Portfolio Review Part I

It’s almost the New Year and it’s time to pause and think about what we are all doing with our portfolios. In this regard I’ve been trying to find a way to update my own portfolio. I’m a great believer that people that write about investment should actually invest and disclose what, why and how they are doing themselves. For anyone interested, my New Year resolution is to update developments on my blog. I already disclose positions for stocks written about in posts but I realize it’s better to disclose a whole portfolio.

How I’m Positioned for the New Year

For the record, I am hedged with a long-stocks/short-index strategy and leverage up on relative outperformance against the market. If I truly wanted to diversify against macro risk, I would sector weight the long side against the index. This just means holding the same percentage of my long side in, say, financials as the index I was shorting. I try to do this to a certain extent, but I also believe in taking a macro view if not a market one.

A quick summary of what I am holding now:

Forgive the pitiable attempt at color coding. The idea was to differentiate these positions in line with the views that they manifest. For easy reading I’ll bunch these stocks into sub-headings.

US Housing and Credit

I’m sympathetic to the idea that the US is heading for a protracted recovery in housing and credit issuance, the idea being that the trough was so bad that any companies with decent evaluations now can expect upside as the economy improves and their operational leverage kicks in. Home Depot is a pure play on housing and the US consumer. Similarly, home furnishings company Williams-Sonoma (NYSE: WSM) is expanding at the right time in the right sector and offers some growth kicker from international expansion.

The idea behind Wells Fargo is to capture some exposure to the US housing market via its substantive holdings of US mortgages. The lesson of 2008 is not that it this just about the value of an asset but more about where it was trending. Wells Fargo holds a lot of mortgages. Housing is starting to recover, ergo buy Wells Fargo. Equifax (NYSE: EFX) is kind of related to this idea because it will benefit from increased credit issuance and that will only come if the housing market is improving. The Federal Reserve is doing anything it can to pump liquidity into the economy and one way or another this is going to mean increased credit issuance.

I’m going to loosely include TJX Companies (NYSE: TJX) on this list. Although the off-price retailer is often seen as a counter-cyclical play, I think that the trend towards buying from discounters is firmly entrenched now, and I note that the growth of Aldi and Lidl in Germany did not let up even as the economy recovered from the integration of East Germany.

Cloud Plays

The cloud sector has been hot this year but it’s not just about the infrastructural plays. Intuit  (NASDAQ: INTU) and Adobe Systems (NASDAQ: ADBE) are two examples of companies benefiting from a shift to selling software as a service. There has been a lot of ink spilt by journalists over Adobe recently, and my eyes glaze over with boredom every time a wannabe shorter starts talking about the reduction in earnings in 2013 and the high PE ratio without actually mentioning that this is part of the plan! The idea is to generate more long term revenue and customer retention, and 2013 is the trough year.

As for Intuit, I've discussed it here. It is growing its small business group revenues, and this is the key to ensuring that it can diversify away from being a play on the economy via its consumer tax revenues. Its cash flow generation is very strong and the evaluation is attractive. Investors shouldn't underestimate the opportunity to cross sell solutions from its product portfolio.

I'll get into the rest of the portfolio in the second part of this review.