Reviewing Portfolio Performance

Lee is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I’m a great believer in the notion that anyone who writes about investing should at least try to write about his investment performance. In a similar vein, I’ve always found it to be amusing that some investment professionals and journalists trumpet their investment expertise to high heaven yet are incredibly reluctant to outline if they are actually any good at it. Aside from the issue of transparency, I also believe that adhering to the self imposed discipline of structuring thoughts by writing them down is a valuable way to improve your investing.

For these reasons, every month I do a short review of the quarter with reference to previous articles. Performance was good in the quarter with a 16.7% gain taking me to 59.9% for the year. I’m leveraged and hedged. In other words, don’t try this at home folks if you can’t handle extra market volatility and want to be long only. My correlation to the market is minimal and, for the record, I short indices. I’m going to discuss some of the articles and positions taken in July.

I've arranged them in four notional categories that reflect the general view at the time.

<table> <tbody> <tr> <td>Company</td> <td>View+ Article Link</td> <td>Performace Since Article</td> </tr> <tr> <td>Acuity Brands</td> <td><a href="/saintgermain/2012/07/06/acuity/6588/">Positive</a></td> <td>10.8%</td> </tr> <tr> <td>Viscofan</td> <td><a href="/saintgermain/2012/07/06/viscofan/6670/">Positive</a></td> <td>9.2%</td> </tr> <tr> <td>Check Point</td> <td><a href="/saintgermain/2012/07/22/it-security-play-soars-moderate-results/7483/">Positive</a></td> <td>-7.9%</td> </tr> <tr> <td>Covidien</td> <td><a href="/saintgermain/2012/07/17/undervalued-health-care-stock/7212/">Positive</a></td> <td>7.0%</td> </tr> <tr> <td>F5 Networks</td> <td><a href="/saintgermain/2012/07/23/where-next-networking-play/7533/">Positive</a></td> <td>-10.4%</td> </tr> <tr> <td>Google</td> <td><a href="/saintgermain/2012/07/25/who-will-win-race-monetize-mobile/7837/">Positive</a></td> <td>13.2%</td> </tr> <tr> <td>Johnson & Johnson</td> <td><a href="/saintgermain/2012/07/21/healthcare-giant-keeps-rolling-along/7424/">Positive</a></td> <td>5.1%</td> </tr> <tr> <td>McCormick</td> <td><a href="/saintgermain/2012/07/06/food-company-delivering-what-about-its-evaluation/6540/">Evaluation</a></td> <td>0.9%</td> </tr> <tr> <td>VF Corp</td> <td><a href="/saintgermain/2012/07/24/you-already-know-brands-perhaps-its-time-learn-abo/7695/">Evaluation</a></td> <td>8.1%</td> </tr> <tr> <td>Fastenal</td> <td><a href="/saintgermain/2012/07/16/fastenal2/7106/">Evaluation</a></td> <td>5.8%</td> </tr> <tr> <td>Paychex</td> <td><a href="/saintgermain/2012/07/05/mixed-outlook-outsourcing-firms/6444/">Caution</a></td> <td>7.0%</td> </tr> <tr> <td>General Mills</td> <td><a href="/saintgermain/2012/07/05/food-company-meeting-its-challenges/6512/">Caution</a></td> <td>4.7%</td> </tr> <tr> <td>H & R Block</td> <td><a href="/saintgermain/2012/07/15/support-services-company-offers-value-where-growth/6893/">Caution</a></td> <td>10.6%</td> </tr> <tr> <td>Acme Packet</td> <td><a href="/saintgermain/2012/07/07/another-tech-company-crashes/6734/">Caution</a></td> <td>12.8%</td> </tr> <tr> <td>General Electric</td> <td><a href="/saintgermain/2012/07/27/it-case-jam-today-stock/7965/">Negative</a></td> <td>2.8%</td> </tr> <tr> <td>Caterpillar</td> <td><a href="/saintgermain/2012/07/13/can-chinas-stimulus-spending-be-relied-upon/7052/">Negative</a></td> <td>8.1%</td> </tr> <tr> <td>Informatica</td> <td><a href="/saintgermain/2012/07/08/tech-company-right-blame-economy/6761/">Negative</a></td> <td>-11.1</td> </tr> <tr> <td>Facebook</td> <td><a href="/saintgermain/2012/07/25/who-will-win-race-monetize-mobile/7837/">Negative</a></td> <td>-25.4%</td> </tr> </tbody> </table>

These performance numbers came over generally favorable conditions for the market so you should expect some upward drift. Similarly, I usually look at stocks with a view to buying so there is some pre-selection here.

The interesting thing is that, in order of attractiveness, the positive stocks recorded an average of 3.8% and ‘evaluation’ (stocks that I like but think are not good value) recorded a 5% gain. Stocks regarded with ‘caution’ returned 8.8% while ‘negative’ stocks recorded a loss of 6.4%.

My first tentative conclusion is that the negative stocks did underperform and I would encourage readers to be objective with investing when seeing something negative about a company you like or hold. George Soros changes his mind at the drop of a hat. Ego has no place in making money.

Negative Stocks

I’m struck by how many people defend Facebook (NASDAQ: FB) just because they like using the site. I like Jessica Alba but I’m not going out and buying her exercise video or book on great topiary designs of the 18th century, or whatever. The company has done a great job in demonstrating it can make money from mobile recently, but investors need to appreciate that the Facebook experience will change with the move to mobile/tablet Internet usage. Its content will change and the way it is used will adjust to a new format. In addition, increasing privacy concerns are adjusting the management of content that other users allow each other to see. For example, look out for how many women will increasingly game for high value men by filtering content and how it is viewed.

GE recently gave some disappointing numbers, and I think there are reasons to worry about some of its long cycle businesses. I’m puzzled by Caterpillar’s strength over this period because nothing has happened to dispel any worries over China; but perhaps some value hunters have stepped in following its sharp fall this year?

Caution Stocks

It’s not lost on me that this was the strongest performing group! If there is a conclusion to be drawn from it, it is that three of the stocks are all relatively high yield plays (the market has loved this theme recently); the other, Acme Packet, is really the story of a company that got crushed when its management was too optimistic, but it has good long term prospects. Incidentally I have recently turned a bit more positive on the company in an article linked here.

The outperformance of the high yield stocks is tempting to chase (indeed I have been looking at them for this reason), but I always think investment discipline should take precedence of just buying something that you think others would buy.

Evaluation Stocks

These are the stocks that I like but think are too expensive right now. They performed okay even though the recent results from McCormick (NYSE: MKC) and V.F. Corp contained some negatives. On the other hand, Fastenal is doing really well operationally. I’ve covered all three of these companies in recent articles (no one can accuse me of not monitoring). McCormick’s article is linked here, VF Corp linked here and Fastenal linked here. In particular, McCormick is frustrating. I like its long term prospects, but it is hard to argue that it is good value right now.

Positive Stocks

Returning to my point about pre-selection, the number of stocks in this category is not reflective of any serious investment research. The fact is that you should be rejecting far more stocks than you are positive over. However, I only look closer at things that strike me as interesting. With that said, it was a mixed performance here. I haven’t covered myself in glory with Check Point Software (NASDAQ: CHKP) or F5 Networks, which I recently wrote about here. I happen to think both stocks are cheap right now and added some more after recent results. Both have reduced estimates, but I think they were cheap before and they are even better value now. You are looking at two stocks that are generating large amounts of cash flows and are still on high single digit and mid-teens earnings growth rates respectively. Before beating up on both stocks' top line numbers, I would suggest looking at deferred revenues which are still growing strongly for both.

Google (NASDAQ: GOOG) disappointed the market recently, but then again this is what you have to expect sometimes from the company. It doesn’t give guidance so its results always create a lot of volatility. However, evidence from Facebook and elsewhere demonstrates that meaningful revenues can be generated from mobile, and if anyone can take advantage it will be Google. It’s a huge cash generator with an incredible position in mobile search.

Acuity Brands is a bit of a favorite of mine, and I bought back in (I had sold on evaluation grounds) after the recent earnings. The rationale can be found here and I hope readers found European company Viscofan to be an interesting and new stock to look at. Covidien’s recent weakness has been a bit puzzling, but perhaps the market is reading across from Johnson & Johnson’s (NYSE: JNJ) lackluster performance in surgery. I discussed the latter linked here. The company seems to be taking an age to turn around its consumer products division, but the latent potential remains there. On the other hand, the pharmaceuticals division is working really well and the stock remains good value.

The Bottom Line

I’m pleased with how things are going and will try to learn from this quarter. In reality it has been an overweight position in healthcare and US housing related stocks that has helped generate outperformance in my wider portfolio, but given that market conditions remain favorable for good yielding blue chips, I think it’s time to renew a focus on finding some with some good growth prospects. Thanks for sticking with this long post, and I hope there are some useful ideas in it for investors.

SaintGermain has positions in Acuity Brands, Johnson & Johnson, F5 Networks, Check Point Software, Viscofan and Covidien. The Motley Fool owns shares of Check Point Software Technologies, Facebook, Google, and Johnson & Johnson and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Check Point Software Technologies, Facebook, Google, Johnson & Johnson, and McCormick & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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