Thursday, May 16, 2013

Portfolio Review April 2013

I would rather forget last month. After nine months of gains, I hit a nasty double digit loss. In truth, this sort of thing was inevitable and the preceding months were as much a part of the process as last month was. The previous month’s write-up and links to others can be found here. I do this stuff because I happen to believe that anyone writing about investment should disclose his own performance. 

Philosophizing over, I'm going to confess to a certain amount of exasperation at being hit with accounting errors with Ixia, a weaker than expected tax return season at Intuit, the loss of a major customer contract with Regal Beloit, and when even Pfizer disappoints then you know it’s not going to be your month.

The weakness at IBM and Citrix Systems was a bit more predictable and I topped up on both. I suspected tech would be weak over earnings and held back buying more before their earnings. In fact, this approach helped me avoid disasters in companies I like and have held before, such as Fortinet and F5 Networks. It was definitely a month of dodging bullets! I’ve put some performance charts at the end of this post for those interested. I will update my current portfolio on my blog in a few days.

For now, it’s the usual format of reviewing the articles for January (i.e. three months previously) and picking out some investing ideas that readers might find useful. The companies in bold are those that I hold now. Acuity Brands was sold because it hit its price target. F5 Networks was sold because it hit its target and my general tech caution.

View Company + Article Link Performance Since Fool Article
Buy Citrix Systems -4.8%
Buy Walgreen 19.1%
Buy Wells Fargo 8.1%
Buy Sanofi (Paris) 3.9%
Buy IBM .2%
Buy Johnson & Johnson 14.5%
Positive Acuity Brands 10.4%
Positive Intel Corp 14.3%
Positive Capital One 3.8%
Positive F5 Networks -39.8%
Positive Google 8.3%
Evaluation Covidien 6.9%
Evaluation Cooper Companies 13.1%
Evaluation Fastenal -2.1%
Evaluation Perrigo 13%
Caution PPG Industries 6.7%
Caution MSC Industrial 3.8%
Caution Varian Medical -11.8%
Caution Quest Diagnostics -.7%
Caution Check Point Software -4.4%
Caution Dover Corp 1.6%
Caution McDonald's 7.5%

Superficially these numbers look good, but let’s recall that the S&P 500 has put on over 12% in 2013. The ‘buy’ stocks averaged 6.8%, ‘positive’ recorded (0.6)%!, ‘evaluation’ returned 7.7%, and ‘caution’ did 0.4%. The difference between what I bought and didn’t was 6.8% to 1.9%.

Some observations and conclusions

  • It’s been a relatively tough period for tech stocks like Fortinet, F5 Networks, IBM, and Citrix, and cyclicals like Dover, Fastenal (NASDAQ: FAST) and MSC Industrial.

  • The defensives are starting to look fully priced with nice gains for Cooper Companies and Perrigo.

  • Tech ‘value’ ex Intel and Check Point Software (NASDAQ: CHKP) has held up better than the growth tech stocks.

  • Nothing but nothing seems to stop the market wanting to buy yield with stocks like Johnson & Johnson and McDonald’s.

In conclusion, think it’s time to start thinking about buying some select industrial and/or technology stocks.

Some stocks to consider

With these thoughts in mind, I think Intel (NASDAQ: INTC) and Check Point Software are worth a look. I’ve covered both after their recent results in articles linked here and here. Intel is a curious beast in the market place. It offers a high yield, good value, and cyclical exposure to consumer electronics, but it is also faces long-term challenges from ARM core processors. It also offers a restructuring story as it adjusts to the shift in computing devices. Gross margin appears to be bottoming and while it hasn’t turned the corner yet ,the potential upside in the stock remains.

As for Check Point, in retrospect, its last results were okay and there are some signs that its customers are more willing to buy its new products. Like Intel, it offers a genuine value proposition because of its high cash conversion and potential to leverage its technology into expanding its sales. On the other hand, I think the market is tired of seeing falling product and license growth and a ‘cash harvesting’ approach to its business development. If that should change, I’m sure the stock will go higher. But will it?

The next two stocks are both industrials. I still think Fastenal is expensive and am concerned with the falling sales growth, but if you are looking for some short-term upside from the idea that industrials will come back then, it is a great stock to look at. Its visibility is limited and it is exposed to short cycle decision making by purchasers, all of which leaves it susceptible to violent changes in sentiment by its customers. Bad when it’s bad, good when it’s good. If you like the industrial space and want a near-term play, then Fastenal is worth picking up

Another industrial worth considering is PPG Industries (NYSE: PPG). I like its end market exposure and its purchase of Akzo Nobel’s U.S. household paints division. Aerospace and automotive are the two stand out sectors within industrial, and PPG is well placed in both. Its long-term dividend record is excellent and it is a very good generator of cash and has the potential to generate some synergy-based cost savings with the acquisition. Despite reporting a good quarter -- notably better than so many other industrials -- the stock has lagged the overall market and looks decent value. I may pick some up.

The last stock for consideration is Capital One Financial (NYSE: COF). The stock has underperformed this year and the credit card companies do face challenges to net interest margins thanks to low interest rates and the maturing of higher rate loans. Moreover, the weak recovery has left the yield curve relatively flat and loan demand is not where it usually is at this stage of an economic recovery. No matter, if you believe that employment will keep increasing and the recovery is ongoing, then at some point demand will come back. Meanwhile, asset quality and delinquency rates carry on improving so Capital One is well positioned to catch an uptick in end demand.

Additional data

As discussed above, here is how this lousy month affected performance since inception. The blue line is my portfolio the red line is the S&P 500.


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