Reviewing My Portfolio

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

At the end of every month I like to review quarterly performance and discuss some of the stocks that I researched entering into the quarter. It’s a useful activity for me because it helps me analyze what I am doing right and wrong; I hope readers find it interesting too. Performance was good in the quarter with a 16.5% gain resulting in 80.1% for the year. I don't expect this performance to continue next year, but here is hoping.

I'm leveraged and hedge long stock positions with index shorts, so my aim is primarily to look at stocks with a view to buying them. I’m a bit of a stickler for journalists actually investing rather than writing gushing praise or criticism over certain stocks. The true test of an investor’s ability is how he invests. With this in mind, the stocks labeled ‘positive’ are those I own or took a position in, while ‘neutral’ means stocks that I was interested in but for whatever reason didn’t buy.  ‘Cautious’ just means that, in researching the stock, I took a bit of a negative view.

Here are the stocks, links to previous posts and performance:

<table> <tbody> <tr> <td>Company</td> <td>View + Article Link</td> <td>Performance Since Article</td> </tr> <tr> <td>Roper Industries</td> <td><a href="/saintgermain/2012/09/17/best-run-company-america/11814/">Positive</a></td> <td>6.6%</td> </tr> <tr> <td>Equifax</td> <td><a href="/saintgermain/2012/09/19/stock-set-benefit-qe3/12231/">Positive</a></td> <td>14.1%</td> </tr> <tr> <td>ConAgra</td> <td><a href="/saintgermain/2012/09/21/best-high-yield-food-stocks/12523/">Positive</a></td> <td>8.2%</td> </tr> <tr> <td>Adobe Systems</td> <td><a href="">Positive</a></td> <td>14.5%</td> </tr> <tr> <td>Kroger</td> <td><a href="/saintgermain/2012/09/13/what-look-retailer/11588/">Neutral</a></td> <td>9.6%</td> </tr> <tr> <td>Verint Systems</td> <td><a href="/saintgermain/2012/09/14/verint/11629/">Neutral</a></td> <td>4.3%</td> </tr> <tr> <td>Pall Corp</td> <td><a href="">Neutral</a></td> <td>-5.6%</td> </tr> <tr> <td>Pier 1 Imports</td> <td><a href="/saintgermain/2012/09/17/good-way-play-housing-recovery/11921/">Neutral</a></td> <td>4%</td> </tr> <tr> <td>United Natural</td> <td><a href="">Neutral</a></td> <td>-10.4%</td> </tr> <tr> <td>FedEx</td> <td><a href="/saintgermain/2012/09/19/company-lowered-estimates-there-upside/12293/">Neutral</a></td> <td>5.7%</td> </tr> <tr> <td>Cognex</td> <td><a href="">Neutral</a></td> <td>0.2%</td> </tr> <tr> <td>Verifone</td> <td><a href="/saintgermain/2012/09/10/stock-crashed-it-buyng-opportunity/11467/">Neutral</a></td> <td>-7.7%</td> </tr> <tr> <td>Bed Bath & Beyond</td> <td><a href="/saintgermain/2012/09/24/can-company-fight-competition/12590/">Neutral</a></td> <td>-9.8%</td> </tr> <tr> <td>Tibco Software</td> <td><a href="/saintgermain/2012/09/25/big-data-play-has-strong-prospects/12688/">Neutral</a></td> <td>-26%</td> </tr> <tr> <td> <p>Paychex</p> </td> <td><a href="">Neutral</a></td> <td>-4.1%</td> </tr> <tr> <td>FactSet Research</td> <td><a href="/saintgermain/2012/09/28/fast-growing-financial-services-firm/12920/">Neutral</a></td> <td>-7.8%</td> </tr> <tr> <td>PVH</td> <td><a href="/saintgermain/2012/09/07/can-pvh-continue-outperform/11059/">Neutral</a></td> <td>17.1%</td> </tr> <tr> <td>Ciena</td> <td><a href="/saintgermain/2012/09/07/latest-telco-company-warning/11111/">Neutral</a></td> <td>5.8%</td> </tr> <tr> <td>Mead Johnson</td> <td><a href="/saintgermain/2012/09/10/defensive-growth-sector-within-emerging-markets/11165/">Neutral</a></td> <td>-13.3%</td> </tr> <tr> <td>Campbell Soup</td> <td><a href="/saintgermain/2012/09/10/another-disappointing-quarter-food-company/11329/">Cautious</a></td> <td>3%</td> </tr> <tr> <td>H.J. Heinz</td> <td><a href="/saintgermain/2012/09/05/should-you-buy-heinz/10888/">Cautious</a></td> <td>5%</td> </tr> <tr> <td>AutoZone</td> <td><a href="">Cautious</a></td> <td> <p>-3.8%</p> </td> </tr> </tbody> </table>

 The 'positive' stocks recorded 10.9% performance while 'neutral' recorded -2.3% returns and 'cautious' saw only a 1.4% increase.

What’s nice about this performance is that the positive stocks have outperformed the neutral stocks. It’s been a few months since this happened. I’m pleased with the excessive prophylaxis that has kept me away from some bad situations in the quarter. My suspicion is that good investing is really all about anticipating and avoiding risk. This subject is far too little discussed in investing circles because it usually implies a lack of confidence or belief. This is a shame because I am much more interested in how someone manages risk rather than losing to another perma-bull trying to get you to invest with him.

Avoiding Risk

The key to avoiding risk is understanding the key profit drivers for the company and what exogenous conditions will move its share price. Once you have done this then you can also avoid risk because you will have also identified the downside drivers.

An example of this is AutoZone (NYSE: AZO). The stock has surged over the last few years and has the usual followers who tag onto a big up move and try to get associated with the stock.  Jim Cramer is always screaming about it. The story is that as the US car fleet gets older (in part due to the recession) then auto dealers will see increases in marginal demand as older cars require more servicing. The problem with this argument is that when new car sales come back, aided by increased ease of financing, then AutoZone and others could see a slowdown in demand. This is a cyclical risk and I would argue that the company is facing it right now.

Another good example is Mead Johnson Nutrition (NYSE: MJN). Infant and baby nutrition are both attractive long term markets to be in, but they are highly competitive. A number of its rivals are seeking to take market share away from the company and in particular within emerging markets (EM). Moreover, the company’s evaluation seemed to be assuming that everything was progressing as planned. Companies like H.J. Heinz, Danone and Nestle are all big players in this marketplace, and they are all looking to counterbalance weak domestic sales by expanding into EM. The risk was that MJN’s stock price would not support any market share loss from the company. This risk proved relevant as MJN gave weaker numbers.

Another interesting company is Cognex (NASDAQ: CGNX). I like this company and think its long term growth is assured. However, in the near term, it does face some potential disappointments from manufacturing companies realigning their investment priorities in light of weaker end demand. I confess I tend to shy away from near term risk. I prefer to hold fire and then assess the situation should disappointing news flow transpire. In the long term it is inconceivable that CGNX’s visualization machines won’t see increasing adoption in EM, but the key is to try to pick an appropriate entry point. I’m still not sure we are there yet.

When Others See too Much Risk

A classic situation with this is Adobe Systems (NASDAQ: ADBE). The company is shifting to a cloud based sales model which results in lower initial earnings.  Of course, this looks so inviting for the shorters out there who just have one evaluation metric (the forward PE) to use.  Frankly this kind of approach is sloppy and suggests that they do not understand what Adobe is trying to do here. It’s their loss, because Adobe is executing ahead of plans and driving new subscribers. Its plans are working right now and, in my opinion, the lifetime value of its customers is likely to increase with the new model.

Lastly, I am impressed by how Equifax (NYSE: EFX) is performing. This company’s key driver is the increased issuance of credit in North America. This is something that many investors are still frightened to believe in, thanks to the events of 2008-09. There is no shortages of commentators willing to rehash old battles with the financial services sector and lay out doomsday scenarios for future credit bubbles etc. This is a shame, because credit is a critical part of the economy and the Federal Reserve and Government are doing everything they can to get the banks lending again. Why fight them?

SaintGermain has positions in Adobe Systems, Roper Industries and Equifax. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Adobe Systems and Cognex. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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