A Month To Forget, by Brian Nelson, CFA
The period of January 15 to February 15 was a tough one for the Best Ideas portfolio. It was quite humbling.
Many of you have messaged me about appropriately communicating caution heading into 2014, and the market dropped quite a bit through the end of January. Our market call was looking spot on. However, in the past few weeks, the index has recovered to the levels at the beginning of 2014. Though we continue to exhibit prudence, the portfolio has unfortunately given up some ground during the month. We know we could do better, and we’re disappointed.
Union Pacific (UNP) and Intuitive Surgical (ISRG) were two relative outperformers in the period, but Ford (F), Intel (INTC), and Precision Castparts (PCP) gave up some of their gains from last month. For a portfolio that raced ahead significantly in the months since inception, it continues to digest some of its biggest gains. We’re taking this profit-taking in stride, as we’re laser-focused on growing long-term outperformance in the portfolio. When the opportunity is ripe, we will strike. Patience remains key to the Valuentum process (see page 11).
Still, with valuations as they are (the S&P 500 forward multiple above both its 5-year and 10-year averages), we don’t feel comfortable being 100% invested in the equity market and continue to believe that retaining some dry powder is the appropriate move (we’re about 75% invested in the portfolio at the moment). The indexes have essentially gone vertical since the beginning of 2013, and the large cash position in the portfolio has been a drag since then, costing a number of points of outperformance. A few untimely put options have also eaten into returns. Prudence, however, remains appropriate given market valuations.
That said, the underlying picks of the portfolio have been so good that we’ve been able to hold the ground with respect to overall portfolio out-performance. Said differently, we’re keeping pace with the market with only 3 of 4 cylinders firing. We can’t be too unhappy with the degree of outperformance (25.2 percentage points since inception), nor are we completely disappointed that the portfolio is up 70%+ since May 2011–-these performance measures are remarkable no matter how you look at them.
Before I go further and get into a discussion about the performance of the incremental transaction alert ideas, I wanted to say thank you. Thank you for making us your investment research provider and your source in your overall diligence process. You’ve seen our great qualities, you’ve seen our good ones, and you’ve seen us make mistakes. And through it all, we can’t begin to tell you how thrilled we are that you’re still here!
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INSIDE THIS ISSUE
1 A Month To Forget
3 United Technologies, Precision Castparts Confirm Aerospace Strength (tickers: PCP, UTX)
5 Investors Will Continue to Be Rewarded in eBay (ticker: EBAY)
6 Ford’s Pension Underfundedness Under Control (ticker: F)
8 Our Best Ideas Portfolio (see article for tickers)
9 Sign of the Times: Facebook Soars, Yahoo Sours (tickers: FB, YHOO)
11 Google Shows Why Patience and Perspective Are Important (ticker: GOOG)
12 Rio Tinto Announced Record Production for Iron Ore in 2013 (ticker: RIO)
13 Visa Boasts One of the Best Business Models on the Market Today (ticker: V)
14 Our Investment Thesis on Union Pacific Remains on Track (ticker: UNP)
15 Chipotle’s Fourth Quarter Was Impressive; Shares Still Expensive (ticker: CMG)
16 PotashCorp’s 2014 Earnings Will Decline Due to Pricing Pressure (ticker: POT)
17 Boeing’s Fourth-Quarter Results Were Disappointing, But We’re Not Worried about the Strength of Commercial Aerospace (tickers: BA, PCP)
18 Surveying the Outlooks of a Few Industrial Companies (tickers: APD, DD, DHR, ITW)
19 Housing Remains Resilient (ticker: DHI)
20 The Watch List
22 Featured Reports: EBAY, TSN, NDAQ
25 Our Stock-Selection Methodology