Friday, March 15, 2019

Shopping List March 2019 (Beta)

As an experiment, we want to provide on a monthly basis a list of dividend aristocrats from the S&P 500, that we believe are more attractive in relative terms than all other dividend aristocrats. At Optarix we call this list our "shopping list". To determine what goes on the list we are using a combination of price/earning ratio (P/E ratio) and dividend yield that is then translated into a score.

The list for March 2019 looks as follows:

Price (USD)
P/E ratio
AT&T Inc.
AbbVie Inc.
Cardinal Health Inc
People’s United Financial Inc
Exxon Mobil Corporation
Franklin Resources Inc.
Chevron Corporation

As a reference: As of writing the S&P 500 (SPX) stands at 2,822.48 and the S&P 500 Dividend Aristocrats stands at 1,1187.79.

The intention is to publish our shopping list on a regular basis and then revisit the list in the future.

How To Use The Shopping List
At Optarix we use this shopping list to compile a shortlist of positions we consider adding or increasing in our portfolio. At present we have shares in all of the above except for People's United Financial and Chevron. So we may choose to add these or we may choose to increase our positions in any of the other five over the next five months.

If you wish, you could use this list in different ways:
  1. To start a portfolio, invest an equal amount in each of these seven stocks
  2. If you have a diversified portfolio already, you can use this list to pick one or several to your portfolio
  3. If you have all of them in your portfolio already, then you could consider adding to one or several of these seven positions in your portfolio
Please note that there are several other factors that you may want to consider.

If you choose to start a new position, buy the stock only with an intention to keep them for at least 10 years. At Optarix our preferred holding period is "indefinitely".

The stocks in the shopping list are attractive on our view relative to the other dividend aristocrats in the S&P 500. We cannot say - in fact nobody can - how these stocks will perform in the future, relatively or absolutely. In particular we cannot make any predictions for these stocks as a group or for any of these individual stocks.

We believe, though, that all dividend aristocrats as a group represent a good, long-term investment and should see satisfactory average yearly returns over the next 10 years and beyond. "average yearly returns" means for any give year we may even see a negative return, e.g. the stock market may decrease a large percentage. Keep in mind that in the first decade of the century, the S&P 500 was down by over 60% year-on-year at a point.

You need to do your own due diligence. This post is not investment advice. If you choose to use the information in this post for inspiration and then go on doing more research on your own, then great! The stocks in the shopping list are a great fit for some portfolios. But they can be very bad choices for other portfolios, e.g. in terms of risk exposure to specific markets, industries, currencies, etc. or in terms of your investment goals and many more factors like these.

For the Optarix US portfolio we are considering to start new positions in either People's United Financal (PBCT) or Chevron (CVX) or both in the future. We may also choose to add to our positions that we hold in the other five stocks in the list.

Happy Investing!

Disclosure: We have positions in T, ABBV, CAH, XOM and BEN. We have no plans to initiate new or change existing positions in the next 48 hours.

Saturday, March 2, 2019

Feb 2019 Results: +1.54% Active Return vs S&P 500

The start into calendar year 2019 was quite impressive. The upside is that – on paper – the portfolios of many US stock market investors have seen a very good increase of value. On the downside this means that the price/earning ratio (P/E ratio) is increased again significantly. The pool of issues to choose from that are fairly priced, let alone underpriced, has reduced again. Among dividend aristocrats there are only two companies with P/E ratios below 10, i.e. Nucor (Symbol: NUE) and AT&T (Symbol: T). At the other end of the spectrum there are 5 with a P/E ratio above 30, and no less than 27 with a P/E ratio of over 20.

Generally, we use a rule of thumb that the P/E ratio should be no more than what we estimate the annual growth of earnings per share (EPS) will be for the given company over the next 5 to 10 years. Obviously, we cannot look into the future. We don’t know what the share market will be doing this week, this month or this year. It will fluctuate up or down (or both) in some random manner. We are convinced, though, that high-quality companies will do as well as the overall stock market, and dividend aristocrats will increase their dividend each year. And if one them doesn’t, we’ll sell shares that we may have in that company over a short period of time and close that position.

Equally, it’s good to see that occasionally there is a new addition to the list of dividend aristocrats. In Feb 2019 the new entrant was People’s United Financial Inc. (Symbol: PBCT). Using our own ranking system, PBCT is on position 1 of our “shopping list” at the moment. Generally, this means we may start a new position, typically by spreading several buys over the next 12 months.

Let’s now turn to the specific results for the Optarix US portfolio. For the 12 months endings 28 Feb 2019, the S&P returned 2.85% while our US portfolio returned 4.39%. Remember that we calculate all numbers after fees and after all taxes. These numbers mean that the Optarix US portfolio created an active return of +1.54%, i.e. this is the percentage in addition to what the S&P 500 returned for the same period. In the following graph you’ll see the active returns for the 12-month periods ending Feb 2018 to Feb 2019. There are 13 such periods.

This graph shows that overall the Optarix US portfolio did better than the S&P 500. One metric to assess the additional performance considering the additional risk is called “Information Ratio”. The metric is a number without unit. The higher the value the better. For the 12 months period ending 28 Feb 2019, the information ratio of our portfolio vs the S&P 500 was 1.43. Generally, any value greater than 0.6 is considered good or very good.

The following graph shows how the information ratio has developed from Nov 2018 to Feb 2019. Please do not read an upward trend into this graph. There is way too little data to support any trend in any direction. We are sharing this data just so that you get an impression of how the Optarix US portfolio is doing in terms of additional return and additional risk versus the S&P 500.

The annualized performance of the Optarix US portfolio as of 28 Feb 2019 is summarized in the following table:

Optarix US
S&P 500
Active Return
Trailing 2 years
Trailing 1 year

As always, please keep in mind that past performance is no indicator for future performance. Numerous studies have shown this. We don’t believe that the Optarix US portfolio is any different. If we can get close to the performance of the S&P 500 in the long run, that’d be great. At times we will fall short, e.g. in the 12 months ending 30 Jun 2018 (see graph above).

If the performance is better from time to time, we take that as a bonus not as something that happens just because we are so much smarter. We are not. We are just trying to apply some common sense including a buy-and-hold strategy. And we are happy to share our experiences both good and bad. 

Happy investing!

Tuesday, February 5, 2019

Jan 2019 Results: +1.39% Active Return vs S&P 500

After the previous month saw sinking indexes, January 2019 went better in terms of stock prices. The Optarix US portfolio again performed better than the S&P 500. For the twelve months ending 31 Jan 2019, the S&P dropped by -4.24% while our portfolio dropped -2.85%. As a result the active return was +1.39% for those twelve months.

We are quite pleased with this result. Again, the Optarix US portfolio performed better than the broad market. Again there was no change in the composition of our holdings. As mentioned previously we anticipate the next action to happen in Q2 or Q3 of this year. Most like that move will add one position to the portfolio.

Please note that we calculate returns after fees and taxes. Since your tax situation might be different and since you may have a different cost structure, your number may deviate from our results.

We'll continue to stick with our set of rules. Doing so takes biases and emotions out of the picture. Also, we don't believe that we will be able to "time" the market. Instead over time we will buy shares at times at favorable prices and at other times we may see a drop in the share price. That is of no concern to us as it will be on paper only. Our preferred holding period is "indefinitely". Therefore the actual share price is of no consequence once we started a position.

As with all rules there can be an exception. Let's assume we create a position at a price of $50 per share. If after a longer period of time, let's say 6, 12 or 18 months, the share price of that position has dropped significantly, we may add to that position if we continue to be convinced that the business in question is an excellent long-term investment.

We started publishing about our Optarix US Portfolio in January last year with announcing the results for the 12 months ending 31 Jan 2018. This means we are now in a position to also announce the results for the 2 years ending 31 Jan 2019. In those 24 months the S&P 500 increased by 8.93% annually while the Optarix US Portfolio grew by 11.46% annually. That's an annualized active return of 2.53%. The past yearly results were already encouraging. This first data point for a 2 year period indicates that the Optarix US Portfolio might be doing better than the S&P 500 over 2-year-periods as well.

Happy Investing!

Saturday, January 5, 2019

Dec 2018 Results: +1.43% Active Return vs S&P 500

December 2018 was yet another very volatile months for the US security markets. The main indexes ended the month near their low for the month.

The Optarix US portfolio was down as well. However, compared to the S&P 500 we managed to achieve an active return of +1.43% over our benchmark in the trailing twelve months (TTM). At the maximum, our portfolio was off the recent peak by about 18% in line with the broader market. Any number greater than 10% is typically seen as a correction, numbers greater than 20% as a bear market (Source: The Motley Fool). Based on that definition we are experiencing a correction but not a bear market yet.

The following diagram shows the active returns for all 12-month periods ending between Dec 2017 and Dec 2018. With the exception of June 2018, the Optarix US Portfolio performed better than the S&P 500. In other words achieved a positive active return.

(Click for Larger Version)

There were no changes in our portfolio in December 2018. Unless something unforeseeable happens we anticipate the next trade to be in Q2 or Q3 of 2019.

We rare sell shares. Our preferred holding period is "forever". We may sell shares once they appreciate in value too much so that their weight is beyond what we feel is commensurate to their chance/risk profile compare to our other holdings.  If that is the case we sell a small portion to bring the weight back in line. This plus cash flow from dividends is then used for entering new positions or adding to existing position. We roughly follow an equal weight approach. However, we are fairly patient in terms of the threshold at which we reduce or increase any of our positions. At times we may let a position continue to increase before we act.

While we cannot predict if the current correction will turn into a bear market, we continue to believe that using our set of rules for managing the Optarix US Portfolio should yield returns similar to the S&P 500. If things go well, we might see a better return than the index.

Happy Investing!

Wednesday, December 5, 2018

Nov 2018 Results: +0.94% Active Return vs S&P 500

Another month and another one with volatility. The Optarix US Portfolio gained 5.19% in the twelve months ending 30 November 2018. Since the S&P 500 gained 4.25% in the same time frame, this means that our portfolio achieved an active return of +0.94%.

We are quite pleased with this result. It’s not as good as compared to the other benchmark we use, the S&P 500 Dividend Aristocrats (stock symbol SPDAUDP). This latter index gained 5.27% in the past 12 months. Therefore, our portfolio lost slightly with a performance of -0.08%.

Overall there seems to be a downward trend, i.e. the active returns decreasing. While we enjoyed the higher active returns in the past, we are equally aware that it’s hard to beat an index in the long run. The best you can hope for is to be approximately in the vicinity of the index’s performance.

With the trade conflicts, the looking budget crisis in the US, the uncertainty about further interest hikes of the Federal Reserve, we believe that volatility in the market stays high and there is a possibility that the long bull market comes to a halt.
Happy investing!

Saturday, November 17, 2018

Top 5 Positions as of 16 Nov 2018 - Nvidia

Again, no change in the Optarix US Portfolio in the last four weeks. The market volatility in October and in particular the bad performance of high tech stocks has had quite an impact on the top 5. Apple (AAPL) has left the group, so did Aflac (AFL). New entrants are Wallgreen Boots Alliance (WBA) and Stanley Black & Decker (SWK).

The updated top 5 list contains these positions. The percentage values is the change since we started the position:

  1. Vanguard Total Stock Market (VTI) +27.29%
  2. Emerson Electric (EMR) +23.18%
  3. Wallgreen Boots Alliance (WBA) + 26.75%
  4. Johnson & Johnson (JNJ) +25.74%
  5. Stanley Black & Decker (SWK) +20.79%
Technology stocks got quite a hammering in October. Nasdaq's decrease by about -9.20% in Oct 2018 is an indication as it's still considered to be tech heave. By comparison, the S&P 500 lost only -6.94% and the Dow Jones -5.07%. November so far saw the S&P 500 increase by 0.9% and the Dow Jones by 1.18% while the Nasdaq is down -0.79%. It almost looks as if there is a "crash" spread out over several months. The still increasing interest rates don't help. The trade conflicts don't help. 

The tightening job market doesn't help either as companies find it increasingly hard to find people to expand their business. If the measures of the current administration in fact lead to more (manufacturing) jobs being created in the United States, then this begs the question: Who will fill those jobs? And at the same time there is a trend towards reducing immigration which puts a limit on the labor pool as well.

Quite a few stocks are now in correction territory with more than 10% off the top. Some have suffered even more (see below). Going forward we believe that the volatility in the stock markets will continue for some time. Increasing interest rates will continue to put a downward pressure on share prices. The pressure may decrease as soon as there are noticeable signs that the Federal Reserve sees an end to the current cycle of increasing interest rates and assumes a neutral position.


The shares of Nvidia (NVDA) are now down about 42% from their top on 02 October 2018. While we agree that at levels of USD 292 per share the valuation of the company is quite ambitious, we equally believe that the current levels may represent buying opportunities. Our position in NVDA is down about 34% which we often use as a trigger to assess if we should close our position or to add to our position.

In this case we believe that main factor for the stock crash - minus 18% on Friday 16 Nov 2018 alone - is that there was a lot of speculation in this stock. People expected the company to grow at 30%, 40% or even more year-over-year. It turned out that there is still a lot of inventory in the sales channels for the gaming range of products which represent a little more than half of all revenues. Nvidia won't sell a lot this quarter which often is one of the more important quarters each year. 

However, the extreme level of inventory in the channels is an aftermath of the hype around crypto currencies and mining of Bitcoin and similar. Taking a step back, we believe this is a one-off situation, nothing permanent. The fundamental business model of Nvidia works. They have good growth rates for their three other business areas, namely data centers, AI and autonomous vehicles.

Disclaimer: We hold shares in all companies mentioned in this post. We have no intention to change or initiate positions within 48 hours of this post. This post is not financial advice. Consult with your certified financial advisor before making any financial decisions.

Saturday, November 3, 2018

Oct 2018 Results: +0.20% Active Return vs S&P 500

Wow, what a ride! Last month saw a number of ups and (mostly) downs in the US markets. People who got into the market only after the GFC (Global Financial Crisis) in 2008/2009 were given quite a scare.

Some pension funds and also ETF’s (Exchange Traded Funds) had annualized returns of more than 10% after tax until end of September. If you have bought shares or ETF’s after the GFC, then you might have grown accustomed to Y2Y performances in excess of 10%. The 10-year bull market was the biggest ever.

For example, some pension funds or ETF reported an average return of 10% or more per year after tax for many years. October however may have seen the value of your retirement savings drop by 5% or 10%. If you became nervous you are not alone. We are still in correction territory with more than 10% off the all-time highs reached earlier this year. Long term you shouldn’t be concerned too much. For example, in 2008 the S&P 500 was down by -37.22 percent at the end of that year. However, that was more than compensated since then with a CAGR (Compound Annual Growth Rate) of about 15.29% in the time January 01, 2009 to December 31, 2017. In this time frame USD 1.00 grew to USD 3.60. Not bad at all!

Results Versus S&P 500

Let’s look at October results now. Our Optarix US Portfolio increased by 5.50% from October 31, 2017 to October 31, 2018. In the same time the S&P increased by 5.30%, resulting in an active return of our portfolio of +0.20%. This means that in the 11 twelve-months periods from December 2017 to October 2018, our portfolio performed better in 10 of them. Only in the 12-month period ending June 30, 2018, our portfolio lagged the S&P 500 by -0.47%.

Results Versus S&P 500 Dividend Aristocrats

In comparison to the S&P 500 Dividend Aristocrats Index (SPDAUDP), our portfolio did better in that it has outperformed the SPDAUDP for the 11th twelve-month period. Still the October active return of 0.59% for the 12 months ending October 31, 2018, is the lowest on record. Note that we started the Optarix US Portfolio only on January 01, 2016, and published results only from January 2018. We cannot look into the future. The result of our portfolio may be better or worse in the future.

Interest Rates

In our opinion the bull market has come to a grinding halt because interest rates continue to increase. Over the last 2 years the effective date at which the US federal government can borrow has increased from 0.29% to 2.20% at the end of October. In lockstep the yield on 3-Months treasury bills grew from 0.26% to 2.29%. The yield for 10-years treasury notes has increased from 1.940% to 3.217%. At the same time the divided yields didn’t increase accordingly, both because the bull stock market and because dividends weren’t increased by a similar amount. As a result the stock market has now reached a point where an increasing number of investors sell shares and park their money in either bonds or cash.

Other Factors

While the interest rates are the most influential factor in our opinion, we also believe that other factors play a role as well. For example, one might ask why the Federal Reserve increases the interest rates in the first place. Well, the labor market is as strong as it hasn’t been in a very long time. In fact, the rate of unemployment at 3.7% represents the lowest value of this metric for 49 years. Businesses want to hire more people but with a tightening supply of qualified workers they have to offer higher wages and salaries. As a result, the labor costs for businesses go up which negatively impacts their profits. At the same time workers have more money in their pockets, both by higher wages but also to some degree by the tax cuts instituted by the current US government.

The problem is that both the tax cuts and the increased wages push interest rates higher. The tax cuts lead to the US government having to offer higher interest rates for borrowing money. The increased wages create more demand and hence businesses can charge higher prices. This we call inflation. To fight the inflation the Federal Reserve has to increase the interest rates so that it becomes increasing more attractive to save more instead of just consuming it.

Are the Market Turbulences over?

It will be very interesting to see if the wild swings (mostly down) in October were all there was. We suspect that there is more to come in the next couple of months. The result of the midterms may play a role but probably only if there was a surprise in terms of the power allocation in the House and in the Senate. The trade tensions with China will keep the market down as well unless there are tangible resolutions of that problem. And we shouldn’t forget the developments in security politics, e.g. the military tensions in the South China sea or the cancellation of missile treaties with Russia.

We estimate the downward potential at another 10% to 20% but that should then be it. And even if that happens, the yearly increases are likely to be more moderate than in the last 10 years until the interest increase cycle ends.

We have no plans to sell any position as we have bought them for the long run (at least 10 years). As cash becomes available, e.g. via dividends, we will continue to buy shares of companies that fit our requirements, e.g. dividend aristocrats and select high-tech companies. And we will stick with our rules to avoid decisions based on emotions instead of sound reasoning.

As always, please be aware that this post is not financial advice. We just want to share our experience with investing our own money. Do your own due diligence and ask your financial advisor.

Happy investing!

Disclaimer: We are merely sharing our experience with investing our own money. You are responsible for your own investment decisions. Always do your own due diligence and consult your certified financial advisor before making a decision regarding your financial assets.