Sunday, January 8, 2017

2016 Portfolio Performance

Well the first full calendar year has passed for The Long Haul Portfolio.  It seems just like yesterday that I started this endeavor back in October 2015. It's been fun tracking and writing about my picks.  2016 was for sure a year to remember.  We transitioned from one of the most volatile starts ever, to one of the calmest summers ever, to one of the sharpest post election rallies ever. You definitely needed nerves of steel to ride this year out.

Of course our style of investing is meant to be very long term so all these bumps in the road are just minor blips on our screen.

Let me get to some recent economic data before I get to the portfolio results. We received a slew of economic reports this week to start the year. I'll simply discuss a few of them.

Jobs Jobs Jobs.  Yep it's all about jobs. That's what every politician bases their campaign off of.  How they are going to create more jobs for you, and get you higher pay. Sounds good to just about everyone of course.  Well the jobs keep coming for the most part in this economy.  Growth still isn't what we consider robust based on historical standards, but when much of the rest of the world is struggling, any growth looks good.

Initial Claims came in at 235k, and NFP came in at 156k. Both are pretty good numbers and show the economy is still stable.  The unemployment rate sits at 4.7%, but I understand to many it seems that number is mis-leading. I'd agree, but it's what we use to judge the health of our economy so it's what we stick with.

A nice number was ISM Services which had a strong 57.2 reading.  That's great for our service based economy.  With consumer confidence at decade long highs I think we have a lot to look forward to the rest of this year.

2016 Results 

Now onto the portfolio results. Let me be the first to say it's disappointing to say this. The portfolio ended the year up 8.37% since inception vs the SPY's 12.10% gain. The disparity in performance isn't that any of the companies are in dire trouble. Although the portfolio is essentially price weighted that means stocks with high notional values drag down the performance even worse when they perform badly. That means a strong performer such as Universal Corp, or Emerson Electric have less of an impact.

Furthermore the big rally we saw at the end of the year was skewed towards stocks the portfolio isn't heavy in.  You can see that with the performance of our picks Cummins, Emerson Electric, and IBM. They have had great years, although a lot of that was back loaded. The reason is sentiment has shifted towards different names than the portfolio holds. Back at the beginning of the year everyone was clamoring for some of my favorites such as McCormick, Church & Dwight, and Altria.  Not so much anymore.  These stocks have meandered lately, and have not really participated much in the recent rally.

The portfolio had quite a few highlights this year.  I'll start with the bad highlights first.

Cognizant Technology Solutions(CTSH) announced they had some payment improprieties related to some business functions. They self reported to the SEC so it seems the company could avoid a worst case scenario. That didn't stop the stock from plunging. Fortunately Elliott Management released a report saying the company could be worth upwards of $80/share. Their report highlighted a lot of reasons why the company is under performing, and their advice on how to rectify the situation. Overall I'd agree some changes could be made. In reality some of the issues in my opinion are hidden compliments such as zero debt. Either way even after this news the stock is still having a hard time recovering from it's losses earlier in the year.

We had a big accounting scare and Hain Celestial(HAIN).  That prompted me to make my first sell. That's something I wish I didn't have to do. But I don't like it when there are accounting issues. That's unacceptable to me. It was later found the issue didn't need any results to be re-stated, but the damage was done. The stock has wandered around in the 30's ever since.  I think that has more to do with the multiple investors are willing to pay for food companies, and Hain was trading at premium due to it's track record for growth. I still like the healthy food category. 

That brings us to our buyouts. It's always a nice confirmation when one of your picks gets a buyout offer. It shows you aren't the only one seeing the value in a company. WhiteWave Foods is being bought out by Danone for $56.25/share. The transaction is expected to be completed in the first quarter.  I won't be buying shares of Danone, but I wish the company the best. They got a great price for WhiteWave.

Next was Reynolds American(RAI) buyout offer from fellow portfolio member British American Tobacco(BTI) in a cash/stock deal.  I personally like the split as it allows me to still participate in any gains. I don't like the added currency exposure I get, but I still see the tobacco industry as a stable performer long term.

Praxair(PX) is also in an agreement of equals to merge with Linde AG.  I think this deal makes sense for their industry. Although I'm a little upset the company didn't get the upper hand in it.  It allows both companies to better compete in a consolidating industry. This pick hasn't been a blockbuster, but if the world economy can start gaining some traction I could see this pick taking off quickly.  

For the most part I'm pleased with the performance of the portfolio. It's heavy on tobacco and alcohol which represent 36.20% of the portfolio overall. Additionally a few names such as Boston Beer(SAM), Diageo(DEO), IBM, and Costco(COST) represent 25.78% of the portfolio due to their high share prices. Unfortunately for me besides IBM each of those picks has has essentially been a laggard overall.  I'm still hopeful. If some of these names wake up the portfolio will see a nice uptick in performance. In hindsight I was way to early on buying Boston Beer. That's about my only regret. 

I have a few picks in mind for 2017. I probably won't add them all, but I'll be keeping my eye on them.  The first full year didn't end the way I wanted it to, but I think this portfolio still has some legs underneath it.  I wouldn't be surprised to see it outperform the index over the long term. These are solid companies in industries with great long term fundamentals.

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