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.

Nvidia

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.

Top 5 Positions as of 19 October 2018

We didn’t by or sell anything since we last published the list of the five biggest positions in the Optarix US Portfolio. However, since 26 September there have been a couple of changes in the list. As of 19 October, the five biggest positions and their gains were as follows:

1. Emerson Electric (EMR) +27.87%
2. Vanguard Total Stock Market (VTI) +28.44%
3. Apple (AAPL) +74.48%
4. Johnson & Johnson (JNJ), +19.77%
5. Aflac (AFL) +20.72%

Emerson Electric (EMR) remained our largest position. Stanley, Black and Decker (SWK) dropped out. Instead Johnson & Johnson (JNJ) entered in fourth. Apple moved up from fifth to third position. 

In particular in the last two weeks there were quite a few market drops for 2% or even 3% in a single day. Occasionally, there was a day with a slight uptick but overall it has become clear in our opinion that market participants have become much more cautious in light of the current challenges. 

For one the interest rates keep rising in the US for the time being. As of writing the yield on 10-year government bonds has increased to 3.195%, which is up from 2.339% at the end of September 2017. The interest rate for 3-months treasury bills increased from 1.04% to 2.27% in the same time frame. Looking at our portfolio the dividend yield changed from 1.99% to 2.20% in the same time frame. Given this data we believe that there is not much upside at the moment in the markets until it becomes clearer by when the US Federal Reserve will change from tightening to neutral. 

Rising interest rates are poison for the stock market. In addition to that we also have the increasing trade tensions but also political uncertainties. For example, the Jamal Kashoggi case is threatening the relationships between the US and Saudi-Arabia. The United States are considering recreating from nuclear arms agreements with Russia. The trade war with China as well as the military issues in the South China sea don’t really help either. The outcome of the midterms, which looked like a homerun for the Democrats, is no longer certain either. These just some of the factors that we believe negatively influence the market participants at the moment. 

What does this mean for the long-term investor? We believe it is more important than ever to spread the risk across a large number of positions. And it is critical to invest only in high-quality companies such as dividend aristocrats. As an investor it’s important to minimize emotions as much as you can when observing the daily ups and downs of the market. Long-term we are confident that shares still represent a very good option to participate in the long-term growth of an economy. If the market falls, then what it really means is that you can buy the same quality shares at lower and hopefully more reasonable prices again. Rising profits could also help to get valuations back to a more reasonable level. 

Happy Investing! 

Disclaimer: We own share in all the companies mentioned. We have no plans to initiate or change any position in any of the stocks mentioned in this post in the next 48 hours. This post is not financial advice. You are responsible for due diligence before making financial decisions. Always consult with your financial advisor.

January 2018 Results

January was yet another good month for our US portfolio. It ended with +4.31%, making it the 15^th month in a row with a positive result. At a time the portfolio was almost up even more than the 4.31%. However, looking at how things have developed over the last few years it’s clear that this is not sustainable. Eventually the real economy has to catch up to what the markets do. And if that doesn’t happen or does not happen to the degree required, then the markets will have to adjust. A first taste were the two days with triple digit losses of the Dow Jones on 29 January and 30 January.

We believe that there are three main reasons the US markets made so much progress in January. Firstly, the tax reform helped a number of businesses to take a windfall. They opted for either buying back more shares, increasing the dividend or to pay a one-off bonus to their employees. Or a combination of these. Another factor was that some companies reported results that were better even if you exclude the change in the US tax rules. AbbVie (ABBV) is one such example. Finally, because the US dollar weakened compared to some currencies, US shares looked more attractive. For example the EUR was USD 1.2457 on 31 January 2018 compared to USD 1.0755 on 31 January 2018, a change of 15.8%. Taking this into account the increase of the S&P 500 over the same period (+23.91%) is still a very good value but doesn’t really look as impressive anymore.

As always let’s look at how our US portfolio performed compared to its benchmarks. The portfolio is up 27.87% year-to-year. In the same timeframe the S&P 500 is up 23.91%, so our portfolio is ahead by 3.96%. This figure is down from 4.31% last month, mainly because of how Procter & Gamble (PG), Johnson & Johnson (JNJ) and Atlassian (TEAM) performed. For all three we continue to be optimistic long-term.

Let’s look at another two benchmarks. One is the S&P 500 Dividend Aristocrats (SPDAUD) and the other ProShares S&P 500 Dividend Aristocrats ETF (NOBL). Using 31 December 2016 as 100%, our portfolio is 5.83% ahead of SPDAUD (+4.91% in December) and 6.25% ahead of NOBL (+5.18% in December) as of 31 January 2018.

Note that the S&P 500 had an annualized return over the last 10 years of about 6.93%, SPDAUD of 8.89% and NOBL of 13.89% (NOBL since inception 09 Oct 2013). Over the 12 months ending 31 January 2018 our US portfolio beat all three of these by at least 3.96%.

Please be aware that past results do not guarantee future results. Also, keep in mind that perhaps we were just lucky picking the rights stocks when we started this portfolio in January 2017. The early indicators suggest that choosing a good balance between about 70% to 90% of dividend aristocrats and 10% to 30% of hand-picked other stock might yield good results for the increased risk.

Happy investing!

Disclosure: We own shares of ABBV, TEAM, JNJ and PG. We have no plans to change our position in the next 48 hours after publication for any of the financial instruments mentioned in this post. S&P 500, ProShares, etc. are trademarks of their respective owners.

Results for PG, JNJ and ABBV

Three positions in our portfolio experienced significant price changes this week after their results was announced: Procter & Gamble, Johnson and Johnson (JNJ) and AbbVie (ABBV). Let’s look at each of them.

The Procter & Gamble Company (PG) announced quarterly results on Tuesday, 23 January 2018. Revenues grew for their 2^nd fiscal quarter, earnings increased by about 10% year-to-year and beat market expectations. Still, the stock price took a hit. Monday’s close was USD 91.88 and the price dropped to USD 89.02 at close of market on Tuesday, a change of -3.11%. Why is the stock price down while earnings beat expectations? Does it matter? To answer the first question, we believe that expectation were too high. In particular the slow revenue growth of about 2% in the period is still perceived as underwhelming as it barely keeps up with inflation if that. Also, margins continue to be under pressure in particular in their razor blade business (Gilette) where they compete with offerings like Dollar Shave Club. The baby diaper business (Pampers) was subject to aggressive price cutting as well to keep market share. We believe that PG needs to continue keeping their costs under control to be able to further reduce prices where otherwise the price difference to competitors would become too big. As to the second question, does it matter? We believe that PG has demonstrated for a long time that it is able to continuously improve revenue and earnings. They have increased their dividends every year for 61 years. We believe 2018 will not be different. Therefore the one day drop on 23 January is likely to be only “noise in the signal” and the currently somewhat lower prices might be an opportunity to add shares. We are keeping in mind, though that the P/E ratio of 22.6 is still very ambitious. As a long-term investor we don’t see a reason at the moment to change our position.

On 23 January, Johnson & Johnson (JNJ) was another company that reported their quarterly results. Here, too, earnings estimates were beaten and the stock took a hit: from USD 148.14 to USD 141.86, or -4.24%. Revenues for the quarter were up by about 11.5% (year to year) and earnings per share (EPS) were up by 10.1% (year to year). For fiscal 2018 the guidance is for sales growth to be between 5.4% and 6.4% and EPS growth between 9.6% and 12.3%. It appears that during the earnings call it became clear that organic growth would only be 2.5% to 3.5% which means that the remainder would need to come from acquisitions. This was interpreted as negative and caused the fall in stock price. JNJ has increased their dividend for 55 years in a row and we believe it will continue to do so in 2018 as well. With an expected EPS growth of about 10% there should be enough wiggle room for that.

Then on 26 Jan, before market open, AbbVie INC (ABBV) reported quarterly results. It was yet another strong quarter beating estimates for EPS and revenue. Earnings grew by about 23% year over year while revenues increased by about 13%. For 2018 AbbVie expects their effective tax rate to be about 9% as they repatriate overseas earnings at a lower tax cost. This will make it even easier to increase dividends and buy back shares. As a result the guidance for EPS for 2018 was increased from USD 6.37 to USD 6.57 to USD 7.33 to USD 7.43. The markets seemed to like this news and the stock price increased by 13.67% on Friday, 26 Jan.

We remain positive on all three: PG, JNJ and ABBV. However, we highlighted the swings – minus 3.11%, minus 4.24%, plus 13.67% - to demonstrate that within just a week, prices can fluctuate wildly, even for more conservative shares. Increasing diversification and taking a long-term view are two factors that help mitigate wild swings.

Disclosure: We own shares in PG, JNJ and ABBV. We have no plans to change our position within the next 48 hours from publication.