Investment Activity-Mid Year Review

Not sure about you, but the first six months of 2014 has flown by awfully fast. So here we are and it’s time to reflect on where I am and where I plan to move on the company’s and index funds I own for the remainder of the year.

Some Stats:

  •  Portfolios are up together a total of 1.3 percent year to date. My other portfolio I manage is up  3.40 percent year to date. Nothing spectacular. Am I beating the market? No but I don’t care.  This is before any dividends so are returns are actually a few percent higher.
  •  My realized returns for the year to date (i.e. amount of profit/loss I’ve tangibly made as a result of selling a position) is at 14.6 percent, which is a very solid number. It is telling me that the decisions I’ve made are enabling me to bank a healthy amount of additional cash, allowing me to grow the portfolios. So far this year I have sold 6 stocks and all six have been at a profit. 4 out of the 6 stocks sold were sold for double-digit returns (i.e. returns > 10%).
  •   I have made a total of 20 trades, with 14 buy orders and 6 sell orders. My expenses from trading commissions and Management Expense Ratios (MER's) came out to 0.14 percent so far this year. In the last few years, my trading costs have come down significantly thanks to the reduction in commissions. Historically my expenses would come in around the 1-1.5% range, which is still decent, but as the portfolios grew bigger, they could have taken a larger chunk out. I am very pleased with this.

 

Current State at the Half Pole

Right now I own 10 stocks in my portfolios. At his point 7 out of the 10 stocks are in a profitable position. Of the 3 losing positions, the largest is my short position on the S&P 500 (Down 20.65 percent YTD). Below are the position and my thoughts about them.

 

Neulion –Ticker NLN (Bought at $0.75, Currently at $1.19 +54.7% YTD)

Neulion is my best performing stock so far this year. I would normally be motivated to sell it now and bank the profit as it is well past my expected return threshold of 20 percent. My thinking right now is that this stock could have a lot of room to run. The institutions are starting to follow the stock and the momentum may drive the stock up a fair bit. In terms of the business, they are really not that different from a CGI or any other IT consulting company, but they are in a very unique and sought after space. Right now it’s all about content. Traditional businesses like telecom and cable firms as Ill and new up and coming businesses like NetFlix, Google and Facebook are looking for sticky content which is content that can’t be recorded easily (i.e. skip commercials) and provides a captive audience. The one type of content that is sticky and resistant to DVR or downloading is live sports. Neulion’s specialty is building interactive platforms that allow people to view sports content on a variety of platforms like mobile, tablets, web site etc.  The company is finally starting to post some positive Economic Profit and it has recently announced some major partnership deals with Rogers and Univision to distribute NHL and soccer content on a variety of viewing platforms. Some call Neulion the NetFlix of sports. I’m not sure of that, but it looks like they are building a large stable of clients that are looking for solutions to present their sticky content beyond just a television. I’m thinking there is still some life in the stock to make an even greater move. At some point I may sell part of the stake to bank some profits, but right now the mindset is to hold on. I am also very aware that the stock will probably take some serious hits in price, but as long as the story is the same, I am OK to hold and perhaps add if the price becomes attractive.

 

Whole Foods-Ticker WFM

(Bought at $43, Currently at $38.58, -10.3% YTD)

I’m big on the concept that retail is becoming a land of two solitudes; luxury and discount. In the grocery side, Whole Food represents the luxury, foodie, live to eat experience. The model has been so successful that others are now trying to get a piece of the action and that has crimped profits slightly. The analysts freaked out and the stock has taken a hit. It is still generating very high Economic Profit. The store base is still growing and despite the increased competition, it is still the best of breed company in the space. As investors bailed out of the stock, I stepped in and averaged my position down as I think the stock is even cheaper now. Year to date the stock is down almost 33 percent and I am down 10.3 percent. I would consider adding more if the performance continues. The stock fell not because, management made bad decisions, on the contrary, they have made very sound decisions. It is a victim of its own success. I would really have to take pause if the stock fell below my loss threshold of 20 percent. Fortunately I’m not there yet and if I do go there, I’ll have something to say about it.

 

Apple Inc.-Ticker AAPL (Bought at $70.99, Currently at $93.61, +31.9% YTD)

For the last two years, Apple has been the whipping boys of the analysts and media. Apple has been chided for lack of innovation and having lost its way. You would have thought it was going to out of business. While the Smart Money People slammed the company, the business was busy selling more and more iPhones, especially in China and also returning a lot of its cash back to shareholders. I kept buying it on the way down and am now being rewarded for being patient. It continues to print money hand over fist. The balance sheet has a lot more debt, but it is generating more than enough free cash to deal with it. The product pipeline is set for a major refresh later this year with rumors flying of larger iPhones, iWatches, and something to shake up the TV hardware side. In the run-up to new product releases, the stock historically runs up as Ill. Right now I would normally to bank my profits, but there seems to be a lot more buzz in the new product cycle and so I think it may be worth sticking around a little longer. Traditionally, the stock runs up in the lead up to major product announcements, so if the patterns holds true, there should be some additional profit to bank. Of course, nothing is guaranteed.

Target-Ticker TGT (Bought at $55.66, Currently at $58.19, +4.55% YTD)

Another out-of-favour stock by the analysts. Target has had a pretty bad 2014. First there were the security breaches and loss of customer credit card data. Then it was the disastrous foray into the Canadian market. Then winter came and supposedly forced everyone to stay home. Earnings fell and the stock tanked. The issues are real but I think they are fixable issues. In fact Target had systems in place that detected the security breach. A lot of retailers don’t even have any security processes in place to even recognize a breach. It just failed in the execution side. Execution failures can be fixed. The reality is that the Target brand is still very dominant. Despite the weak winter earnings, the company is still generating healthy returns on its invested capital that are greater than its cost of capital. Top management has been replaced by people who understand how valuable the brand is will not stand idly by to see it erode. As the analysts slammed Target, I bought in and going forward, I would consider buying more. The thing with out-of-favour stocks is they take time to bounce back, so again I realize I will have to be patient.

 

General Electric-Ticker: GE (Bought at $25.26, Currently at $$26.35, +4.3% YTD)

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I bought GE because it has been transitioning itself to become among the leading manufacturers of industrial, environmental, and healthcare products in the world. It has been going through a process of shedding businesses that are unprofitable and allocating capital to businesses it feels will be the leaders of the 21st century. It has done so very methodically and strategically. GE has been driven in the past decade or so by its lending arm and it has muddied the valuations and positive performance of its other industrial divisions. Now that GE is tangibly signalling that it wants to get out of the financing business and become an industrial power house, I could see valuations become much richer. Because of this, GE is a company I would be happy to hold for a long time and add more if the stock should get thrown out in any market pullback.

Visa-Ticker: V (Bought at $201.63, Currently at $210.87, +4.6%)

Visa is the dominant brand in the world when comes to payment processing systems. It generates very rich Economic Profit. It is also unique for a financial company in that it has very little debt. Its balance sheet is pristine, so it’s not going anywhere. The way we pay for things is changing dramatically with  traditional competitors (MasterCard, American Express) as well as new entrants (Square, PayPal, Facebook and even individual vendors with their own pay wallet formats), but I think Visa with its strong brand will still be one of the go to methods to paying for things in the future. The stock has been under pressure this year because of uncertainty in Russia where Putin has been musing about developing its own in-house payment system. The market has been nervous. The reality is that Russia is one country out of hundreds and they do not use credit that much. I was able to open a position when the market was having a case of the nerves earlier in the year. If it were to fall back again, I would consider adding more to the position. There is room for the stock to get to the $240’s over time.

Coca Cola Ticker-KO (Bought at $37.95, Currently at $42.23, +11.3% YTD)

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Another company that many analysts and market experts have said that has lost its way (Are you noticing a trend in how I am identifying companies?). Coke is one of the most iconic and recognized brands on the planet. It has also become a poster child for the obesity epidemic in Western countries. As a result, consumption of soda pop has been trending down in recent years in North America. The reality is Coke is no longer just about fizzy, sugary soft drinks. Coke is essentially a portfolio of beverages ranging from vitamin enhanced water, fruit juices, and energy drinks. The company also recently announced it was taking a small stake in the company that created the Keurig coffee pod machines. It is by far the largest beverage manufacturer and distributer on the planet and despite the slowing of soda pop sales in the West, it is enjoying decent growth in the Emerging Markets and other developing nations. Despite these pressures, the company continues to generate ridiculous amounts of cash and pays a very competitive dividend. In a way I am seeing these traditional food manufacturers becoming more and more like the tobacco companies of the 20th century that print consistently a lot of cash and throw it back to shareholders in the form of dividends. Coke is truly a global company now and not as dependent on the US for its profitability. The stock was trending down into the mid-thirties when I decided to buy in. Stocks like Coke tend to trade a high multiple, so when the opportunity came up to pick up on a lower valuation, I thought it would be a good entry point. Because of its ability to generate consistent, predictable cash-flows, I would be comfortable holding the stock for a long time. If the stock should tank, I would use it as an opportunity to add more shares.

 

EBay Ticker-EBAY (Bought at $51.40, Currently at $50.62, -1.52% YTD)

EBay was scoring high on my rankings. Good solid Economic Profit, clean balance sheet, and selling at a discount. From a valuation, the stock is conservatively worth between $65-75/share. The stock and company has been taking some heat for its decision to repatriate cash in foreign countries back the U.S. and to incur a very high tax bill. Many analysts thought the company should have issued debt, given the low interest rate environment and preserve the taxes payable. Management has chosen instead to keep the balance sheet clean. Its PayPal payment platform is becoming more entrenched in the online payment services space and some investors like Carl Ichan have been pressuring management to spin-off PayPal to unleash more value in Ebay. So far it is hesitant to do so. I’ve been flat on the stock so far, but if the stock should pull back into the mid $40’s I would be interested in averaging down my cost position as long as the company continues to crank out healthy Economic Profit.

 iShares Emerging Market ETF Ticker-EEM (+7.5% since purchasing)

I believe that Emerging Markets (EM) will continue to be the growth engine for future economic development and will be very important strategic players. They are not going away nor are they going back to the more centrally planned economic systems of the past. You wouldn’t have known it at the start of the year when anything EM related was getting thrown out to sea. I saw it as an opportunity to average down my costs so I jumped in and we are now seeing the sector getting a second wind. Volatility comes with the territory and I are comfortable with the roller coaster ride. It comes down to taking advantage of opportunities when sentiment is negative to build positions and riding them through.

Short Position S&P500 Index (-19.4% since opening position)

This is my most frustrating, challenging, and worst performing, positions. I’ve written ad nauseum about the disconnect between equities prices and economic fundamentals and I still continue to maintain the position, that the US equities are due for a major reality check. As long as the Federal Reserve continues to push for a zero interest rate policy, the scale is tipped in favour of stocks, making this position very difficult to hold. Fortunately, because I still remain committed to my long term strategy of buying Ill-run, Ill-managed companies that are selling at a discount, I have been able to capitalize on the bull run of the past few years. I am trying to buy companies that have durable brands and will withstand whatever pull back eventually comes. I am clearly very early to this game and I have no idea when things will switch, so I am paying to stay in the game.

Costco Ticker-COST (Bought at $112.27, Currently $115.67, +3.02%)

Broken record again. Another very well-run, best of breed companies, that while generating razor thin margins, continues to generate consistent Economic Profit has established a respected brand. They just know how to execute. While analyst will lament their growth numbers, it really comes down to durable profitability and creating a value shopping experience for their customers. The company also believes that its employees are assets that bring value and not a cost centre like some of their main competitors. It’s a company I am fine to hold on for a long time as core holding.

When I look at the list of stocks and companies that I have purchased, there’s a lot there that satisfies me. I feel that these companies are in keeping with my investment strategy regarding types of investments I want to own (i.e. buy great well-run businesses that are leaders in its sector,  that are not popular with the market consensus, but continue to generate meaningful Economic Profit in good and bad economic cycles, and buy them when they are cheap). While I am pessimistic about the overall direction and sentiment that is in the stock market, I am very encouraged that these companies I’ve invested in will rise above the noise the short term and create meaningful wealth in my portfolios. I am trying to take a page from my piece on using tennis strategies by making long term investments in quality companies (i.e. keeping the ball in play and staying in the match). Eventually when the stock market pulls back some or all of these positions will likely pull back. Assuming the fundamentals of the businesses remains the same; I would then look to add to those positions to average down the costs. We’ll see what the rest of the year brings.