Portfolio Three Updated March 2016 – Tax Time

Portfolio Three is our third longest lived portfolio, at 8 1/2 years.  The beneficiary contributed $4500 and the trustee $9000 for a total of $13,500.  The current value is $12,814 for a loss of ($685) or (5%).  Adjusted for the timing of cash flows, this is (1%) a year.  The detail can be found in the links on the right or here.

This year we sold Yahoo after all the drama and bought ConocoPhillips, Alibaba and Facebook.

There are a few stocks on watch.  LinkedIn (LNKD) dropped almost half its value when it issued forward earnings guidance; since then the stock has stabilized and is on watch.  I still believe in the company although many others apparently do not.  ConocoPhillips (COP) was hit immediately by the collapse in oil prices (even though we were buying it on a dip) – this is also on watch to see how they do in this difficult environment for commodity companies.  Wynn (WYNN) is a casino company with properties in Macau China catering to heavy Chinese gamblers; the crackdown on corruption has severely dampened earnings.

For taxes in 2015, there is a net loss for the year due primarily to a fall in value of Weibo (WB) which was pummeled in the great Chinese stock market rout and we sold the stock (it since gained back some of its value).  

Of the other stocks we’ve sold in recent years they are still below the price we sold them at.

Portfolio Three After 2015 Purchases and Sales

Portfolio_Three_Updated_Fall_2015

Attached is a screen shot from Google Finance of Portfolio Three after stock sales and purchases for 2015.  New stocks are Alibaba (BABA), ConocoPhillips (COP), and Facebook (FB).  The returns by stock represent stock price appreciation not dividends so dividend stocks have a higher return than listed.

Stock Selections for 2015

Attached are the stock selections for 2015.  We are expanding the list slightly because most of the funds not only have new cash to invest for 2015 but we also did a recent round of selling that needs to be re-invested.

US Stocks

  1. Box (BOX) – $13, 52 week range $11-$24, $1.5B market cap, no dividend, little debt.  Box provides a cloud-based document storage and governance capability and is growing rapidly among Fortune 500 corporations
  2. Mastercard (MA) – $101, 52 week range $75-$101, $114B market cap, 0.7% yield, $1.5B debt.  Mastercard is a global credit card brand that benefits from the long-term migration of cash and checks to credit.  Their biggest competitor, Visa, recently announced a merger with Visa Europe which likely will distract that company for several years and give Mastercard an opportunity to pick up market share
  3. ConocoPhillips (COP) – $55, 52 week range $41-$74, $68B market cap, 6% yield, $25B debt.  ConocoPhillips is an oil and gas exploration company that is a major bet on future price rises for natural gas and oil with technical knowhow and efficient production.  They recently made major cuts in response to the commodity price collapse
  4. Union Pacific (UNP) – $86, 52 week range $79-$124, $73B market cap, 2.6% yield, $13B debt.  Union Pacific operates a massive US rail network and has been hit recently by reductions in the industrial and commodity economies.  However, they are highly efficient and represent a solid long term bet on industrial growth and recovery

Foreign Stocks

  1. Tata Motors (TTM) – $30, 52 week range $21-$51, $19B market cap, no dividend, $11B.  Tata Motors is an Indian based company that benefits from low costs and growth in the Indian car market and also owns Jaguar and Land Rover.  The stock will be down a bit early next week because they just released earnings and showed an unexpected loss due to a one time event
  2. China Eastern Airlines (CEA) – $30, 52 week range $20-$50, $8B market cap, no dividend, $6B debt.  China Eastern Airlines can benefit from the growth in outbound Chinese tourism and investment as well as potential government mandated consolidation in the airlines sector which could result in higher profits and reduced competition
  3. Alibaba (BABA) – $83, 52 week range $57-$120, $207B market cap, no dividend, $8B debt.  Alibaba is a major web commerce / mobile player in China.  Much of Yahoo’s value was based on an ownership stake in this entity (we recently sold off Yahoo)
  4. Novartis (NVS) – $89, 52 week range $88-$106, $214B market cap, 2.7% yield, $22B debt.  Novartis is a major Swiss based drug maker

Wildcards

This is a new section.  These are some riskier stocks either because of high prices or uncertain outcomes.

  1. Tesla (TSLA) – $232, 52 week range $181-$286, $30B market cap, no dividend, $2.6B debt.  Tesla is a maker of electric cars led by the charismatic Elon Musk.  Their valuation is very high considering that they lose money, gas prices are low which reduces the savings from electricity, and they deliver a fraction of the cars that a “major” automotive giant would.  On the other hand, their fan base is passionate and their design is praised
  2. Facebook (FB) – $107, 52 week range $72-$110, $301B market cap, no dividend, little debt.  Facebook is the ubiquitous social media presence with a huge and growing global and mobile footprint and messaging.  Their market cap has almost tripled since their IPO and are led by the charismatic Mark Zuckerberg
  3. Cheniere (LNG) – $46, 52 week range $43-$82, $11B market cap, no dividend, $16B debt.  Cheniere is a long term bet on liquified natural gas, which takes (relatively) cheap US gas and ships it to offshore countries seeking clean energy and diversified energy sources.  This is a risky but possible bet because the facilities are mostly built but yet to ship gas and prices are falling, but the long term upside is also large if they can survive and prosper

Portfolio Two Updated October 2015

Portfolio Two is our second longest portfolio, at 11 years.  The beneficiary contributed $6000 and the trustee contributed $12,000 for a total of $18,000.  The current value is $28,334 for a gain of $10,334 or 57%, which works out to about 6.8% / year across the life of the portfolio.  You can download the detail here or utilize the links on the right side of the page.

This portfolio has been buoyed by two star performers, Amazon (AMZN) and Facebook (FB).  Both of those stocks have moved up substantially recently and account for half the total gain.

Poor performers are TransAlta (TAC), which was hammered by the drop in the Canadian dollar and the collapse of the commodity markets, and Wynn (WYNN) resorts which was hurt badly by changes in Chinese policy that limit gambling and especially “high roller” VIP gambling in Macau.

We will likely sell off all these stocks and move into cash and then ETF’s, likely following the approach listed in this post titled “Investing – Basic Plan” of low-cost ETF’s and CD’s purchased through a brokerage.  At approximately $28,000, the portfolio would likely be about $10,000 5 year CD (at around 2% / year) and $9,000 of VTI (Vanguard total stock market) and $9,000 of VEU (Vanguard total stock market ex-USA).  There would be about $6900 in net taxable gains that would need to be paid and the trustee / their parents need to decide who is going to pay this amount (if the rate was 15%, this would be about $1035 in taxes).  If the taxes were paid out of this distribution, then we would be re-investing just under $27,000.  This portfolio has unique reasons for doing the sell-off and re-investment into ETF’s that we don’t plan to repeat with other portfolios unless it is necessary.

Trends in Stocks

Investing in stocks is always hard.  You are looking at data about the past but you are betting on an individual stock in the future.  In addition, there has been huge correlation among stocks and markets and the impact of currencies and central bankers (often inter-twined) has given various world markets boom and bust qualities.

In the US, there are two markets, the NASDAQ and NYSE.  NASDAQ has traditionally been more technology focused, meaning that when these stocks go up, the NASDAQ soars.   Here is a quote on “the only six stocks that matter” about the NASDAQ from the Wall Street Journal:

Six firms— Amazon.com Inc.,Google Inc.,Apple Inc.,FacebookInc.,Netflix Inc. and Gilead Sciences Inc.—now account for more than half of the $664 billion in value added this year to the NasdaqComposite Index, according to data compiled by brokerage firm JonesTrading.

Thus the bottom line is that if you don’t have these stocks in your portfolio, the overall index may be rising (and our benchmark for performance), but your own returns will be worse.  We do have some of Amazon and Facebook in portfolio 2, but not much of it overall.

Outside the USA, foreign markets have been hurt by the rising US dollar, which makes their market values lower for us here in the USA (where the dollar is our currency).  This hurts stock investments in Europe (the Euro), Canada (the Loonie), and Australia (the Australian dollar) if you are denominated in US dollars (which we are).   The dollar is up significantly vs. almost every other currency in the world with the exception of the Chinese Yuan.

The Chinese market went crazy this year, in what appears to be a major bubble, that recently started crashing and was accompanied by strong intervention from the central authorities, who went after short sellers and even stopped stocks from trading for various reasons.   At one point almost the entire Chinese stock market by valuation (over 80%) was not trading.  The rationale is that if stocks are heading down, and you can stop trading, then this gives the market participants time to stop panicking.  This type of intervention stops the market from functioning efficiently, however, and will have many other unforeseen impacts down the road.

Mergers and acquisitions (M&A) activity also soared in 2015, which is a sign of bullishness and also likely a sign of a market peak.  A Wall Street Journal article recently summed it up:

Companies are merging at a pace unseen in nearly a decade. Halfway through the year, about $2.15 trillion in M&A deals or offers have been announced globally, according to Dealogic. That puts 2015 on pace to challenge the biggest year on record, 2007, when companies inked deals worth $4.3 trillion… In industries ranging from health care to technology to media, chief executives are rushing to make acquisitions, often either in anticipation of takeover moves by rivals or in response to them.

When acquisitions occur, you as a stock market investor typically want to be the “acquired” company, not the “acquirer”.  The “acquired” company receives a premium price to their current market value but the burden of “earning” that higher price falls on to the acquired company, and typically M&A does not pay off long term for most companies (as opposed to internal or “organic” growth).  While there have been many acquisitions, most notably in the health care / insurance / pharma industry which is consolidating under Obamacare, our portfolios had few of these acquired companies in the mix.

Finally, you had a decimation of the commodity indexes.  Commodities such as oil, some foodstuffs, natural gas, iron ore, copper, gold, etc… have seen their prices collapse, which in turn damages the stocks of mining companies, oil companies, and many other participants in the commodity value chain.  Per Bloomberg:

Almost all commodity markets have taken a severe beating lately. The aggregate Bloomberg Commodities Index is down 61 percent from its 2008 peak and 46 percent from the 2011 post-crisis high

These are severe reductions.  They impact entire economies particularly the Arab countries (which make all their export income in oil), Russia (many commodities), Australia and Canada.  There are large “secondary” impacts as well – reduced commodity prices hurt service demand in Canada and Australia and put their housing boom at risk.

So what does this mean for us and our portfolios?  We’ve been hurt by the commodity bust, the rise of the US dollar (on our foreign stocks), and we’ve missed some of the booming stocks because they were narrowly concentrated in a few names and some of the largest M&A was in sectors where we had few investments.

We are now going to look at some of the stocks and cull some prior to our next round of purchases which will occur in August – September as the beneficiaries of the various portfolios head off to school for the year, and will tie new purchases (of the cash) with additional investments that will be made soon.

Portfolio Two Updated March, 2015 – and It’s Tax Time

Portfolio 2 is our second longest portfolio, at 10 1/2 years. The beneficiary contributed $5500 and the trustee $11,000 for a total of $16,500. The current value is $24,497 for a gain of $9,397 or 57% or 7.4% across the life of the fund. Go here for details or download the spreadsheet from the link on the right.

During 2014 we sold 4 stocks; 2 are near their sales price, Urban Outfitters went up about 20% since then, and Yandex halved in price. So we are about even on that.

During 2014 the portfolio generated $449 in dividends; that’s a yield of about 1.9%. That’s pretty good when you consider that cash yields pretty much zero nowadays.

For stocks on watch – we still have TransAlta (Canadian utility) which has a high dividend and also some stocks that have had big gains, such as Toyota Motor and of course Facebook. Statoil and the 2 Canadian banks also have hit problems due to the commodity price crash (especially oil) and the rise of the US dollar which makes holding stocks denominated in Canadian dollars and Norwegian Kroner less valuable.

Portfolio Two Quick Update December 2014

Portfolio Two is listed below. We were hit in Statoil due to the crude collapse and the falling Norwegian currency. TransAlta, the Canadian energy company, was also hit by these forces.

The portfolio also has Amazon, which is falling a bit relative to other tech companies. They are a well run, long term player, but the street was looking for (marginally) higher profits.

Wynn casinos are also on watch because of a crack down on corruption in China, which limits gambling revenues.

Many other companies are doing well, particularly Facebook and Nidec (Japan) which have half the portfolio’s current unrealized gains.

Portfolio_2_12-12-14