The Good Business Portfolio: Q1 2019 Earnings And Performance Review

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Includes: AA, 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 5.15% better than the Dow average year to date of 10.45%, for a portfolio total gain of 15.60%.

The 22 businesses comprise 99% of the portfolio, with the other 1% in cash, and the average total return over the Dow average for the 53-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 22 companies in the portfolio, earnings of 18 beat or meet their first-quarter earnings estimates, and 3 missed the earnings estimate.

This article gives a review of the 2019 first-quarter earnings and 2019 YTD performance of The Good Business Portfolio (My IRA portfolio). So far this year is a good one, even with Boeing (BA) having a temporary dip, which is the portfolio's largest position. 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 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 22 companies in the portfolio, so it does have open slots.

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

10.45%

15.60%

5.15%

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 5.15% total return above the Dow average gain of 10.45%, for a total portfolio gain of 15.60%, which is good with seven months to go in the year and the Boeing recovery yet to begin. The present volatility because of the trade conflicts will stop someday, and the company fundamentals will continue to shine this year and for years to come for the portfolio of good businesses.

Companies in the Portfolio

The 22 companies and their percentage in the portfolio and total return over a 53-month test (starting January 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 a fair and bad performance. The Dow baseline for this period is 43.56%, and 17 of the positions easily beat that baseline. The other five are companies that did not beat the Dow baseline but 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. The five companies in trim position are Johnson & Johnson (JNJ) at 8.1% of the portfolio, Eaton Vance Enhanced Equity Income Fund II (EOS) at 7.9% of the portfolio, Home Depot (HD) at 9.2% of the portfolio, Omega Health Investors (OHI) at 8.5% of the portfolio and Boeing at 12.9% of the portfolio. Therefore BA, EOS, JNJ, OHI, and Home Depot are now in trim position, but I am letting them run a bit, since they are great companies. 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%, and then it's time to trim.

Dow Baseline

43.56%

Company

Total Return

Difference

Percentage of Portfolio

Cumulative Total

53 Months

From Baseline

Percentage of Portfolio

Boeing (BA)

159.66%

116.09%

12.90%

12.90%

Home Depot (HD)

96.54%

52.97%

9.22%

22.12%

Johnson & Johnson (JNJ)

43.85%

0.28%

8.11%

30.23%

Omega Health Investors (OHI)

14.03%

-29.53%

8.51%

46.65%

Eaton Vance Enhanced Equity Income Fund II (EOS)

53.46%

9.90%

7.91%

38.14%

Walt Disney (DIS)

55.80%

12.24%

7.57%

54.22%

Automatic Data Processing (ADP)

104.09%

60.53%

6.63%

60.85%

McDonald’s Corp. (MCD)

129.94%

86.38%

6.51%

67.36%

Ingersoll-Rand plc (IR)

100.33%

56.76%

5.48%

87.95%

Texas Instruments Inc. (TXN)

118.58%

75.01%

5.30%

77.76%

Altria Group Inc. (MO)

24.59%

-18.97%

5.10%

72.46%

Philip Morris International Inc. (PM)

25.61%

-17.95%

4.71%

82.47%

Digital Realty Trust (DLR)

96.03%

52.47%

3.82%

91.76%

General Electric (GE)

-50.67%

-94.23%

1.54%

93.30%

Danaher Corp. (DHR)

102.73%

59.16%

1.13%

94.43%

Freeport-McMoRan (FCX)

-44.82%

-88.38%

1.03%

95.46%

American Tower (AMT)

112.32%

68.75%

0.87%

96.33%

Realty Income (O)

53.33%

9.77%

0.59%

96.92%

Lockheed Martin (LMT)

149.47%

105.90%

0.73%

97.65%

Simulations Plus (SLP)

319.56%

276.00%

0.64%

98.29%

Visa (V)

99.84%

56.28%

0.35%

98.65%

PepsiCo Co. (PEP)

51.12%

7.55%

0.59%

99.24%

Average
Above

37.26%

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 the company, testing the LEM (Lunar Excursion Module). GE has some great products, but the misleading accounting of the past has taken 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 for the past five years, a fair chart with nice gains as the United States economy is growing again at a faster pace.

Chart Data by YCharts

The above is the full list of my 22 Good Business 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 first-quarter earnings season, the 22 portfolio companies did well, with 18 beating earnings estimates, 1 matching estimates (a CEF), and 3 below estimates. BA, FCX, and MO 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. MO provides good steady income with a yield of 6% as we wait for the IOQS sales to start.

Boeing is the largest holding in the portfolio at 12.9%. It is being pressed to 15% of the portfolio before trimming because of the company 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 1-year target of $450. BA is a long-term buy and has a backlog of over seven years. So far this year, it is not beating Airbus (OTCPK:EADSY) in orders because of the 737 Max being grounded. The first-quarter earnings (released 4/24/2019) was $3.15, missing the expected by $0.03 and lower than last year of $3.64, with revenue decreasing 2.1% year over year - a poor report. Boeing has completed the software fix for the 737 Max and will submit it to the FAA within a couple of weeks. Until the 737 max gets flying again, the company will be under pressure, but I think this creates a good buying entry point. I am getting greedy with Boeing and let it get to 16% of the portfolio, where I trimmed the position in February 2019 to keep it under 16% of the portfolio.

On 4/16/19, Johnson & Johnson's earnings were above expected at $2.10, compared to last year at $2.00 and expected at $2.04. Revenue beat expected revenue by $470 million, with total revenue flat at $20.02 billion. The strong dollar is hurting JNJ, but the company is still growing and has plenty of cash to buy companies and continue its growth. 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 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 (57 years of increases), JNJ is for you.

On 4/25/2019, Altria's earnings were $0.90, missing expected at $0.90 and compared to last year's $0.95. Hold and only sell when MO becomes too large a percentage of the portfolio. Revenue missed by $210 million, and e-cig will have to be watched to make up the difference in revenue going forward as MO starts to sell IOQS e-cigs in the United States. Total revenue was $4.39 billion, down 6% year over year. Hold this defensive position for its 6.1% dividend and moderate growth as the e-cig market makes up for the decreased cigarette smoking sales.

On 5/21/2019, Home Depot earnings were expected at $2.20 and came in at $2.27, compared to last year at $2.08 - a great quarter Y/Y. Revenue beat compared with expected by $40 million. Total revenue was $26.38 billion, up 5.7% 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 4/18/12019, Philip Morris's earnings were $1.09, compared to the expected of $1.01 and last year at $1.00. Revenue missed by $10 million from the expected, with total revenue at $6.75 billion, down by 2.0% 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's (a totally international company) earnings to have a headwind, but they came through with good earnings. The company pays a 5.2% dividend and is in a defensive business, with growth to come from smokeless products, which had moderate growth this quarter but will go up, since the FDA has approved its smokeless products in the United States.

In the portfolio, two companies are losing money over the 53-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 $2.75/Lb., FCX is 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 53 months. On 4/30/2019, General Electric's earnings were at $0.14, compared to the expected at $0.09 and last year at $0.16. Total revenue was $27.3 billion, down 1.7% year over year, and revenue was in line. The company is reorganizing, which should help if you are patient. It is almost all industrial now and has great products - time to grow the standard business. It has another new CEO, and he is changing 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 that reduced debt by $21 billion is 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 May 6, I added to the position of Digital Reality Trust from 3.40% of the portfolio to 3.60%. I will add slowly to this position as available cash allows, and want to get it to 4% of the portfolio, a full position.

On April 22, I sold all of the remaining Hewlett Packard (HPQ) position. The last earnings report was poor, and future growth looks weak at 2%. Time to sell HPQ for a better business.

On March 26, I trimmed my position of Hewlett Packard from 1.0% of the portfolio to 0.6%. The last earnings report was poor, and future growth looks weak at 2%. Time to sell HPQ for a better business.

On March 22, I added to my position of Simulations Plus from 0.45% of the portfolio to 0.60%. I will add slowly to this position as available cash allows.

On March 13, I increased my position of Realty Income Corp. to 0.85% of the portfolio, I could use a bit more steady monthly income.

On March 12, the portfolio closed out the position of Arconic (ARNC). I only have one more commodity play, Freeport-McMoRan, that I think will go up over time.

On March 11, the portfolio reduced the position of Arconic from 0.4% to 0.3%. I will sell the rest of this position within the month. The dividend was just cut, and forward growth is under par.

On March 7, I added to my position of Simulation Plus from 0.33% of the portfolio to 0.45%. I will add slowly to this position as available cash allows.

On March 4, I trimmed position of Hewlett Packard from 1.3% of the portfolio to 1.0%. The last earnings report was poor, and future growth looks weak at 2%. Time to sell HPQ for a better business.

On February 28, I trimmed my position of Boeing from 16.1% of the portfolio to 15.8%. I love Boeing, but you have to have diversification.

On February 2, I increased my position of Realty Income Corp. to 0.7% of the portfolio. I could use a bit more steady monthly income.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The five top percentage of the portfolio companies in the portfolio are, Johnson & Johnson at 8.2% of the portfolio, Eaton Vance Enhanced Equity Income Fund II at 8.6% of the portfolio, Home Depot at 9.5% of the portfolio, Omega Health Investors at 8.2% of the portfolio and Boeing at 13.1% of the portfolio. Therefore BA, EOS, JNJ, OHI, and HD 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 15% 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 to expected at $2.64. Farnborough Airshow sales in dollar value for Boeing just beat out Airbus 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. Eight KC-46A tankers have been delivered YTD for 2019. Boeing has dropped in the last 6 weeks because of the second 737 Max-8 crash, and I look at this as an opportunity to buy BA at a reasonable price. This is just my opinion.

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 lines, and Mr. Market did nothing. JNJ has just increased the dividend to $0.95/quarter, which is 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 22 companies in the portfolio, five are underperforming the Dow average in total return by more than 10%. All five 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 5.15% ahead of the Dow average YTD, with increases in earnings expected in the second quarter for almost all of the portfolio companies. When Boeing gets the 737 Max flying again, this should give the portfolio a nice bump up.

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.

Disclosure: I am/we are long JNJ, HD, BA, MO, EOS, DIS, PM, GE, MCD, ADP, OHI, IR, TXN, FCX, DHR, PEP, AMT, 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.

Additional disclosure: 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 on the companies are my own.