A Resurgence(Q1 Update)

Investing can be funny sometimes. The market looked to be on the brink of a collapse at the end of 2018. Talking heads were instilling fear and prognosticators foretold of the  impending doom of the American economy. Three months later, things appear a bit rosier. The markets have boomed and confidence is up. Investors are happy and making money looks easy. Benjamin Graham would have declared this a classic Mr. Market situation.

The truth is things probably fall somewhere in the middle.  Predicting a collapse doesn’t do us much good, but neither does euphoric jubilation.  I really don’t know what is going to happen in the near future. The rest of 2019 could be wonderful, but it could just as easily be terrible. Around 1 out of every 3 years is a down year. I hope the market goes up, but if it doesn’t it will provide us with new buying opportunities.

I have a family member who tends to be overly pessimistic. He is in constant fear of a market crash and has urged us to sell off and go into cash any number of times. I like to joke that he has called 20 out of the last 5 recessions. I don’t think this is a productive way to live your life and moreover a drain on your investing performance. I choose to avoid playing the macroeconomic game, it is simply too hard and too reliant on emotion. One day everything looks great and the next the world looks bleak. I instead focus on finding well run companies with durable competitive advantages. These companies can weather any economic storm and in the long run should provide market beating returns. If you can find companies that have better economic conditions than the average index company, while also trading at a lower multiple than the index, you can’t help but outperform over the long run.

1st Quarter Performance 2019

Reminder my 10K Portfolio started with $10,000 and bench marked against the SPY at 285.06 which as of the closing on 4/1/19 stands at 285.83

%Return(1)          SPY Return(2)         Difference(1-2)

Portfolio value- $10,364.61:          3.64                          .27                                3.37

While I had a rather disastrous end to 2018, I’ve burst out of the gate in 2019. I’m now beating SPY by over 3% points. While I’m always happy to see outperformance, there hasn’t been nearly enough time to pat myself on the back just yet. I started this portfolio on 8/19/2018. We have yet to even reach the one year anniversary. This portfolio is being run for the long term, so what happens within the first year or two is really of no consequence. What does matter are the results over a longer time period. As the years go on, market prices should converge on intrinsic value.

Let’s take a look and see how some of my companies executed this past quarter. Notice I care not how much the stock price moved, but rather how the businesses have performed.

Best Performers

GOOG- It is hard not to marvel at how well this company has executed. Google continues to dominate their field and remains one of the very best businesses in the world. They continue to widen their moat and generate ever growing mountains of cash. Year in and year out they blow through expectations and don’t appear to be slowing down anytime soon. Twenty plus percent growth to the top and bottom line all while sitting on over 100B in cash. I’ll continue to sit back and enjoy the ride.

LUV- Since the end of their last quarter Southwest has gotten into a bit of trouble due to Boeing’s unfortunate incident with the MAX 737 plane. Sadly hundreds of innocent people lost their lives due to this error. Southwest has a number of these planes and the US government has forced Southwest to ground them all until the problem is completely fixed. The quarter ending 12/31 however couldn’t have been much better. The company was firing on all cylinders, doing better in every conceivable way. Considerable growth in earnings led to just a hair shy of three billion in free cash flow. They then used this free cash to buyback a ton of shares, reducing the overall share count by 6.1%. Not too shabby in my book. Southwest also announced that they will start flying in and out of Hawaii. I’m a happy stockholder and will be sure to one day take advantage of this new route.

Worst Performers 

LEA- Unfortunately Lear did not report a phenomenal quarter. Both sales and operating income fell, a trend I hope they are able to reverse. As an automobile supplier, Lear relies on auto sales. Given the cyclicality of auto sales, it is difficult to predict what will happen in any given quarter.  The company was however able to use this as an opportunity to buyback a significant amount of shares, increasing my ownership of the company.

IPGP- The company continues to feel the impact of the Trump administration’s negotiations with China. IPGP’s largest clients are Chinese manufacturers. Given the unknown of potential tariffs, these manufacturers have been unwilling to spend on upgrades to their machinery. I am hoping the US and China can come to an agreement soon, allowing IPGP to get back onto the path of growth.

As always thanks for reading, I appreciate it! Be sure to subscribe to this blog and follow me on twitter @TheGarpInvestor.

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