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The end of another month and it’s time to review performance. I like to do these things for my own analytical benefit and so readers might get access to an idea or two from an article. It’s also useful because it helps identify any stocks that have slipped under the value radar but may now be attractive.
January was a pretty good month and the return on the quarter was 21%, bringing the yearly return to 105.5%. Don’t get too excited--last year was a poor January, and I’m about to anniversary some very strong numbers for February-April last year. This performance won’t continue and I know it. I won’t yap on with investment jargon but for those who know and care I've attached a montly returns chart at the bottom of the article.
Stock Discussion
The format is the same as usual with links to the previous articles, all of which were originally on this site. I’m covering stocks discussed in October (for a three month view), and readers should note that the S&P 500 has put on 3.8% and 5.1% since the start and end of October until now. In other words, expect the stocks to have done well but note I’m leveraged and hedged. In other words, I just want to be ahead of the index with my stock picks.
Stocks in bold are those I have bought subsequently with any current positions outlined in the disclosure at the bottom of this article. I'll update current holdings on my blog in due course.
I'm pleased with the turnout here. The 'buy' stocks averaged 11.2% and the 'positive' stocks did 16.9%. The latter are stocks I liked but didn't buy at the time. The 'evaluation' stocks (I liked but rejected on value grounds) returned 6% and the 'caution' stocks averaged 3.7%.
Value in the Laggards?
A few words on the negative performers.
The main reason why Yum! Brands and Family Dollar (NYSE: FDO) have fallen is because their fundamentals have changed. Yum is tying its colors to the Chinese mast and all the major informal eating out companies are seeing slowing growth there. Throw in the alleged quality control problems with its chicken in China and it's surprising that the stock hasn’t fallen further. As for Family Dollar, all the dollar stores have seen slowing comparable sales growth this year. Perhaps it’s time they all cut back on their expansion plans? In addition, Family Dollar still has growth prospects, but I think it’s a question of calibrating them against the evaluation and risk, and it still doesn’t look cheap enough now.
VF Corp is becoming interesting because it is slowly coming into value range, while I think Discover Financial Service’s (NYSE: DFS) underperformance is a buying opportunity; I picked some up last month. The credit cycle is back and Discover has been growing loans. I think it is the right strategy, and the company will be rewarded for doing so. There are some headwinds because of older loans maturing and net interest margin pressures, but history suggests that when household wealth expands (as it is doing now) and employment increases then consumers will start lending again. I think there is upside here.
As for the other ‘caution’ stocks there isn’t really a theme here. Intel has its challenges managing the migration to tablets/mobile, but it is starting to look like good value now. If it can stabilize gross margins and stop downgrading top line guidance the stock can go much higher. We shall see.
With Pepsico (NYSE: PEP) I’m a great believer that management should ignore the market and just do what they think is right. However, in this case I’m with the market! Pepsico has some very powerful brands that it is not realizing the value of. The market seems to be whispering ‘break up, break up, split’ in Pepsico’s ear and this isn’t just about investment bankers tarting around trying to get fees. Emerging markets are different, and companies need strong product focus rather than a sprawling empire of products across all geographies. Moreover, nobody fills their kitchen with Pepsi products in order to do the company a favor or because they like everything Pepsi. They do it because of product innovation, marketing and quality. This requires focus.
Becoming Interesting?
McCormick(NYSE: MKC) is a bit like Family Dollar in some ways. It is defensive growth, but everybody knows it and has bid the stock up to such an evaluation that any hiccup will hurt investors. It recently guided below market estimates and the stock has fallen a bit. My previous view was that its industrial sales were slowing and much of the growth on the consumer side was due to acquisitions. This led me to suspect that market estimates for revenue growth were too high, and thus it has proved to be. Now that more realistic growth targets are being priced in, the stock is worth looking at.
Costco(NASDAQ: COST) has been performing very well but, again, this is a story of a quality stock on a premium rating. I like the company, and note how its gross margins are improving. The ‘trade-off’ of volume growth versus losing margin, or vice versa, seems to have stopped, and Costco looks set to expand both volumes and margins. Moreover, others have managed to increase hard line margins (something Costco didn’t do in the last quarter), and with the global consumer electronic market appearing weak there must surely be good opportunity for margin expansion in the US for Costco.
Finally, as promised above: You will note some hefty drawdown months, but it's par for the course and overall I’m pleased with how things are going, particularly with the lack of correlation.
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