Monday, October 15, 2012

Portfolio Review

I’ve been writing for the Fool for a few months now and I thought it would be interesting to make a review of articles and performance. Now I know what you want to know, but my overall portfolio return is a bit meaningless to most because I follow a leveraged and hedged (short indices not stocks) strategy. For the record I’m up 38% on the year but the last quarter has been slightly negative. I’m going to talk about the long side of the portfolio and specifically stocks that I have written about before the end of May. I very much enjoy writing these articles as they help me to clarify thoughts and I (hope) become a better investor while sharing some ideas. I write them as a kind of investing journal.

In summary it has been a bit of a frustrating quarter. On the positive side I’ve been slightly overweight housing and avoided the slump in mining, commodities and anything else China related. The defensives have held up well and my overweight on health care has paid off. On the negative, a few tech stocks have fallen sharply without actually delivering anything traumatic in their results. For example Check Point Software $CHKP hasn’t seen estimates lowered at all recently and I think the market is overly focusing on its declining product sales growth while ignoring the fact that its software blade sells and doing very well.

F5 Networks $FFIV grew product revenues over 15% in the last quarter and is generating bundles of cash. No matter the market just seems to think that technology should be sold off in a broad brush when growth starts to weaken. It doesn’t matter that the primary growth drivers for both these companies are secular. Namely, criminals trying to penetrate IT systems and the growth of smart phone usage and bandwidth demand.

With that said, in the rest of this article I will focus on the stocks that I’ve been pleased with. I will follow up with another article on the negatives avoided in the quarter,  the mistakes, the stocks that got away and some opportunities out there

The Good

These are the stocks that I am happy with. As a rule and for disclosure purposes, the stocks in these tables in bold are the ones I hold now. The stocks in bold italics are those that I have held recently but no longer hold.

Stock Link To Original Article Performance Since Article
Sirona Dental Systems Sirona Link 5.3%
Nordstrom Nordstrom Link 4.2%
Fortinet Fortinet Link 12%
Equinix Equinix Link 23.6%
Cal-Maine Foods Cal-Maine Link 12.5%
Home Depot Home Depot Link 9.6%
Wells Fargo Well Fargo Link 3.8%
Acuity Brands Acuity Brands Link 10.8%

Sirona Dental Systems $SIRO is a little known and discussed stock. For the life of me I don’t know why! It offers good exposure to ageing demographics and is in a sector of health care without significant reimbursement issues. Its CEREC Cad/Cam technology is game-changing and still operates with low penetration rates. Long term growth looks assured.

I’ve written a lot about Nordstrom $JWN and I think the company is extremely well run. We all know that the US mass-market consumer is being more frugal and moving towards shopping online. Nordstrom’s response? Well, the company is investing aggressively in its online presence and in its lower priced Rack stores. Meanwhile it continues to execute well in its legacy stores. It all makes sense and I like the way the company is adjusting to the new retail reality. I am looking for a re-entry point.

I continue to hold IT security company Fortinet $FTNT. This is a play on the rise of cyber crime but it is also a ‘trading down’ play in my opinion. Its unified threat management (UTM) solutions are typical sold to the SMB and mid-market customer. In this environment I think the mid-market may well be moving down to Fortinet’s options as the company is increasingly demonstrating it can service them too. The other thing to like about Fortinet is that it maybe a takeover target. It’s highly cash generative, sells to a core market that many large IT companies don’t service and it has the kind of growth rates that the likes of IBM $IBM and Cisco $CSCO can only dream of.

No One Ever Lost Money Taking a Profit

Two stocks that I no longer hold are Equinix $EQIX and Cal-Maine $CALM. These two couldn’t be more different. Equinix is a data center company with very strong underlying cash flow and very high client retention ratios. The sector has been on fire this year and I’ve also benefitted from holding Telecity in the UK. My reasons for selling both are purely that on a risk/reward basis they are both fully valued right now. Every data center company that I look at (including Equinix) is aggressively ramping up capacity and at some point I can’t help thinking that over-capacity could ensue.  I don’t know when or if this will happen, so all I can do is set a price target with a margin of safety. Equinix’s price is way above that now. Was I too conservative? Well, no one ever lost money by taking a profit.

Turning to Cal-Maine, this company is the largest US producer of shell eggs. I like this company a lot but am a bit concerned by the threat of corn price hikes following inclement weather. In the long run, higher corn prices might be a good thing for Cal-Maine but markets might not see it like that in the near term.

Housing Overweight Pays Off

The last three are all US housing related stocks. I’m happy to be overweight this sector and think there is more to come. Wells Fargo $WFC offers exposure to housing because it has been gradually increasing its US mortgage exposure over the last few years. In addition, US households have tidied up their balance sheets significantly and many measures of credit quality are running at multi-year lows. As a financial it will also offer upside if sentiment changes of the Sovereign Debt issues in Europe.

I’ve written a lot about Home Depot $HD and think the stock remains good value. It’s only recently that the company started talking about a recovery in housing and the scene looks set for Home Depot to start decoupling its top-line growth from GDP type growth. In addition, it has a very strong market position and is undergoing initiatives like increasing its own brand sales in store. I'm also a fan of lighting company Acuity Brands $AYI. It offers a combination of upside exposure to US residential and commercial construction and there is the long term kicker of growing LED adoption spurring sales growth.