97 compared to last year at $1.74 and expected at $1.95. Revenue beat expected revenue by $190 million, with total revenue up at $20.93 billion or up 0.9% 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 (56 years of increases), JNJ is for you.

On 1/25/2019, Altria's earnings were $0.95, meeting expected and compared to last year's $0.91. Hold and only sell when MO becomes too large a percentage of the portfolio. Revenue missed by $20M 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 $4.79 billion, up 1.7% year over year. Hold this defensive position for its 6.1% dividend and moderate growth.

On 2/13/2019, Home Depot earnings were expected at $2.16 and came in at $2.25 and compared to last year at $1.69, a great quarter Y/Y. Revenue missed compared with expected by $90 million. Total revenue was $26.49 billion, up 10.9% Y/Y. Hold and only trim when HD becomes too large a percentage of the portfolio, which is now. This was a good report.

On 2/7/12019, Philip Morris's earnings were $1.25 compared to expected of $1.17 and last year at $1.32. Revenue missed by $110 million from the expected, with total revenue at $7.5 billion, down by 9.5% 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 good earnings. They pay a 5.2% 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, two companies are losing money over the 50-month test period - Freeport-McMoRan and General Electric.

FCX cash flow has recovered well and should be able to have a positive cash flow each year even with the present lower price of copper. Copper demand is increasing each year with little new supply on the horizon. 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 when the trade wars stop. FCX has closed the final long-term deal to export copper concentrate with the Indonesian Government. With copper at about $2.98/Lb., FCX is a good speculation at the present 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. FCX has a strong cash flow even at these reduced copper prices and may actually be able to increase the dividend next year.

The other problem company is General Electric; the portfolio position is losing money and is behind the DOW over the test period of 50 months. On 1/31/2019, General Electric's earnings were at $0.17, compared to expected at $0.22 and last year at $0.27. Total revenue was $33.3 billion, up 5.4% year over year and revenue beat expected by $1.07 Billion. 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 another 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, he is acting and more deals to reduce debt are on the way. The DHR deal reduced debt by $21 Billion a good step in the right direction, and he is also cutting personnel to get the earnings growing again.

Recent Portfolio Changes

I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio so I can invest in good companies on my buy list.

  • On February 28 trimmed position of Boeing from 16.1% of the portfolio to 15.8%. I love Boeing, but you have to have diversification.
  • On February 2 increased position of Realty Income Corp. (O) to 0.7% of the portfolio, I could use a bit more steady monthly income.
  • On January 30 increased the position of Simulations Plus (SLP) from 0.2% of the portfolio to 0.4%. I think their product may be the product of the future for drug testing.
  • On January 28 Bought a starter position of Realty Income Corp., I could use a bit more steady income and hope to add to this holding in the future. Realty Income Corp. is now 0.4% of the portfolio.
  • On January 28 sold the remaining portion of Mondelez (MDLZ). The forward growth does not look good enough.
  • On January 24 increased the position of Digital Reality Investors (DLR) from 3.1% of the portfolio to 3.6%. I want to get DLR up to a full position of 4%.
  • On January 16 sold the remaining shares of 3M (MMM). I decided to sell this small position in order to reduce the number of positions with a new target number of 20 positions max from 25.
  • On January 11 started a new position in Lockheed at 0.65% of the portfolio.
  • On January 9 trimmed Mondelez from 1.32% of the portfolio to 0.64%. The growth rate looks low going forward, and the portfolio is looking at Lockheed as a replacement.
  • On November 19 the portfolio trimmed 3M from 1.4% of the portfolio to 0.92%. The last earnings report was fair but and the next year does show the growth that is wanted. I was going to sell this small position, but the recent market volatility makes me want to hold this defensive income position.
  • On October 10 trimmed Home Depot (HD) from 10.1% of the portfolio to 9.6%. I love HD but don't want it to get above 10% of the portfolio.
  • On October 10 the portfolio added a starter position of VISA (V) at 0.4% of the portfolio.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in the portfolio are, Johnson & Johnson is 8.0% of the portfolio, Eaton Vance Enhanced Equity Income Fund II is 8.1% of the portfolio, Home Depot is 8.8% of the portfolio and Boeing is 15.88% of the portfolio. Therefore BA, EOS, JNJ, and Home Depot are now in trim position, but I am letting them run a bit since they are great companies.

Boeing is going to be pressed to 16% 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 first quarter earnings for 2018 were unbelievable at $3.64 compared too expected at $2.64. Farnborough Air Show sales in dollar value just beat out Air-Bus by about $6 Billion, and both companies had a great number of orders. Boeing received an order for 18 more KC-46A planes. The second quarter 2018 earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write off expense on the KC-46 which has started delivery in 2019. Two KC-46A tankers were delivered in January 2019. As a result of the good fourth-quarter earnings, S&P CFRA raised the one-year price target to $500 for a possible 20% upside potential.

JNJ will be pressed to 9% of the portfolio because of its defensive nature in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did nothing. JNJ has an estimated dividend increase to $0.97/Qtr. in April 2019, which will be 57 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.

Conclusion

The 11 guidelines referenced 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 in the portfolio, seven are underperforming the DOW average in total return by more than 10%. 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 2.96% ahead of the DOW average YTD with increases in earnings expected in the first quarter for almost all of the portfolio companies. 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, MCD, ADP, OHI, IR, TXN, FCX, HPQ, DHR, PEP, AMT, ARNC, DLR, V, SLP, LMT, O. 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.