Strubel Investment Management Q4 letter to clients.
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Acacia Capital was up 12.27% for the second quarter, although it remains in the red for the year because of how difficult the first quarter was. The fund is down 14.25% for the first half of the year. Q2 2020 hedge fund letters, conferences and more Top five holdings Acacia's top five holdings accounted for Read More
It was a great year for stocks and a poor year for bonds. The S&P 500, an index of roughly the 500 largest American stocks, returned 32.39% in 2013. The MSCI World Market Index which is a group of 1,612 of the largest stocks in the world returned 24%.
Not so for the bond market, investment-grade bonds returned -2.42% and inflation-protected bonds returned in the neighborhood of -9%. Other asset classes were mixed as well. Real estate posted a small gain of 2.42%, and emerging market stocks returned -5%.
Our stock portfolios (which include stocks from both the US and internationally) which make up the bulk of most client assets, performed very well.
Our more aggressive portfolio returned 36.61% before fees, beating both the S&P 500 and the MSCI World Index handily.
Our more conservative stock portfolio kept pace with the US market and easily surpassed the world market, returning 32.08% before fees.
Most of our clients have a diversified portfolio containing a mix of stocks, bonds, and real estate so the performance of your individual portfolio will be a combination of all the numbers.
Also due to my growing business I’ve had to make some changes on how client performance statements are presented. For clients with accounts at FOLIO the performance statements will now show only your accounts performance and not show the performance of any benchmarks. It was becoming to labor intensive to compute that information for each client on a quarterly basis. I made the change this quarter after our year of excellent performance so you can be assured that nothing is being hidden. Instead I will go over the performance versus benchmarks with each client during our individual meetings
Despite bond performance being negative this year, I believe bonds are an important part of most investors’ portfolios. The goal of money management isn’t to beat an index or earn the highest possible return; it is to help each client reach individual financial goals.
The best way to do that is with an intelligently created, diversified portfolio. Many clients have told me horror stories from their past experiences with other firms and other advisors. Advisors would shift client’s funds into riskier stocks at the top of the market, such as one client that was placed almost exclusively into tech stocks prior to the tech bubble burst. Another client had an advisor that tried to time the moves of the market by shifting in and out of stocks and bonds. Over 5 years that client’s rate of return was approximately 0% after fees!
While assets such as bonds and real estate provided disappointing returns this year and might do the same next year, they still need to be included in most clients’ portfolios. In the event of a prolonged and steep market downturn, bonds will likely do well and be an important (and profitable) asset to own.
We made several changes to our portfolios and have a few probable other changes on the horizon.
Stock portfolio changes
Capital Appreciation Stock Portfolio
We sold out of Cubic Corp (CUB) and Advance Auto Parts (AAP). We also had one of our holdings, Dell (DELL), go private.
To replace them, we bought defense contractor Northrop Grumman (NOC), IT giant International Business Machines (IBM), and repurchased an old favorite, global consulting company Accenture (ACN). None of these companies have a particularly interesting story. They are all large, high quality companies available for an attractive price.
You also shouldn’t be surprised if you see us sell out of GlaxoSmithKline (GSK), Roche (RHHBY), Novartis (NVS), Scripps Network Interactive (SNI) or Corinthian Colleges (COCO). Scripps Network Interactive may be bought out by a larger media company, and we are giving management at Corinthian Colleges one more year to turn around operations before we finally throw in the towel. The pharmaceutical companies such as Novartis, Glaxo, and Roche are still fine companies and investment but if we find a more attractive opportunity those would be the stocks we would sell.
As replacements, we are taking a long look at Qualcomm (QCOM), Altria (MO), Amdocs (DOX), and Coach (COH). I’m currently conducting research on Coach and interested in anyone who has opinions on Coach handbags. If you are a Coach customer or were a Coach customer, I’d love to hear your thoughts on the brand. You can send me a quick email with your thoughts to [email protected] or give me a call at 717-293-1170.
In past newsletters, I mentioned we might sell Visa (V). Well, what happens may be a pattern: Visa stock looks expensive, and then Visa reports results, and the company does well. When taking into that account, the latest results don’t look as expensive as before, so we decide to hold. Visa has an excellent business model, has only one major competitor (MasterCard), and is riding a secular trend of increasing credit and debit card (and other online payment methods) usage and decreasing cash and check usage. Visa is one of the more expensive stocks we own, but also one of the best businesses. We will likely keep the stock awhile longer. But, at the risk of sounding like a broken record, don’t be surprised if we sell.
Dividend Stock Portfolio
For our dividend portfolio, look for us to sell some or all of the following companies: Nestle (NSRGY), Raytheon (RTN), Johnson & Johnson (JNJ), and H&R Block (HRB). All of the stocks have risen substantially and the dividend yield on many is barely above the S&P 500 average. Nestle is 2.48%, Raytheon is 2.56%, Johnson & Johnson is 2.78%, and H&R Block is 2.81%. We generally wait to sell until a company announces its dividend raise for the year. If it is still low, then we will sell.
To replace some of those companies, we are looking at two very different investments: Darden Restaurants (DRI) and Mind C.T.I. (MNDO)
To give you an idea of what my research process is like, here is my current thinking on both of those potential investments. Since nothing is final yet we could buy both, one, or none.
Darden Restaurants (DRI)
Darden is one of the world’s largest full service restaurant companies. Darden is basically three companies under one corporate umbrella. Darden owns two mature restaurant brands, Olive Garden and Red Lobster. It also owns a portfolio of higher growth brands like LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52, and Eddie Vs Prime Seafood. The third business is real estate. Unlike other restaurant companies, Darden owns much of its real estate. With 2,138 locations, the company owns the land and buildings of 1,048 and the buildings at an additional 802 leased sites.
The current arrangement is not only tax inefficient for Darden shareholders but it also appears difficult for the company executives to manage. Darden has vastly underperformed industry peers over the last 5 years. A large hedge fund, Barington Capital, is currently attempting to get Darden to separate into three distinct entities to create more value for shareholders, and we believe they will be successful.
Darden represents the type of low risk investment we look for in dividend portfolios. Darden is profitable and growing although less so when compared to peers. The company also pays an attractive dividend of over 4%. If Barington Capital is successful, then we stand to make quite a bit of money. If not, then we will be left holding a profitable company and get paid a 4% dividend for our troubles. Not a bad situation.
MIND C.T.I. (MNDO)
MIND C.T.I. is a small Israeli telecommunications company, quite different from Darden. Unlike Darden, the company is extremely well run by its founder Monica Lancu and very shareholder friendly. The company pays out virtually all earnings in the form of a dividend. The current dividend yield is around 12%.
The company operates in a very profitable niche. It provides billing and CRM software to small telecom companies that are overlooked by the big boys, such as Oracle or Amdocs. Once a company is using MIND C.T.I.’s software it is difficult to switch to a competitor since the software is so integrated into a company’s business processes. The flipside is that it’s extremely difficult to win new customers since clients are reluctant to switch.
So it’s difficult for MIND C.T.I. to grow. Basically, the 12% dividend investors get each year from MIND is about all the return they can expect. Considering that the long-term average return for small cap stocks is around 11%, 12% isn’t too bad a deal. It’s especially not bad considering how expensive traditional “safe” stocks like Proctor & Gamble, McDonalds, and Coca Cola are trading.
With the stock market rising so much this year, we are forced to go off the beaten path so to speak to find attractive dividend investments that meet our risk reward criteria.
We are also looking at Kraft Foods (KRFT), Ecopetrol (EC), and Cisco (CSCO) as potential investments for the dividend portfolio.
Looking to 2014
The economy is still barely recovering. The employment to population ratio which shows what percent of the population is working is still down almost 6% from its peak and has been stuck at 58.6%.
Industrial capacity utilization, which measures how much of the current manufacturing capacity of the country is being used, rose to 79%. Likely do to companies not replace old, worn out plant and equipment because of low demand.
Finally looking at the jobs picture we are still 20 million jobs short.
This graph shows the number of jobs we need so that each unemployed person, each person that dropped out of the labor force but would like a job, and each person working part time for economic reasons would have a full time job. The economy has 24 million people who want a full time job and only 4 million jobs available. So it is not a case of workers having the wrong skills or not having the proper incentives to look for a job, there is simply 20 million too few jobs available.
2013 was basically a wasted year for job creation with available jobs flat lining at 4 million after a few years of increasing. The lack of increase in jobs is due to the cuts in government spending and tax increases. In 2013 the payroll tax break expired and harsh cuts on the order of several billions were made to the federal budget.
This austerity effectively put the real economic recovery on hold. The unemployment rate dropped as more people left the labor force but the true unemployment picture has barely changed.
With a pool of 20 million unemployed people out there companies can keep down labor costs and increase profitability. This increase in profitability combined with some growth is what has fueled the rise in the stock market over the past few years.
With less austerity this year we will hopefully see stronger economic growth but we are still very far from a healthy economy.
Here’s hoping you and your family had a wonderful holiday season and will have a great 2014.
As always, referrals are appreciated. If you know of someone who could use my services please pass on my name and contact information or hand out my business card.
P.S. A reminder to Coach handbag purchasers, I’d like to hear your thoughts on the brand or your purchasing experience. Please contact me.