Reduce: NUE

Reduce: Nucor Corporation

Just one signal today. This time it is a sell signal for Nucor Corporation (NUE). We reduced our position at an average price per share of USD 44.56. We bought these shares at an average price of USD 39.63 on 11 June 2020 (see our post). This result is a gain of 12.44%. A nice short-term trade for a stock that we've held since 2019.

This is an example of our trading algorithms being able to suggest this kind of short-term trades if the right opportunity arises. In fact, at the they create a buy signal it's not known yet, when a sell signal for the stock will be created. It might as well create yet another buy signal. Also, instead of creating a signal within 5 days, it might be weeks or months until the next signal.

While not all trades suggested by our algorithms result in positive returns, this is a nice example of a successful trade. Overall, our trading algorithms get it right more often than wrong. And that adds some yield above and beyond what the portfolio would return if we were to balance only once per month, quarter or year.

Signals for MA, V, NUE, WMT, WBA, KO - Closing ROST Position

After a couple of days without trading signals, today our trading algorithms created seven signals. A further signal was created for ROST, which was unusual, so let's start with that one first.

Close: Ross Stores Inc

Ross Stores Inc (ROST) accounced that they suspended their quarterly dividend for the time being. We don't see this changing any time soon given they reported a quarterly net income of negative USD 306 millions, i.e. a loss. As a consequence ROST no longer meets the requirements to be counted as a dividend aristocrat. This is a bit sad to see since they became a dividend aristocrat only earlier this year.

We started a position in ROST in March. This week we sold all shares to close the position. The average sell price was USD 94.20. With unit costs at USD 75.74 this represents a gain of 24.37%. This is a very good result given the circumstances due to the high volatility in the financial markets caused by the Coronavirus pandemia.

(Image source: Wikipedia)

New: Mastercard Inc A

We started a new position with Mastercard Inc A (MA). MA is a growth stock. We expect their growth story to continue although we anticipate that there will be an impact from the Covid-19 crisis.

Average buy price was USD 292.54.

New: Visa Inc

Another addition to our US portfolio is Visa Inc (V), also a growth. Similar story to Mastercard: we expect it to continue. Here, too, we expect the growth story to continue. The COVID-19 crisis will have an impact, though. Because of lockdowns worldwide both Visa and Mastercard may see reduced revenues. As countries come out of lockdown and as the economy recovers, results of these two financial services stock should improve again as well.

As with Mastercard, we see Visa as a longterm investment. Average buy price was USD 189.37.

Increase: Nucor Corp

We've had our Nucor Corp (NUE) since early 2019. The stock price has come done since then from about USD 57 to below USD 40. We added to our position along the way.

This week our trading algorithms created a buy signal. We added more shares at an average price of USD 39.63.

NUE is a dividend aristocrat and currently has a dividend yield of about 3.9%.

Increase: Walmart Inc.

The trading algorithm also produced a signal for Walmart Inc. (WMT). We've had this position since 2019. During the COVID-19 crisis, the stock performed well. As a retailer WMT was an essential business and was able to keep its shops open. We reduce our position a couple of times in March realizing gains.

We had a sell signal in April as well, this time at USD 126.01. Today they buy signal was at USD 120.02. In essence the trading algorithm reduced the position somewhat and is now increasing it again. In other words: sell high, buy low. In some sense the algorithm treats "high" and "low" alwasy as relative to the overall market.

Increase: Walgreens Boots Alliance Inc.

The next buy signal was for Walgreens Boots Alliance Inc. (WBA). We started this position in 2018. The stock price development has been disappointing as it dropped from about USD 65 to about USD 40.

Along the way, however, we did a few trades. This week's buy signal helps reducing the unit costs. Note that the trading algorithms are designed such that it seizes buying opportunities without exaggerating the exposure to a given company.

This week we added more shares at an average price of about USD 40.86.

Increase: The Coca-Cola Company

The final buy signal today was for The Coca-Cola Company (KO). This is a position we started in 2017. In March and April this year, the position was reduced a couple of times to realize some gains at prices between USD 46.98 and USD 56.85.

Today's signal added shares again at a lower price of about USD 45.56 per share.

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	11.87%	8.67%	3.20%
Trailing 1 year	4.39%	2.85%	1.54%

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!