It has been over a year since I last laid out our portfolio in a series of blog posts. How has it evolved since then? Our domestic equities (excluding utilities and REITs) were listed here.
8%+ positions: JNJ, AAPL, DIS
JNJ continues to be our largest and oldest holding, and one that I have neither bought nor sold since 2015. It once again takes the lead spot, again with a 10%+ weighting. If I had available cash, I would consider increasing that further.
While we have traded AAPL more frequently, with four purchases matching four sales, it remains solidly in the #2 position. We have added 200 shares in the last two months, and believe it to be a terrific bargain at the current price. I have a high conviction in the future of the company that reaches well beyond the current quarter's device sales.
Disney has been a key piece of our portfolio since 2014, and with a purchase in June has now cemented itself in the #3 spot. I am willing to trim this one a little, if it reaches full value, but thus far have been content to write call options on the last 100 shares, for a net gain this year of a little over $500 -- a nice "dividend" for owning a stock while waiting for it to reach my trim price.
5% positions: PG, KMB, MMM, CVS
As with J&J, I am slow to trade PG. We have held this position since 2009, and neither bought nor sold in the last year. It is not an exciting company, but one that I am comfortable holding in size under any market conditions. I have been tempted to trim a little, to be sure, but where else can I find a company this reliable to stabilize my portfolio?
KMB is a similar company, in some ways, but new to my portfolio as of last December. Since our initial purchase (in two chunks a month apart) we have simply held and collected dividends, again not tempted to trade this steady giant. In theory, anything is for sale at the right price. In practice, it is unlikely that anybody would offer me enough to part with this one. (I would need to see a price north of $140.)
While CVS remains one of our largest positions, the path has not been smooth. We trimmed the position by 50% in January, at $79/share, due to concerns over credit quality and merger uncertainty. Those fears have eased over the past year, as the company has continued to turn in solid revenue and earnings, and as the merger has proceeded more or less according to plan, while the shares have retreated more than 20% from my sell point. This remains a speculative position, but one where I believe management has a clear plan to lead the company forward. Thus we restored 2/3 of the trimmed shares, at an average price of $63/share, and I would at least consider adding back that final third if I had cash available (and if no other shiny bauble catches my eye).
4% positions: MSFT, GIS, INTC, UNP, HON
As I discussed last year, I continued to build out our position in MSFT with two additional purchases followed by a small trim. Microsoft is a great company, in the middle of a strong growth spurt, but the stock is pretty expensive. I hesitate to trade these shares, due to what I see as a bright future for the company, but the current position is as large as I am willing to hold for a company with these characteristics. If it were to appreciate substantially from here, I would need to trim it back even further (and in fact this is what happened to last year's growth darling, NKE).
A year ago, I wrote that I'm not sold on GIS as a "core" holding (and thus held it as a 2.5% position). To address the growth concerns that I identified at the time, they acquired Blue Buffalo in a hugely expensive deal that devastated their credit rating. I sold on the announcement at $52.67, locking in a $1500 loss, but have since repurchased an even larger position at an average cost of $42. As with CVS the price makes a difference, and a 20% discount can be the difference between a sell and a buy. As with CVS, the added information from a few quarterly reports and a detailed operational outlook has given me confidence in the direction of the company that was lacking at the time of the sale. To me, these companies are worth MORE today than when I sold them, yet the price is much lower. Go figure!
We previously owned INTC for a little over a year in 2013-2014, selling on valuation concerns after the price ran up. I consider it a high quality company, though admittedly in a volatile industry, and thus the recent dip in valuation was too much for me to pass up. Like MSFT the position size will be capped, forcing trims if it appreciates by 25% or more from here, but it is a company I am comfortable to hold long-term at this size.
Little to say about UNP and HON. They are both held in our taxable account, and thus not subject to trading at this point. (Though we did gift some of the UNP shares and then repurchase them.)
3% positions: SBUX, AMGN, HRL, NKE, ITW
SBUX was built according to the plan described, and is now at a full/permanent position. AMGN has not been traded over the past year. Not much to say about either one...
HRL has been traded actively. We closed out the position a year ago, with two sales at an average price of $36.50, then reopened the position over the next two months with two purchases at an average price of $34. We have since trimmed it back with two sales at an average price of $40. I never owned HRL before 2017, so I do not have strong feelings or an especially high degree of comfort with the company. Thus I am open to buying on dips and selling on spikes, as the trading activity suggests. What remains here is likely a permanent position -- but I say that with less conviction than some of the companies I have held longer.
NKE has been a substantial holding of ours since 2016, and was briefly one of our largest, however I am uncomfortable keeping max positions of a company with a P/E over 25, and trimmed in three sales at an average price of $70. No matter how successful they are or how strong their brand, it is a poor fit for my portfolio parameters and skews the overall averages. That said, I am comfortable holding a 3% position while ignoring the valuation, and I will happily add more if the price retreats to a level where I am comfortable again.
ITW is new to our portfolio, a company that I have long admired but which never previously made the cut. I find the dividend attractive after the recent bump, and am happy holding it at this level while I learn more about their operations.
2% positions: PEP, VFC, UTX, SYY, T, GPC, XOM, CSCO1% positions: BRK.B
Not much to say here... PEP and BRK.B are new additions, ones I will likely build over the next year. CSCO is another that I would like to build a little further. VFC, UTX, and SYY were all trimmed due to valuation at prices well above their current levels, though I have no concerns about their operations. T is now considered in this category, while previously I had it classified as a "utility".
Eliminations
Notable in their absence are the five stocks you saw last year that are no longer listed: BDX, MKC, LOW, IBM, and GE.
I sold BDX on credit quality concerns. It may be a great company, but it was selling at a premium valuation that entirely discounted the credit risk from the massive debt load it took on. I will consider it again once the debt moderates, but the combination of very low credit quality and high valuation made it a clear sell for me.
I sold MKC strictly on valuation. I saw no way to possibly justify $155/share, and in fact trimmed it twice even before that level. It is a strong company, one of the key Consumer Staples, but there is a price for everything -- and I won't even look at that one again until the forward P/E falls below 24.
LOW is a fine company, one that I've owned for three short (profitable) stints, but it is not a core holding for me and not likely to become one. I would continue to treat it as a trading position if the opportunity arose.
IBM was a bad mistake. I bought a year ago at $153, then sold following the debt-funded acquisition of Red Hat at $118. I am willing to patiently own a company that is working through challenges, but not willing to ride that pony once the managers start stacking on debt. As with GIS, I might be willing to re-enter at the right price, if it were possible for me to develop any confidence in management's ability to operate the company. At this point that would likely require a new CEO.
GE was also a bad mistake, though happily a little less expensive (because I bought less in the first place). I grossly underestimated the severity of their problems, buying at $18.90 and selling at $15.40. I guess I could consider buying back in today at $7.50, but I would rather own companies that are successful rather than speculate that this piece of junk might be worth a little more than nothing.
Conclusion
As you can see, I am a sucker for value traps... Happily I seem to do well enough with QUALITY companies to make up for those bad mistakes, and I've learned to be quick enough on the trigger that I no longer ride my mistakes all the way down the slide. Overall, our "domestic equities" listed above have delivered a 2.20% return YTD and a 5.57% IRR since the last blog of this category, published 11/25/17. The S&P500 has delivered a -5.99% return YTD and -3.96% return 11/25/17, so it seems that my holdings have "beat the market" over that period? That is likely due to the emphasis in the portfolio on quality and defense, that should generally hold up well in weak markets.
I am comfortable with my portfolio as it stands. There are several positions I would like to build further, either to bring them up to size (PEP, BRK.B, CSCO) or due to value at this time (JNJ, AAPL, CVS), but our ready cash has already been spent and thus further purchases will be gradual. I could in theory look for something to sell, but for now am inclined to watch how things develop. The quarterly earnings season, and revised outlooks, will inform that process.
Disclosure: I am/we are long MMM, AMGN, AAPL, T, BRK.B, CSCO, CVS, DIS, XOM, GIS, GPC, HON, HRL, ITW, INTC, JNJ, KMB, MSFT, NKE, PEP, PG, SBUX, SYY, UNP, UTX, VFC..
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