Saturday, April 6, 2013

Portfolio Review For March

Every month, I like to look back at the quarter’s performance and look at the articles I wrote over the month leading into. It’s a useful discipline, and I think writers have a duty to disclose whether they can actually do what they write about.

I had a return to form last month with a 10.2% return, which contributed to an 18.9% return for the quarter and 57.5% over the last year. I've been on a good run which will be hard to sustain. The previous write up can be found here, and I will update the current portfolio on my blog in due course.

This month, I’m going to look back at December’s articles originally published on the Fool.

I hedge and am leveraged, so expect my performance to continue to be market neutral (R^2=.08) and more volatile than the market. I short indices not stocks. Readers should be aware that the S&P 500 has put on around 10.8% since the start of December, so as a hedged investor, I’m looking to at least beat that on the long side.

It’s the usual format with links to articles in the table and a summation of the views taken at the time. The stocks in bold are those that I bought or held.

View Company+Link Performance Since Article (%)
Buy Adobe Systems 13.7
Buy Walgreen 23.9
Positive Pier 1 Imports 12.2
Positive Paychex 11.9
Evaluation Kroger 19.6
Evaluation Cooper Companies 11.5
Evaluation Costco 8.9
Evaluation General Mills 17.3
Caution Restoration Hardware 1.4
Caution Ciena .8
Caution FactSet Research 4.6
Caution Procter & Gamble 11.5
Caution FedEx 15.1
Caution Bed Bath & Beyond 14.8
Caution Patterson Companies 11
Caution Finisar -5.9
Caution AutoZone 9.5
Caution Lululemon -19.6
Caution Tibco Software -1.8

The ‘buy’ stocks averaged 18.8% with the ‘positive’ (I liked but didn’t buy or hold) stocks returning 12.1%. ‘Evaluation’ (like but not cheap enough) generated 14.3% and the ‘caution’ (liked or disliked with some concerns) stocks came in with 3.8%. These distinctions can be seen as arbitrary, but if you average all the stuff I didn’t buy/hold, it comes to a less-than-market return of 7.2%.

Evaluation and positive stocks

The reason I didn’t buy Pier 1 Imports and Paychex was because I felt they were both pretty good short to mid-term plays, but they are not stocks that I would like to commit to for the long term.

I’m also aware that the ‘evaluation’ stocks outperformed the market, but these things happen in a bull market. Kroger and Costco are both fine and worthy companies and I have updated views on them here and here.

The company that interests me the most in this group is The Cooper Companies. Eye care companies have strong long-term growth prospects from an aging Western demographic and the high incidence of myopia in the Far East. Moreover, Cooper can generate significant revenue and margin expansion by shifting people to a one-day modality, and encouraging customers to trade up to silicone hydrogel lenses.

The good news is that this sort of stock should trade at a premium because it offers relatively recession resistant growth. The bad news is that (from my point of view) it is no longer great value. One to monitor.

With General Mills and Procter & Gamble , I think we have a classic case of the market rewarding fashionable stocks because they suit its mood. Right now, the market wants large cap high yield stocks, because they act as a proxy for very low U.S. Government bond yields.

Procter & Gamble also has the upside prospect of its management getting round to releasing the latent potential of some of its powerful brands. I’m not the biggest fan of the company, and note that it hasn’t been doing that well in China compared to its rivals, although it seems to be stabilizing market share in the U.S. No matter the market wants this sort of stock, so don’t be surprised if it goes up in line with the market.

What’s with the caution?

Actually, investors should research more ‘caution’ than ‘buy’ stocks, because this helps avoid overtrading and creates a more rigorous approach to investing. I’m proud to be a coward.

Delving into the list, we come to Bed Bath & Beyond . The company would release results on the April 10, and investors will get a further update on its plans to restructure and turn around disappointing same-store sales growth. Unfortunately, there are tangible signs that online competitors are eroding market share.

However, the market has decided to give the company the benefit of the doubt. Indeed, the rest of the housing related sector is doing well and the market has been bullish overall. In such circumstances, you can expect stocks like Bed Bath & Beyond to do well, but much of the gains could disappear if the next earnings aren’t good.

The next two highlighted stocks are both telcos. Finisar recently reported its familiar story of strong datacom spending but weak telecom revenue. Many observers believe that this could be a better year for telco spending, but it certainly didn’t show up in Finisar's numbers.

In addition, some analysts think there is a potential longer-term issue with Cisco (currently a key customer) silicon photonics-based solutions that will rival Finisar’s existing products. Finisar claims it is ‘agnostic’ over using the technology itself in future, but that will be small recompense for losing market share to others using it first.

Ciena reported a good quarter. Shareholders were immediately rewarded with a sharp rise, only to see it start falling afterwards. This is inevitably going to be the situation with a stock like Ciena.

The company has good exposure to some of the genuine growth areas of telco spending like network convergence, Voice over LTE, and 100G networking. These are areas that the major carriers are spending money in this year. Indeed, analysts have some pretty spectacular growth rate forecast for the next few years. However, the stock trades 37 times earnings for October 2013. It’s the sort of stock that will be volatile and move around based on sentiment over telco spending prospects.

The bottom line

One conclusion from this quarter's performance is always to remember to not be selective over how you view your risk aversion. It would be easy for me to pick out one or two winners from the 'caution' list and then beat myself up over not buying them, but the same approach led me to avoid the losers too. And as the numbers outline, the stocks I didn't buy were under performers overall.

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