Sunday, October 14, 2012

A GARP Portfolio Review

As a financial blogger it’s always useful to keep a watch list of stocks for readers to keep an eye out for. I love reading others' lists and seeing if there is anything interesting I hadn’t thought of on it. I tend to favor growth at reasonable price (GARP) investing so the majority of the stocks in this article will be GARP candidates.

With this in mind I decided to do a mini-review of some of the stocks I’ve been writing about. You can find the stocks that did well linked here and the bullets I dodged linked here. In this article I want to focus on the ones that got away, my regrets/opportunities and the stocks that I liked but thought were too expensive.

The Ones That Got Away

These are stocks that I have written positively about and liked but for some reason haven’t got around to buying. They have actually done quite well. I have no excuses here. This is purely down to either indolence or me trying to be ‘smart’ by waiting for a dip. The lesson learned here is that if you like a stock and its valuation then just go ahead and buy it. Leave market timing to the gamblers.

Stock   Link  Return Since Article
 Google  GOOG Link  17.3%
 Discover Financial Services  DFS Link  13.5%
 Church & Dwight  CHD Link  4.3%
 V.F. Corp  VFC Link  10.3%

I like Google $GOOG and think the company is managing the transition to mobile internet usage very well. Its dominant position in mobile search plus its integrated services across many platforms will enable it to continue to generate strong growth and huge cash flows for years to come. I think the trend towards e-commerce is inexorable and crosses national and cultural factors.

Maybe it’s because I use Adsense in my blog that I can see that North American ad revenue per user tends to be higher than anywhere else. However, there is no reason why other countries can’t and won’t increase these metrics to close to what North America does. All of which spells huge growth potential for Google, and I think long term prospects are excellent. 

Church & Dwight $CHD is a stock I’ve held and sold out of when it hit my price target. It dipped recently on a relatively poor set of results but I think its ‘recession proof’ story remains compelling. The poor performance was actually limited to one product line (Orajel) and the company believes it has rectified the situation through product innovation. Management did not lower internal forecasts. Such conditions usually create buying opportunities but alas I wasn’t quick enough to catch it.

With regards Discover Financial Services $DFS I was hoping to catch a dip and for some reason it slipped off the radar for the few early days in June when it did. I missed it and it has surged ever since. V.F.Corp $VFC is different tale but emanates from the same desire to be too smart. I like the company a lot but I tried to guess some weakness in an upcoming report which might then have created a good buying opportunity. They raised guidance. Enough said.

Regrets & Opportunities

Stock Stock Link Return Since Article
Check Point Software CHKP Link -23.2%
F5 Networks FFIV Link -27.2%
Equifax EFX Link      .1%
CVS CVS Link     -.2%
Riverbed RVBD Link      .2%

It’s been a tough summer for technology, and holding Check Point Software $CHKP and F5 Networks $FFIV hasn’t been my finest hour.  However, I happen to believe that both are undervalued and took the opportunity to buy some more. At some point sentiment will change. We all know that tech faces some economic headwinds but I simply don’t believe that holding a stock (Check Point) that generated 9% of its current enterprise value (EV) in 2011 and has double digit growth prospects is a bad idea. Similarly, despite some caution from its customers, F5 Networks is still set for high teens earnings growth. Sticking to the cash flow theme, by my calculations it has just generated 6.1% of its EV in free cash flow. Does it really deserve the trashing the market has given it?

The story at CVS $CVS is one that I believe demonstrates how short term the market can think sometimes. Somehow the fact that Walgreen $WAG and Express Scripts have resolved their difference has created a catalyst whereby every money manager shifts out of CVS and into Walgreens because that is the ‘hot money’ trade. Frankly, I think they are wrong. Don’t underestimate customer inertia; once a customer shifts to CVS I think they will do everything they can to keep him/her. The company is indicating 50% retention of the customers that shifted over but my hunch is that there will be some upside to this number. Moreover, the stock is well placed to increase margins via higher sales of generics and private label products.

Good But Weren’t Cheap

Stock Stock Link Return Since Article
Allergan AGN Link -7.6%
TJX Companies TJX Link 9.8%
Estee Lauder EL Link 1%
Perrigo PRGO Link 6.4%
Novo Nordisk NVO Link 7.2%
Cree CREE Link -6.5%

Interestingly, Allergan has had a pullback and it could be time to take a close look again. TJX Companies $TJX is a super company and a great way to play the ‘trading down’ trend within clothing and home ware. The company is executing on all fronts but it does look fully priced in for now. The sector isn’t without competition and, when stocks have this kind of run, any disappointment will hit them hard.

Perrigo $PRGO is another story that has really captured investors’ attention. Private label OTC health care and nutritional products (as mentioned above with CVS) are categories that will experience strong growth for years to come. Unfortunately, I think it is more than fully priced into Perrigo’s share price. I see no reason to pay an EV/EBITDA multiple of 15 for this stock, despite how attractive it is.