Seeking Alpha

The R.I.P. Portfolio's Q2 2019 Update

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Includes: AAPL
by: WG Investment Research
Summary

This real-money portfolio was first introduced to the Seeking Alpha community in December 2015.

The portfolio outperformed its benchmark in Q2 2019 but is still lagging the S&P 500's performance since inception. However, the R.I.P. portfolio is properly positioned for the future.

The financial holdings have been a drag to the portfolio's YTD performance but, looking out, the large financial institutions are well-positioned for the next few years.

The Retire In Peace portfolio, or R.I.P. portfolio, was first introduced to the Seeking Alpha community in December 2015 and I have published quarterly articles that captured the activity and performance of the portfolio since that point in time. The companies that I write about on SA are largely the holdings of the R.I.P. portfolio, so the main purpose for the quarterly articles is to allow for my SA followers to track the performance of the stocks that I write about on this platform.

See the article linked above for additional detail on what I would like to accomplish with these quarterly updates.

Additionally, the portfolio goals and my long-term strategy are identified in the sections below.

Quarterly Market Update

The first six months of 2019 turned out to be the best start for the S&P 500 since 1997, with the Information Technology sector leading the charge.

Source: Fidelity

This impressive stock performance was after the broader market posted the worst yearly results in the last decade in 2018. The supercharged performance for the broader market over the last six months are largely, in my opinion, a result of improving investor sentiment, strong(ish) labor numbers, and newfound expectations for interest rates to remain lower for longer (or even go lower).

Simply put, the bull market seems to be getting long in the tooth.

Source: CNBC

I believe that there are real concerns that investors need to consider in today's environment, even with a "promising" backdrop. To start, the China-US trade relationship appears to be on better footing now but, as you can expect, things can change quickly. The President of the U.S. tends to change the narrative on almost a weekly (if not daily) basis so stay tuned because a long drawn out trade war will definitely have a material impact on the stock market.

Another important risk factor to consider is the near-term earnings potential for the large U.S. companies. For example, 113 companies of the S&P 500 have issued earnings guidance for the quarter just ended and 87 of those companies issued negative EPS guidance.

Source: FactSet, 6/28/19

The total number of companies that issued negative EPS guidance is well-above the five year average of 74 and the most significant contributor is the Information Technology sector (yes, the best performing sector so far in 2019).

Source: FactSet, 6/28/19

This tells a somewhat worrisome story. The stock market has performed extremely well since the since the start of 2019 but I believe that the underlying fundamentals may be telegraphing a slowdown in the nearish future.

Now bringing this all back to the R.I.P. portfolio. I am heavily invested in technology (positive), industrials (positive), financials (neutral), materials (negative) and healthcare (negative) so the quarterly performance was pretty much in line with expectations. I have been in risk-off mode and repositioning the portfolio for a slowdown since mid-2018 so the next quarter or two should be more of the same, of course, unless there is a major market meltdown.

In this article, I will highlight the recent changes to the R.I.P. portfolio and describe how the portfolio performed for the most recent period-end.

The R.I.P. Portfolio's Goals And Strategy

I am building this portfolio with retirement in mind, so I have 30-plus years to invest and make adjustments; therefore, the quarterly [and annual] volatility is not a major concern. These funds will stay in the market for the foreseeable future, so the portfolio will have the luxury of compounding for many years.

"Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't, pays it." - Anonymous

It is also important to note that this is a real-money portfolio. The R.I.P. portfolio consists of five different accounts: a Roth IRA, a Traditional IRA, and three taxable brokerage accounts. These are not my family's main retirement assets, but it is a portfolio that I hope will greatly contribute to a stress-free and relaxing retirement.

The Goals and Strategy section was last updated in January 2018.

Main Investments (i.e., core holdings) - The companies that are considered core holdings should have established management teams that have proven track records of creating value. Furthermore, the companies should have competitive moats and be above-average operators within the respective industries. The core holdings are mainly large cap companies that are widely held by the financial community and this is by design.

Goals & Strategy - The portfolio seeks primarily long-term capital appreciation by investing mainly in equity securities of high-quality companies that have already shown the ability to produce sustainable earnings growth.

The portfolio aims to beat the benchmark, the SPDR S&P 500 ETF (SPY), by at least 1% on an annual basis.

Missing out on short-term gains and/or having paper losses are not my main concerns, because I plan to stay committed to my long-term strategy of utilizing a bottoms-up investing philosophy to select companies that I plan to hold for many years.

The portfolio has the following allocation targets and acceptable ranges:

Industry Target Allocations Acceptable Range
Industrials/Conglomerates 15% 10-20%
Healthcare 10% 5-15%
Financials 10% 5-20%
Insurance 5% 3-7%
Technology 15% 10-20%
Communication Services 15% 10-20%
Basic Materials 5% 3-7%
Funds 10% 5-15%
Consumer 10% 5-15%
Other* 5% 0-10%

*The Other category comprises of speculative investments in companies that have the potential to create outsized gains over the next three-to-five years (what I like to refer to as "investing in seedlings"). The investments within this category could eventually become longer ranged holdings if after further analysis it is determined that the companies indeed have the attributes that I look for.

Contributions - I plan to contribute between $1,000 and $2,500 of new capital per month to the portfolio and I typically put the new capital to work each and every month, regardless of the performance of the broader market.

Q2 2019 Update

Below you will find the portfolio and its performance, and the activity for the second quarter of 2019.

Company Ticker # of shares Price At 6/30/2019 Beg. Value at 4/1/2019 Activity - Purchases (Sales) Quarterly Unrealized G/L Quarterly Realized G/L Current Value Unrealized Gain (Loss) Portfolio Weighting YOC Current Yield Annual Income
General Electric (GE) 392.967 $10.50 $3,923 $- $203 - $4,126 $(3,080) 3% 0.2% 0.4% $16
Westinghouse Air Brake Tech. (WAB) 15.05 71.76 1,107 - (27) - 1,080 86 1% 0.7% 0.7% 7
Baker Hughes (BHGE) 25.00 24.63 693 - (77) - 616 (311) 0% 1.9% 2.9% 18
Honeywell (HON) 48.25 174.59 7,631 - 792 - 8,423 2,918 5% 2.9% 1.9% 158
Berkshire Hathaway (BRK.B) 21.00 213.17 4,219 - 258 - 4,477 292 3% 0.0% 0.0% -
United Technologies (UTX) 25.77 130.20 3,303 - 52 - 3,355 216 2% 2.4% 2.3% 76
AT&T (T) 307.57 33.51 5,771 3,945 591 - 10,307 1,592 7% 7.2% 6.1% 627
Verizon (VZ) 52.73 57.13 3,091 - (78) - 3,012 746 2% 5.6% 4.2% 127
Franklin Income (FKINX) 2690.81 2.32 6,162 - 81 - 6,243 1,408 4% 6.7% 5.2% 323
WisdomTree US Divi Growth ETF (DGRW) 116.93 43.65 5,013 - 91 - 5,104 403 3% 2.4% 1.8% 93
Ishares Core Divi Growth ETF (DGRO) 85.10 38.20 2,631 492 128 - 3,251 264 2% 2.3% 2.3% 74
Fidelity MSCI Real Estate ETF (FREL) 69.60 26.18 - 1,784 38 - 1,822 38 1% 4.8% 4.8% 87
Walt Disney (DIS) 33.86 139.64 3,759 - 969 - 4,728 2,144 3% 2.3% 1.3% 60
Bank of America (BAC) 425.16 29.00 11,668 - 662 - 12,330 5,817 8% 4.7% 2.5% 306
Citigroup (C) 51.01 70.03 3,152 - 420 - 3,572 1,148 2% 4.3% 2.9% 104
KeyCorp (KEY) 83.76 17.75 1,306 - 181 - 1,487 611 1% 6.5% 3.8% 57
Fifth Third Bank (FITB) 2.79 27.90 2,472 (2,705) 312 (11) 78 21 0% 4.7% 3.4% 3
Dupont (DD) 54.00 75.07 8,639 (4,559) (26) - 4,054 (304) 3% 1.9% 2.0% 82
Corteva (CTVA) 54.00 29.57 - 1,539 58 - 1,597 58 1% 1.8% 1.8% 28
Dow Chemical (DOW) 53.67 49.31 - 3,020 (373) - 2,647 (373) 2% 5.0% 5.7% 150
Synchrony Financial (SYF) 112.98 34.67 3,584 - 333 - 3,917 1,329 3% 3.7% 2.4% 95
Target (TGT) 11.59 86.61 925 - 78 - 1,003 343 1% 4.6% 3.0% 31
Kroger (KR) 115.20 21.71 2,137 643 (279) - 2,501 (565) 2% 1.9% 2.3% 58
Starbucks (SBUX) 14.66 83.83 1,085 - 144 - 1,229 519 1% 2.5% 0.6% 7
Johnson & Johnson (JNJ) 41.15 139.28 5,714 - 18 - 5,731 1,467 4% 3.5% 2.6% 148
Amgen Inc. (AMGN) 8.72 184.28 1,608 (122) 121 122 1,607 181 1% 3.5% 3.1% 51
Pfizer (PFE) 154.85 43.32 6,665 (258) 301 187 6,708 2,221 4% 5.0% 3.3% 223
Merck (MRK) 20.25 83.85 1,673 - 25 - 1,698 640 1% 4.2% 2.6% 45
Charles River Labs (CRL) 11.00 141.90 1,598 - (37) - 1,561 427 1% 0.0% 0.0% -
Cardinal Health (CAH) 6.41 47.10 300 - 2 - 302 (138) 0% 2.8% 4.1% 12
AIG warrants AIGWS 27.00 12.36 153 - 181 - 334 (158) 0% 0.0% 0.0% -
Metlife (MET) 56.40 49.67 2,407 - 395 - 2,801 1,010 2% 5.5% 3.5% 99
Prudential Financial (PRU) 11.99 101.00 1,090 - 120 - 1,210 115 1% 4.4% 4.0% 48
Brighthouse Financial (BHF) 4.00 36.69 145 - 2 - 147 (44) 0% 0.0% 0.0% -
Principal Financial Group (PFG) 1.04 57.92 51 - 9 - 60 6 0% 4.1% 3.7% 2
Apple (AAPL) 21.95 197.92 4,151 - 192 - 4,343 1,873 3% 2.7% 1.6% 68
Twitter (TWTR) 111.00 34.90 3,651 - 223 - 3,874 1,942 2% 0.0% 0.0% -
Facebook (FB) 7.00 193.00 1,167 - 184 - 1,351 183 1% 0.0% 0.0% -
CISCO (CSCO) 122.98 54.73 8,329 (1,783) 185 873 6,731 3,752 4% 5.8% 2.6% 172
Intel (INTC) 79.34 47.87 4,234 - (435) - 3,798 928 2% 3.5% 2.6% 100
Softbank (SFTBY) 12.00 47.93 584 - (9) - 575 71 0% 0.0% 0.0% -
Cloudera (CLDR) 59.00 5.26 22 297 (9) - 310 (22) 0% 0.0% 0.0% -
Accenture plc (ACN) 5.23 184.77 913 - 53 - 966 390 1% 2.6% 1.6% 15
General Motors (GM) 117.56 38.53 4,291 0 238 - 4,529 844 3% 4.8% 3.9% 179
Procter & Gamble (PG) 8.67 109.65 896 - 55 - 951 309 1% 4.0% 2.7% 26
Alibaba (BABA) 1.00 169.45 182 - (13) - 169 46 0% 0.0% 0.0% -
Wabash National Corp (WNC) 63.40 16.27 856 - 175 - 1,032 150 1% 2.3% 2.0% 20
Under Armour (UA) 104.00 22.20 1,962 - 346 - 2,309 700 1% 0.0% 0.0% -
Other* -- -- -- 10,153 1,156 618 - 11,927 978 8% 1.2% 1.3% 150
CASH -- -- -- -- 30 -- -- 30 -- 0% -- -- --
$145,065 $3,479 $7,468 $1,172 $156,012 $33,190 100% 3.2% 2.5% $3,945
Industry/Portfolio Companies Value Portfolio Weighting Goal Weighting Over (Under)
Industrials/Conglomerates - GE, HON, BHI, WNC, BRK.B, SFTBY, UTX, WAB $23,683.28 15% 15% 0%
Healthcare - JNJ, PFE, AMGN, CAH, MRK, CRL 17,606.97 11% 10% 1%
Financials - BAC, C, KEY, FITB 17,466.52 11% 10% 1%
Insurance - AIG*, MET, BHF, PRU, PFG 4,552.93 3% 5% -2%
Technology - AAPL, CSCO, INTC, ACN, CLDR 16,148.60 10% 15% -5%
Communication Services - T, VZ, DIS, TWTR, FB 23,271.48 15% 15% 0%
Basic Materials - DD, DOW, CTVA 8,297.08 5% 5% 0%
Funds - FKINX, DGRW, DGRO, FREL 16,419.52 11% 10% 1%
Consumer - KR, GM, TGT, UA, BABA, PG, SBUX, SYF 16,608.96 11% 10% 1%
Other - XIN, RHE, FSI, MTZ, AVD, GPRE, TDOC, KTOS, TSLA, GE call options, APPN, Z, NIO, GTX, REZI, APRN, LYFT, UBER 11,926.54 8% 5% 3%
Cash 29.95 0% 0% 0%

*AIG TARP warrants are included in value and weighting

Sales, Purchases & Dividend Activity

Current Makeup Of Portfolio

Below is a graphic from Morningstar that captures a high-level snapshot of the R.I.P. portfolio as of the period-end.

Full Disclosure: The AIG Tarp warrants are not included in this Morningstar analysis.

There are a few data points that should be highlighted: the holdings of the R.I.P. portfolio are attractively valued when compared to the S&P 500 on a price-to-prospective earnings basis but, in the same breath, the portfolio holdings also have significantly lower-than-average ROA and ROE ratios. Moreover, the portfolio's projected EPS growth over the next five years is now slightly above the average for the S&P 500.

Lastly, the R.I.P. portfolio is highly levered to cyclical companies and Large Cap value still makes up approximately 53% of the total assets (down from 60% at the end of fiscal 2018).

Portfolio Performance for Q1 2019 and since the portfolio was first introduced to SA community (December 4, 2015)

Return (Q2'19) Return (YTD) Return (Intro) Return On Invested Capital (Review)
5.1% 17.5% 35.1% 45.9%
This period YTD Since Intro Since Intro
Beg. Balance $145,065 $124,676 $52,610 Initial Value $46,042
Contributions 3,479 8,768 72,230 Contributions 72,230
Unrealized G/L 7,468 22,567 31,172 Realized G/L 4,551
Ending Balance $156,012 $156,012 $156,012 Unrealized G/L 33,190
Portfolio Bal. $156,012
Dividend Inc. $1,108 $2,119 $10,056
Realized G/L 1,172 948 4,551 Dividend Income $10,056

Full Disclosure: The American Association of Individual Investors, or AAii, prescribed calculation (The Beginning Vs. the End) was used for calculating the portfolio's return for each period-end.

From an income standpoint, the portfolio's annual dividend income has grown significantly since 2016 (portfolio was first introduced in December 2015).

Note: Q3-Q4 2019 are projections based on: (1) expected contributions to portfolio and (2) estimated growth in dividends.

The portfolio's dividend income was $1,108 for Q1 2019, which is slightly higher than the previous quarter ($1,011 in Q1 2019). The portfolio's projected dividend income for 2019 is approximately 28% higher than the total income received in 2018 and this estimate may actually turn out to be too conservative. It should also be noted that I do not have a specific income goal for the portfolio, but I have purposefully focused on investing in high-quality dividend paying stocks since late-2015.

Now, for the most important metric, the R.I.P. portfolio has underperformed its benchmark since the portfolio was introduced to the SA community on December 4, 2015. Q1 2019 was a major disappoint but the portfolio outperformed the broader market by almost 90 basis points in the most recent quarter. Moreover, the portfolio went from outperforming its benchmark throughout 2017 to underperforming it since early 2018 (although catching up more recently).

There are 2 main factors that contributed to portfolio's underperformance (let me stress that these are reasons, not excuses): the portfolio has a value-tilt and is overweight financials. Both which have been out of favor for several years. See my full-year 2018 article for additional detail on these contributing factors.

During the most recent quarter, the top performers and under-performers for the portfolio were: Performers - [1] Disney, [2] Bank of America, and [3] Honeywell; Underperformers - [1] Intel, [2] Dow Chemical, and [3] Kroger.

I consistently write about all of these positions so please see my current thoughts on each company/stock at my Seeking Alpha profile.

Noteworthy Quarterly News

Buybacks and/or Dividend News:

  1. Procter & Gamble increased its quarterly dividend by 4% (from $0.7171 to $0.7459), which brings the forward dividend yield 2.7% based on today's price.
  2. Dow Chemical declared its first quarterly of $0.70, which makes the forward dividend yield 5.6% based on today's price.
  3. MetLife increased its quarterly dividend by 4.8% (from $0.42 to $0.44), which brings the forward dividend yield to 3.5% based on today's price.
  4. Apple increased its quarterly dividend by 5.5% (from $0.73 to $0.77), which brings the forward dividend yield to 1.5% based on today's price.
  5. Cardinal Health increased its quarterly dividend by 1% (from $0.4763 to $0.4811), which brings the forward dividend yield to 4.1% based on today's price.
  6. Target increased its quarterly dividend by 3.1% (from $0.64 to $0.66), which brings the forward dividend yield to 3.0% based on today's price.
  7. Fifth Third increased its quarterly dividend by 9.1% (from $0.22 to $0.24), which brings the forward dividend yield to 3.4% based on today's price. The bank's board also authorized a 100M share buyback program.
  8. Corteva declared its first quarterly of $0.13, which makes the forward dividend yield 1.8% based on today's price. Additionally, the board approved a $1B share repurchase program.
  9. Citigroup announced plans to increase its quarterly dividend 13% (from $0.45 to $0.51), which brings the forward dividend yield to 2.5% based on today's price. The bank's board also authorized a $17.1B share buyback program.
  10. Bank Of America announced plans to increase its quarterly dividend by 20% (from $0.15 to $0.18), which brings the forward dividend yield to 2.5% based on today's price. The bank's board also authorized a $30.9B share buyback program.

Merger, Acquisitions and Disposals:

  1. DowDuPont completed the spin off of Dow Inc and Corteva during the quarter.
  2. United Technologies and Raytheon (NYSE:RTN) announced a potential merger but there are still plenty of questions on whether or not this deal will be completed.

Looking Ahead: It's Not About Tomorrow, It's About 10+ Years From Now

In a broader context, I have been positioning the R.I.P. portfolio to capitalize on a three major trends:

  1. the digitalization megatrend, which includes autonomous cars and the Internet Of Things industry;
  2. a rising interest rate environment; and
  3. the changing media space, which includes how companies will be structured and how content will be consumed by/distributed to customers.

See this quarterly update article for detailed explanations for my thoughts on each of the major trends. The following companies in my stock universe are the ones that I see being the biggest beneficiaries of these trends:

  1. Digitalization - Cisco, Intel, Apple, Accenture, General Electric, Honeywell, GM, AT&T, and Verizon
  2. Rising Rates - Bank of America, Citigroup, KeyBank, Fifth Third AIG, Principal Financial, Prudential and MetLife
  3. Media Shift - Disney, Twitter, AT&T, Facebook, and Verizon.

Final Thoughts

I am looking forward to 2019 and what the next few quarters may bring. Again, I have been in risk-off mode since mid-2018 and I believe that it will pay huge dividends over the next 18-24 months. While the broader market may not rise as much as some experts are calling for after posting an impressive 17% rise over the last six months, I do believe that equities will post solid returns over the next four quarters.

The portfolio's value-tilt, including the heavy investments in the financial and healthcare sectors, have been out-of-favor for awhile now but I believe that it will be a different story as we head into 2020. Based on my internal valuation work, I believe that Bank of America will have the greatest impact to the portfolio's outperformance over the next few quarters. As I previously described here, this bank is attractively valued and it has a real capital return story to tell.

Author's Note: I plan to still write about these companies on a regular basis so stay tuned. And lastly, I always have these two quotes in mind whenever I make an investment decision:

"Behind every stock is a company. Find out what it's doing." - Peter Lynch

"Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time..." - Warren Buffett

Disclosure: I am/we are long GE, WAB, BHGE, HON, UTX, BRK.B, T, VZ, FKINX, DGRW, DGRO, FREL, DIS, BAC, C, KEY, FITB, DD, DOW, CTVA, SYF, TGT, KR, SBUX, JNJ, AMGN, PFE, MRK, CRL, CAH, MET, PRU, PFG, BHF, XIN, TSLA, UBER, MTZ. 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.