Reducing CARR; Increasing XLK

Rebalancing

As part of the continuous rebalancing of our US portfolio, today we reduced our position in Carrier Global Corporation. The position was started early on 03 April 2020 when Ratheon and United Technologies (UTX) merged into Ratheon Technologies (RTX) and at the same time spun off Carrier Global Corporation (CARR) and Otis Worldwide Corporation (OTIS). Since this spin-off we added more shares in CARR. Today we sold some CARR shares at USD 18.51. With unit costs at about USD 14.46 this represents a gain of about +28%. An excellent yield for a holding period of about 7 weeks.

With the proceeds we increased our position in SPDR Select Selector Fund - Technology (XLK), which we had started on 15 May 2020. The reason we added XLK to the portfolio was the observation that over the last few years growth stocks and in particular technology stocks outperformed value stocks. Dividend Aristocrats are a very solid base investment and represent value stocks.

We picked the technology sector as by and large the age of internet, cloud, Artificial Intelligence (AI), big data and [insert your favorite technology buzz word here] has barely started. Previous technical revolutions such as the industrial revolution or the Age of Steam had what Carlota Perez calls an "Installation Phase" followed by the turning point. We agree with Perez in that we have most likely have reached that turning point for the Age of Information and Telecommunications. We believe that for the next few decades technology companies should be well positioned to benefit from what we think is a long-term trend. Companies such as Amazon, Google or Microsoft are just the beginning. There are many more to follow.

To spread out the risk and only gradually add technology stocks we decided to utilize an Exchange Trade Fund (ETF) to start this position. At some point we may decide to add more direct investments in technology companies to our portfolio. As of writing we already have positions in Apple (AAPL), Microsoft (MSFT), Atlassian (TEAM), Nvidia (NVDA), Texas Instruments (TXN) and similar more.

Do not assume, though, that we are moving away from dividend aristocrats. Instead we believe that those still represent a very sold core investment. Therefore we continue to own shares in all 66 dividend aristocrats. We simply are "spicing up" the portfolio with some investments in the technology sector where we believe we have a sufficient understanding of the long-term opportunities of the company in terms of benefitting from the Age of Information and Telecommunications.

By mixing in some technology stocks to the dividend aristocrats we expect the performance of our overall portfolio to be between dividend aristocrats alone and the S&P 500. In other words, we expect our specific portfolio structure to perform better than the dividend aristocrats alone.

References

For more information about the work of Carlota Perez in particular her book "Technological Revolutions and Financial Capital" see her web site at http://www.carlotaperez.org/

We do not receive any benefits from any of the source listed in references.

Increased Texas Instruments (TXN)

We started our position in Texas Instruments (TXN) in October 2019 right after the markets were disappointed in their quaerterly results back then. The share price had just dropped by about 10% at the time, which to us looked more like a "for sale" sign. We had TXN already on our shortlist for new positions, so that drop was a great opportunitiy. We got an average share price of USD 119.

Last week Friday was a weak day at the stock exchange with the major indices decreasing between -0.58% and -0.93%. In this market, TXN was down about 3.1% (though not as good as the -10% last time), so we felt this was a good opportunity to buy more of them. The average share price this time was USD 130.

As we wanted to keep our exposure to the technology sector and since we just reduced our Nvidia (NVDA) position, increasing TXN was a good option in our opinion. We like TXN because of the maturity of it as a company and also because they have delivered increasing dividends since 2004. While they do not qualify as a dividend aristocrat just yet, a track record of 15 yearly increases is quite impressive, too. Also, TXN is mostly active in analog applications which is quite different to chip manufacturers like Intel (INTC) or Advanced Micro Devices (AMD).

Going forward, if there are other opportunities such as weak market or a weak TXN share price, we will consider adding to our position, provided the investment story remains very good.

Disclosure: We hold positions in all of the companies mentioned in this post. Do your own due diligence and consult with a financial advisor before making financial decisions. This blog is for inspiration only. All responsibility with decisions you make is yours.

Reduced Nvidia (NVDA) after gain of 68%

On Wednesday, 23 Jan 2020, we reduced our position in Nvidia (NVDA). The average share price was about USD 252.

In May 2018 we started this position at a price of approximately USD 250. We never try to time the market as based on all the evidence, no investor gets the time right long term. At the time we believe that USD 250 was a good price but we were wrong. Nvidia had pushed a lot of inventory into the channels mostly driven by the bitcoin mining hype at the time. In the subsequent quarters, the company couldn't sell as much product as they had to wait until the inventory in the channel was back to normal. They simply overestimated the demand.

As a result the quarterly results in the subsequent quaerters disappointed the markets and the share price dropped to less than USD 150 in May 2019. We then decided to add to our position at that time.

By reducing our position we are essentially selling some of the shares we bought at USD 150 at a price of USD 252, which is a gain of approximately 68%. In addition we continue to be optimistic for Nvdia but trimmed back the position that grew too big for our taste within the portfolio. We believe that Nvidia's products continue to be well-positioned for graphics and artificial intelligence (AI) applications, both on-site and in the datacenter.

When you get the timing wrong - or more specifically, when the timing turns out to be wrong - then it makes sense to have another look at the company and consder buying more shares if all information and data available point confirm the investmen story. In our experience, if the investment story was good from the beginning buying more at the reduced level can boost the returns.

Disclosure: We hold positions in all of the companies mentioned in this post. Do your own due diligence and consult with a financial advisor before making financial decisions. This blog is for inspiration only. All responsibility with decisions you make is yours.

Sell High, Buy Low to Improve Portfolio Performance

Rebalancing in General

Generally we follow an equal weight approach for the Optarix US Portfolio. This means each positiion has roughly the same value in the portfolio based on market prices.

If a position becomes too large relative to other positions, we may choose to sell some portion of that position. With the cash from such sales and the cash from dividend payments we then increase positioins that relatively to other positions have a lower value. This is called rebalancing.

As a result we tend to sell shares at somewhat higher prices and buy at somewhat lower prices. Note though, that what constitues a high or low price changes over time. The main factor here is where the market and as a consequence the overall portfolio is headed.

Let's look at a couple of specific examples.

Rebalancing with AbbVie

In July 2016 we started a position in AbbVie (ABBV) at a total cost of USD 63.28. In February 2018 the position relative to the overall portfolio became too large for our taste and we sold some of it at a price of USD 117.73, a gain of about +86%, not bad for an investment of about 1.5 years.

In July 2019 the position in ABBV had decreased again compared to our other positions in the portfolio. We decided to increase our position again at a price per share of USD 73.66.

As of writing the price for ABBV is USD 90.17, or +22.4% for 5 months. The shares of the original investment are up from USD 63.28 to USD 90.17 or +42.49%, still quite a satisfactory gain in particular considering that dividends are on top of those numbers.

Rebalancing with Nvidia

The second example is Nvidia (NVDA). Our timing was terrible when we started a small position in May 2018. We paid USD 249.57 per share at that time. We thought that with the increased demand in using graphics adapters for Artificial Intelligence (AI) in data centers but also for assistance systems in cars, Nvidia was well placed in the long run. Also, they have increased their dividend for many years in a row now.

What we didn't anticipate the significant decrease in demand in crypto mining. In the aftermath of a hype in that space, a lot of inventory was built up in the channel and Nvidia had to slow down production. This impacted their results for a few quarters.

So we almost doubled our position again by buying more shares in May 2019 at a price of USD 144.25. At that point our initial shares had a loss on paper of about -42.20%.

As of writing NVDA's share price is at USD 238.81. The shares we bought in May 2019 have unrealized gains of +65.55% while the initial position has unrealized losses of -4.59%. All up, the total position is now up +16.58%.

Summary

By selling relatively high and buying relative low, it is possible to improve individual positions in your portfolio. The emphasis is on the word "relative" for making such sell or buy decisions.

We are not trading on a daily basis. The operative word is patience. You can't force it for a specific position. However, if you have 50 or more positions, then once in a while opportunities open up.

Keeping emotions out of the picture by following a well-defined set of rules helps making better decisions. We have missed out for example on increasing our position in Netflix when they were at USD 231 (now at USD 333). Our rules don't catch all opportunities. However, they spot a good number of good bets.

Disclosure

We own shares in all companies mentioned in this article. We have no plans to change any of hose positions in the next three trading days. Past results are no guarantee for future returns. Do your own due diligence and consult your financial advisor before making investment decisions.

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.