The R.I.P. Portfolio's Q1 2020 Update
Summary
- This real-money portfolio was first introduced to the Seeking Alpha community in December 2015.
- The portfolio underperformed its benchmark in Q1 2020 and it is lagging the S&P 500's performance since late-2015.
- The portfolio was overweight financials and industrials going into Q1 2020 and that turned out to be a terrible decision given the fallout from COVID-19.
- However, I still believe that this portfolio is in a great position to benefit from 3 major trends in 2021 and beyond.
The Retire In Peace portfolio, or R.I.P. portfolio, was first introduced to the Seeking Alpha ("SA") 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 details on what I would like to accomplish with these quarterly updates. Additionally, the goals for the portfolio and my long-term strategy are identified in the sections below.
Quarterly Market Update
What. A. Quarter. Q1 2020 turned out to be one of the worst quarters ever for the S&P 500, and one of the largest quarterly declines since the Financial Crisis.
Source: CNN Business
The first 3 months of 2020 turned out to be extremely volatile for the market as the COVID-19 related concerns impacted almost every sector of the S&P 500.
Source: Ziegler Capital Management
As shown, Financials and Industrials saw the largest quarterly declines and this had a direct impact on the R.I.P. portfolio. Over the years I have been heavily invested in technology (positive), industrials (negative), financials (negative, outside of late-2019), materials (negative) and healthcare (positive) so the portfolio performance has been subpar for awhile now. But, Q1 2020 turned out to be a complete disaster.
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 | 10% | 5-15% |
| Communication Services | 15% | 10-20% |
| Basic Materials | 5% | 3-7% |
| Funds | 15% | 10-20% |
| 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.
Q1 2020 Update
Below you will find the portfolio holdings and quarterly performance, in addition to the trading activity for Q1 2020.
| Company | Ticker | # of shares | Price At 3/31/2020 | Beg. Value At 1/1/2020 | 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) | 439.773 | $7.94 | $4,905 | - | $(1,413) | - | $3,492 | $(4,315) | 2% | 0.2% | 0.5% | $18 |
| Westinghouse Air Brake Tech. | (WAB) | 15.12 | 48.13 | 1,175 | - | (447) | - | 728 | (266) | 1% | 0.7% | 1.0% | 7 |
| Baker Hughes | (BKR) | 25.00 | 10.50 | 641 | - | (378) | - | 263 | (665) | 0% | 1.9% | 6.9% | 18 |
| Honeywell | (HON) | 48.99 | 133.79 | 8,626 | - | (2,071) | - | 6,555 | 1,049 | 5% | 3.2% | 2.7% | 176 |
| Berkshire Hathaway | (BRK.B) | 21.00 | 182.83 | 4,757 | - | (917) | - | 3,839 | (345) | 3% | 0.0% | 0.0% | - |
| United Technologies | (UTX) | 26.19 | 94.33 | 3,899 | - | (1,429) | - | 2,471 | (668) | 2% | 2.5% | 3.1% | 77 |
| AT&T | (T) | 213.95 | 29.15 | 7,766 | $363 | (1,892) | - | 6,237 | 908 | 4% | 8.4% | 7.1% | 445 |
| Verizon | (VZ) | 70.22 | 53.73 | 3,969 | 297 | (493) | - | 3,773 | 538 | 3% | 5.3% | 4.6% | 173 |
| Franklin Income | (FKINX) | 2798.40 | 1.94 | 6,491 | - | (1,062) | - | 5,429 | 595 | 4% | 6.9% | 6.2% | 336 |
| WisdomTree US Divi Growth ETF | (DGRW) | 207.74 | 38.91 | 7,802 | 1,821 | (1,540) | - | 8,083 | (435) | 6% | 2.8% | 2.8% | 222 |
| Ishares Core Divi Growth ETF | (DGRO) | 131.19 | 32.59 | 4,173 | 1,011 | (908) | - | 4,275 | (228) | 3% | 2.9% | 2.9% | 126 |
| Fidelity MSCI Real Estate ETF | (FREL) | 168.74 | 20.80 | 3,012 | 1,415 | (917) | - | 3,510 | (683) | 2% | 4.5% | 4.5% | 159 |
| Walt Disney | (DIS) | 34.27 | 96.60 | 4,927 | - | (1,616) | - | 3,311 | 727 | 2% | 2.3% | 1.8% | 60 |
| Bank of America | (BAC) | 401.16 | 21.23 | 14,011 | - | (5,494) | - | 8,517 | 2,566 | 6% | 4.9% | 3.4% | 289 |
| Citigroup | (C) | 56.15 | 42.12 | 4,136 | 170 | (1,941) | - | 2,365 | (229) | 2% | 4.4% | 4.8% | 115 |
| KeyCorp | (KEY) | 86.67 | 10.37 | 1,729 | - | (830) | - | 899 | 23 | 1% | 7.3% | 7.1% | 64 |
| Fifth Third Bank | (FITB) | 51.84 | 14.85 | 87 | 676 | 7 | - | 770 | 37 | 1% | 6.8% | 6.5% | 50 |
| Dupont | (DD) | 9.11 | 34.10 | 3,496 | (1,577) | (1,608) | (1,910) | 311 | (560) | 0% | 1.6% | 4.5% | 14 |
| Corteva | (CTVA) | 54.74 | 23.50 | 1,610 | - | (324) | - | 1,286 | (253) | 1% | 1.8% | 2.2% | 28 |
| Dow Chemical | (DOW) | 70.79 | 29.24 | 3,631 | 141 | (1,702) | - | 2,070 | (1,606) | 1% | 5.4% | 9.6% | 198 |
| Synchrony Financial | (SYF) | 124.03 | 16.09 | 4,115 | 294 | (2,414) | - | 1,996 | (887) | 1% | 3.8% | 5.5% | 109 |
| Target | (TGT) | 11.72 | 92.97 | 1,496 | - | (407) | - | 1,090 | 429 | 1% | 4.7% | 2.8% | 31 |
| Kroger | (KR) | 138.74 | 30.12 | 4,008 | - | 171 | - | 4,179 | 630 | 3% | 2.5% | 2.1% | 89 |
| Starbucks | (SBUX) | 14.86 | 65.74 | 1,300 | - | (324) | - | 977 | 267 | 1% | 3.4% | 2.5% | 24 |
| Johnson & Johnson | (JNJ) | 42.02 | 131.13 | 6,088 | - | (578) | - | 5,510 | 1,246 | 4% | 3.5% | 2.7% | 151 |
| Amgen Inc. | (AMGN) | 8.90 | 202.73 | 2,130 | - | (325) | - | 1,805 | 379 | 1% | 3.6% | 2.9% | 52 |
| Pfizer | (PFE) | 314.53 | 32.64 | 11,506 | 512 | (1,753) | - | 10,266 | (184) | 7% | 4.6% | 4.7% | 478 |
| Merck | (MRK) | 20.65 | 76.94 | 1,866 | - | (277) | - | 1,589 | 531 | 1% | 4.8% | 3.2% | 50 |
| Charles River Labs | (CRL) | 11.00 | 126.21 | 1,680 | - | (292) | - | 1,388 | 254 | 1% | 0.0% | 0.0% | - |
| Teladoc | (TDOC) | 32.00 | 155.01 | 2,679 | - | 2,281 | - | 4,960 | 3,223 | 3% | 0.0% | 0.0% | - |
| Cardinal Health | (CAH) | 6.60 | 47.94 | 331 | - | (14) | - | 316 | (123) | 0% | 2.9% | 4.0% | 13 |
| AIG warrants | AIGWS | 27.00 | 0.87 | 273 | - | (249) | - | 23 | (469) | 0% | 0.0% | 0.0% | - |
| Metlife | (MET) | 58.22 | 30.57 | 2,926 | - | (1,146) | - | 1,780 | (11) | 1% | 5.7% | 5.8% | 102 |
| Prudential Financial | (PRU) | 20.48 | 52.14 | 1,149 | 469 | (550) | - | 1,068 | (497) | 1% | 5.2% | 7.7% | 82 |
| Brighthouse Financial | (BHF) | 4.00 | 24.17 | 157 | - | (60) | - | 97 | (94) | 0% | 0.0% | 0.0% | - |
| Principal Financial Group | (PFG) | 1.08 | 31.34 | 59 | - | (25) | - | 34 | (20) | 0% | 4.4% | 7.0% | 2 |
| Apple | (AAPL) | 22.14 | 254.29 | 6,487 | - | (856) | - | 5,631 | 3,161 | 4% | 2.8% | 1.2% | 68 |
| (TWTR) | 128.00 | 24.56 | 4,102 | - | (959) | - | 3,144 | 697 | 2% | 0.0% | 0.0% | - | |
| (FB) | 7.00 | 166.80 | 1,437 | 155 | (424) | - | 1,168 | (156) | 1% | 0.0% | 0.0% | - | |
| CISCO | (CSCO) | 144.34 | 39.31 | 6,641 | 169 | (1,136) | - | 5,674 | 1,826 | 4% | 5.4% | 3.7% | 208 |
| Intel | (INTC) | 80.64 | 54.12 | 4,801 | - | (437) | - | 4,364 | 1,494 | 3% | 3.7% | 2.4% | 106 |
| Softbank | (OTCPK:SFTBY) | 47.00 | 17.64 | 1,012 | - | (183) | - | 829 | (179) | 1% | 0.0% | 0.0% | - |
| Cloudera | (CLDR) | 59.00 | 7.87 | 686 | - | (222) | - | 464 | 132 | 0% | 0.0% | 0.0% | - |
| Accenture plc | (ACN) | 5.27 | 163.26 | 1,105 | - | (245) | - | 860 | 284 | 1% | 2.9% | 2.0% | 17 |
| General Motors | (GM) | 163.10 | 20.78 | 4,695 | 957 | (2,264) | - | 3,389 | (1,504) | 2% | 5.1% | 7.3% | 248 |
| Procter & Gamble | (PG) | 8.83 | 110.00 | 1,097 | - | (125) | - | 972 | 330 | 1% | 4.1% | 2.7% | 26 |
| Ollie's Bargain Outlet | (OLLI) | 8.00 | 46.34 | 522 | - | (152) | - | 371 | (105) | 0% | 0.0% | 0.0% | - |
| Alibaba | (BABA) | 1.00 | 194.48 | 212 | - | (18) | - | 194 | 71 | 0% | 0.0% | 0.0% | - |
| Wabash National Corp | (WNC) | 92.05 | 7.22 | 1,158 | 165 | (659) | - | 665 | (582) | 0% | 2.4% | 4.4% | 29 |
| Under Armour | (UA) | 104.00 | 8.06 | 1,995 | - | (1,156) | - | 838 | (770) | 1% | 0.0% | 0.0% | - |
| Other* | -- | -- | -- | 11,996 | 48 | (2,722) | 109 | 9,322 | (1,882) | 7% | 2.0% | 1.6% | 152 |
| CASH | -- | -- | -- | 7 | 14 | -- | -- | 21 | -- | 0% | -- | -- | -- |
| $180,559 | $7,102 | $(44,496) | $(1,801) | $143,165 | $3,680 | 100% | 3.3% | 3.2% | $4,614 |
| Industry/Portfolio Companies | Value | Portfolio Weighting | Goal Weighting | Over (Under) |
| Industrials/Conglomerates - GE, HON, BKR, WNC, BRK.B, SFTBY, UTX, WAB | $18,840.66 | 13% | 15% | -2% |
| Healthcare - JNJ, PFE, AMGN, CAH, MRK, CRL, TDOC | 25,835.14 | 18% | 10% | 8% |
| Financials - BAC, C, KEY, FITB | 12,550.24 | 9% | 10% | -1% |
| Insurance - AIG*, MET, BHF, PRU, PFG | 3,001.63 | 2% | 5% | -3% |
| Technology - AAPL, CSCO, INTC, ACN, CLDR | 16,993.85 | 12% | 10% | 2% |
| Communication Services - T, VZ, DIS, TWTR, FB | 17,631.06 | 12% | 15% | -3% |
| Basic Materials - DD, DOW, CTVA | 3,666.91 | 3% | 5% | -2% |
| Funds - FKINX, DGRW, DGRO, FREL | 21,297.24 | 15% | 15% | 0% |
| Consumer - KR, GM, TGT, UA, BABA, PG, SBUX, SYF, OLLI | 14,005.05 | 10% | 10% | 0% |
| Other - (XIN), (RHE), (FSI), (MTZ), (AVD), (GPRE), (KTOS), (TSLA), GE call options, (APPN), (Z), (NIO), (GTX), (REZI), (APRN), (LYFT), (UBER) | 9,322.16 | 7% | 5% | 2% |
| Cash | 21.31 | 0% | 0% | 0% |
| 100% | ||||
| *AIG TARP warrants 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 and GE options 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-book basis, but, at the same time, the portfolio holdings also have significantly lower-than-average ROA and ROE ratios. More simply put, the portfolio is higher on the risk spectrum.
Lastly, the R.I.P. portfolio is highly levered to cyclical companies and Large Cap value still makes up approximately 50% of the total assets (down from 60% at the end of fiscal 2018).
Portfolio Performance for the current period and since the portfolio was first introduced to SA community (December 4, 2015)
| Return (Q1'20) | Return (Intro) | Return On Invested Capital (Review) | ||
| -24.2% | 0.6% | 7.9% | ||
| This period | Since Intro | Since Intro | ||
| Beg. Balance | $180,559 | $52,610 | Initial Value | $46,042 |
| Contributions | 7,102 | 89,960 | Contributions | 89,960 |
| Unrealized G/L | (44,496) | 594 | Realized G/L | 3,483 |
| Ending Balance | $143,165 | $143,165 | Unrealized G/L | 3,680 |
| Portfolio Bal. | $143,165 | |||
| Dividend Inc. | $1,134 | $13,247 | ||
| Realized G/L | (1,801) | 3,483 | Dividend Income | $13,247 |
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).
The portfolio's dividend income was $1,134 in Q4 2019, which is slightly higher than the previous quarter ($997 in Q4 2019). Looking ahead, the portfolio's estimated dividend income for 2020 is projected to be approximately 19% higher YoY. 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.
For the most important metric, the R.I.P. portfolio has underperformed its benchmark (S&P 500) since the portfolio was introduced to the SA community on December 4, 2015. It was the same story in the most recent quarter.
There are two main factors that contributed to the portfolio's underperformance since its inception (let me stress that these are reasons, not excuses): the portfolio has a value-tilt and is overweight financials & industrials - both factors have been out of favor for several years now. See my full-year 2018 article for additional detail on these contributing factors. However, these factors, in my opinion, will contribute to the portfolio outperforming in 2020 and beyond.
During the most recent quarter, the top performers and underperformers for the portfolio were: Performers - [1] Teladoc (by a wide margin), [2] Tesla, and [3] Kroger; Underperformers - [1] Bank of America, [2] Synchrony, and [3] General Motors.
I consistently write about all of these positions so please see my current thoughts on each company/stock at my Seeking Alpha profile. I should note that I plan to stay long Bank of America, even after the recent slaughter. The bank was my largest position at year-end 2019 and I remain bullish about the stock over the next 3-to-5 years.
Noteworthy Quarterly News
Merger and/or Acquisitions:
- United Technologies received final approval for the spinoffs of Carrier (CARR) and Otis (OTIS). Both of the spinoffs were finalized shortly after quarter-end.
Buybacks and/or Dividend:
- Intel increased its quarterly dividend by 4.8% (from $0.32 to $0.33), which brings the forward dividend yield to 2.3% based on today's price.
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 3 major trends:
- The digitalization megatrend, which includes artificial intelligence, autonomous cars and the Internet Of Things industry;
- a rising interest rate environment (although this trend may not actually happen in the next year or two) - rates cannot go lower than today, right?; and
- 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:
- Digitalization - Cisco, Intel, Apple, Accenture, General Electric, Honeywell, AT&T, and Verizon.
- Rising Rates - Bank of America, Citigroup, KeyBank, Fifth Third, AIG, Principal Financial, Prudential and MetLife.
- Media Shift - Disney, Twitter, AT&T, Facebook, and Verizon.
Final Thoughts
2019 was a great year for the market, but I already want to forget about how the first 3 months of 2020 played out. I plan to stay in risk-off mode, as it is hard to see how the economy recovers in the near-term from the current COVID-19 impacts. I still believe that defensive dividend paying stocks will be the winners over the next 18-24 months. I mentioned in the last quarterly update that "the R.I.P. portfolio is positioned to post solid returns over the next 4 quarters, of course, barring an overall market meltdown." Well, we had an overall market meltdown and the portfolio felt the pain!
The portfolio's value-tilt, including the heavy investments in the financial and healthcare sectors, have been out-of-favor for a while now (with the exception of the last 2 quarters of 2019), but I believe that it will be a different story in 2020 for the healthcare holdings (i.e., Pfizer, JNJ, TDOC, AMGN and MRK). Teladoc is a must-own and I believe that Pfizer will likely have the greatest impact to the portfolio's performance over the next few quarters, as this large company has promising business prospects (even in the current environment). It also helps that Pfizer pays an above-average dividend.
Author's Note: I plan to still write about these companies on a regular basis so please consider following me if you would like to stay updated. 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
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Disclosure: I am/we are long GE, HON, RTX, BAC, C, FITB, KEY, BRK.B, TSLA, SYF, XIN, FB, DIS, MTZ, OTIS, CARR, PFE, JNJ, AMGN. 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.