Portfolio Review Part II

In the first article of this series, I discussed how I was setting up for 2013. I'm going to get to the process here, but first a recap of the overall portfolio. For the record, my New Year resolution is  to update the portfolio on my blog linked here.

The current holdings are as follows:

Technology

Another interesting area of IT is security. Check Point looks like a value play, but it needs to convince the market that it can continue double digit earnings growth even if product growth is slowing. I picked up some Fortinet (NASDAQ: FTNT) after Palo Alto’s recent results confirmed that the sector wasn’t any weaker. Fortinet looks like a good value; the company generates a lot of cash and is more focused on the SMB market than its rivals. I think a target price of $23 is not excessive for such a strong growth company even if its guidance proved too exuberant in the summer.

The last stock in the tech holdings is F5 Networks (NASDAQ: FFIV). It has been a turbulent year for the stock and there are legitimate fears that it is over-reliant on Government revenues right now. Nevertheless, F5 generates lots of cash flow and I think telco spending (a key vertical for F5) could come back next year. The underlying trend of bandwidth-rich application growth driven by increased connectivity remains intact, and F5 is a good play on this.

Stay Healthy

Pfizer, Johnson & Johnson (NYSE: JNJ) and Sanofi Aventis are my ways of playing the market’s demand for high and stable dividend yield and all have worked well. JNJ is also attractive because its main profit driver will come from execution rather than macro issues. JNJ needs to deal with product recalls, the integration of Synthes and development sales of some of its impressive new pharmaceuticals. It is slowly working, and I think the value proposition remains compelling.

The other two specific healthcare stocks are the Biotech Holders ETF (just a nice way to get diversified exposure to biotech) and a reduced weight position in a small cap UK pharma play Vectura. The latter has a lot of cash on the balance sheet plus great prospects with some COPD compounds in partnership with Novartis. There is also upside from the approval of some blockbuster asthma and COPD drugs. Well worth a look but with the usual caveats attached to small cap biotech/pharma investing.

The Misfits

This group of stocks can be loosely defined as all having growth drivers that are somewhat non-cyclical. Wabtec offers exposure to railway spending, and I like Roper Industries as a superbly run company with leadership in a diverse set of end markets. I think the market is undervaluing Walgreen (NYSE: WAG) just because it has suffered this year from the Express Scripts debacle, but the evaluation is attractive and it looks like it has passed the worst of it. Getting customers back will be difficult, but it will happen to a certain extent and the stock is cheap anyway.Tesco in the UK is in a similar situation. The company overstretched itself in recent years with things like ‘Fresh n Easy’ and expansion into Eastern Europe (where I live, and I assure you Tesco has nothing to offer over the local produce), which caused it to lose sight of the ball in the UK. No matter, it still has huge footfall and a dominant position. I think it can turns things around.

Nutreco is a Dutch animal and fish feed company and a great way to play increases in long term food pricing. Lighting company Acuity Brands (NYSE: AYI) is a stock I have been in and out of this year.  It is the leading player in industrial and commercial lighting in the US, and while its housing exposure is relatively small, I think history shows us that (with commercial in particular) these types of markets usually follow housing.  Home building takes place and then commercial properties are developed around them. In addition, there is a quiet revolution building within LED lighting and controls, which will slowly take share away from conventional lighting. They don’t appear to be higher margin products but I would expect increased volumes.

The last of the ‘misfit’ holdings is Allergan, a company with a nice mix of stable ophthalmic end markets and some secular growth prospects from the expansion of indications of Botox. The evaluation may appear rich, but investors should be willing to pay up for quality and the rate of cash conversion is quite high.

Observations

A cursory look at this portfolio would reveal a bias towards technology and healthcare, and I have no problem with that. An overweight position in the latter is a conscious choice, and with the technology stocks I think there is a nice mix of drivers that do not just mean I’m holding cyclical ‘beta.’ The one area that I am surprisingly weak in is food, where stocks like ConAgra and Viscofan were sold after hitting price targets. Similarly, I have no FMCG exposure and am probably a little light on the US consumer too. I will look to add another financial soon. Another area that I haven’t had time to explore is Europe, and I really need to add more there too.

In conclusion, I will look for a stock in food, retail, financials, possibly an FMCG (if I can find any on a reasonable evaluation) and there is probably room for another technology stock.