Goodbye Summer (Q3 Update)

Unfortunately, all good things must come to an end. Summer came and went in the blink of an eye. Labor day weekend is now well behind us and so are any hopes I once had of not gaining a good 15 lbs over the Summer. A couple of trips and way too many burgers and beers are probably the primary culprits. I hope you all got to enjoy the summer heat as much as I did.

September however brings a new level of excitement. Kids are back in school and if they are forced to learn, we should be as well. We are all mere students of the game and therefore we need to work on our investing practice. A day doesn’t go by where you cannot learn something, so seize hold of the opportunity. A little bit of knowledge every day, will turn into a mountain of information over a lifetime. With that out of the way, let’s check in and see how I did this quarter.

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Q3 Performance

As of 9/1/2019, my 10K portfolio stood at $11,088.12. When I started on 8/19/18, the SPY had a price of $285.06. As of 9/1/19 the SPY closed at $292.37(it’s actually had quite a run up since.)

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

Portfolio value $11,088.12:      10.88                       2.56                         8.32

With dividends reinvested into the SPY their returns would look a bit more like this.

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

Portfolio value $11,088.12:      10.88                       4.42                        6.46

I have to say that I am more than satisfied with my results thus far. I have cut a few of my losers and held tight onto my winners. I like to let my winners ride and let compounding do the work. Some might be overvalued and others are hopefully undervalued. In the long run, stocks will follow suit with growth in intrinsic value. I feel good about the companies I’m invested in and their prospects for the future. That being said, I hold onto almost $1,700 in cash. I am finding it hard to find deals I am comfortable with in the current environment. That doesn’t mean the search is over, just means I have to turn over more stones. One will appear and I will be ready to put my remaining capital to work.

Taxes

One topic I don’t see talked about nearly enough is the effect of taxes on investment returns. So often I hear analysts talk about a stock hitting their price target, meaning it is now a sell. Too often, these recommendations fail to mention taxes. Should you have a good gain, the second you initiate that sale, your gain is now realized. You will now be responsible for the taxes. Let’s just look at a simple example. Say you bought company A at $100. You made a great pick and after 6 months, the stock has now doubled to $200. Obviously you have made a fantastic investment, the question is what do next? If you sell out entirely, you will have a gain of $100 and it will be considered a short term capital gain, as you have not held it for longer than a year. It will be taxed at your normal income tax bracket. As of now, these taxes will fall somewhere between 10% and 37%. Let’s just assume a middle tax bracket of 24%.

On the $100 gain you will have to pay $24, leaving you with $176 to work with. Additionally, depending on where you live, you will owe state and local tax. Here in Baltimore County, Maryland you owe 5.75% to the state and 2.83% to the county. This lops off another $8.58, bringing that initial $200 down to $167.42.

The variables are of course ever changing. Should the characteristics of company A fail to live up to expectations or should your investment thesis no longer hold true, it very well might be a good time to sell out and switch companies. The important lesson is to take the effects of taxes into consideration and make an apples to apples comparison. In this example it is not $200 in Company A vs $200 in Company B, but instead $200 in Company A vs $167.42 in Company B. With that in mind, selling out of Company A might not be as enticing.

As always, thank you for reading. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

 

One Year Down

I have now officially been running this blog for a full year now. I’ve had my ups and my downs, but I think I’ve grown considerably as an investor. I truly think I am better than when I started and I am now even more committed to GARP investing. Putting my thoughts out in public has forced me to focus on my core beliefs and has held me accountable. I expect my growth in year 2 to be even greater than in year 1. Just like wealth, knowledge is always compounding.

Year One performance

I started this journey exactly one year ago. I put $10,000.00 of my own money into my 10K Portfolio. I put that money into companies I believed in and let them do the work for me. Thankfully, I didn’t fall flat on my face and I’ve been able to make some money. My portfolio now stands at $10,843.11. As I often state, making a positive return isn’t all that difficult. You can buy government bonds and make a virtually risk free return, it just won’t be very good. I choose to compare my portfolio to the S&P 500. If you can’t outperform the general American index in the long run, you don’t have much business in picking individual stocks. When I started on 8/19/18, the SPY stood at $285.06. As of 8/19/19 the SPY closed at $292.33.

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

Portfolio value $10,843.11:             8.43                      2.55                         5.88

Simply looking at the SPY ticker isn’t quite fair to the index. My portfolio value accounts for all dividends I have collected over the last year. The SPY does not automatically reinvest dividends. They currently give out a yield of 1.86%. Without knowing the exact days of distribution and all that jazz, I think it is easiest if I just add in 1.86% to the SPY return in order to give a more accurate picture. Therefore a more realistic result would be as follows:

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

Portfolio value $10,843.11:             8.43                      4.41                         4.02

Overall, I am pretty satisfied with my results in year one. I outperformed the SPY by a hair over 4%. Take this with a grain of salt, one year is not nearly enough time to get an accurate picture. It will likely take at least 3 years to really tell whether this out performance is for real. That being said, I certainly prefer to have this head start.

Mistakes Made

I have learned a number of lessons since starting this blog. Some were completely new to me, while other things I knew but needed to be reinforced. My first punch to the gut came shortly after beginning. I rushed into some companies, rather than waiting for an appropriate entry price. Soon after I bought into my first companies, the market took a precipitous fall. Had I just bought in a couple of months later, my returns would likely be higher by a good 10%. The biggest lesson I learned was not to fight against a large macroeconomic situation. I grossly underestimated both how much effect the trade war could impact my companies and how long such a situation could last. I thought we were looking at a blip on the radar and my companies would return to form in just a couple of months. I was wrong. This trade war has lasted far longer than I had anticipated and has greatly lowered the earning power of some of my companies. I don’t think the end is in sight and for that reason I have chosen to make some changes to my portfolio. I still believe in these companies, in the long run I would bet that all will end up fine. However, I must stick to my principles as a GARP investor and therefore I choose to invest in the path of growth, not turnaround situations.

Portfolio Changes

Within the last month, I have cut out my positions in HII, IPGP, and LEA. As I stated, all are fine companies. They simply haven’t been able to whether this trade war without suffering. Each has seen their earning power eroded greatly and the stocks have followed suit. Unfortunately, I lost money on all three of these investments. Thankfully, some of my winners have more than made up for it. In fact, my investment into FND alone has made up all losses in these three companies. With the money from selling, I bought one additional share of FB for $180.17. I now sit on a cash balance of $1,688.44. I have a number of companies on my watch list that I am following and I will be waiting for a good time to enter into two or three new positions. I’ll be sure to let you know when that happens.

As always, thank you for reading. I have appreciated your support over the last year and look forward to seeing where this journey takes me. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

 

 

Blogging Is Hard (Q2 Update)

I hope everyone has gotten to enjoy the long holiday weekend. This time of year, we get to celebrate America and appreciate all the freedoms we are given. On the investing front, we should acknowledge how fortunate we are to invest in a country that has provided long term annual market returns of 8-10%. If you can just keep up with the market over the long run, you’ll end up pretty well off.

Just like the market though, running a blog has its ups and its downs. Sometimes you feel the jolt of inspiration, a never ending flow of thoughts simmering at the surface just waiting to be written down. At others, writing a post can seem like the greatest hassle in the world.  Recently, writing for the blog has frankly been a challenge. This is my first post in three months, since my last portfolio update. What starts as a one week lapse, quickly turns into two, which inevitably carries on for many more. Just like investing, the weeks tend to compound.

It isn’t like I haven’t had any good ideas, I just haven’t been able to muster the energy to sit down and write out a full post. The year 2019 gives us a never ending supply of distractions, whether it was watching the NBA Playoffs or browsing through Reddit and Twitter, I always found something inconsequential to occupy my time. I can now say I understand how a famous author can keep fans waiting year after year without ever finishing a series(well maybe I don’t understand the whole having fans part). George RR Martin, you have my sympathy.

On the financial side of things, 2019 never ceases to surprise. After a calamitous end to 2018, 2019 started the year sprinting out of the gate. By the end of the the first quarter, I was sure the market had to give some back. Instead the market has continued its steady onward march. Luckily for me, my portfolio has been fully invested and my companies have continued to grow.  I’m not however ready to be too confident. The bottom could fall out at any moment, so who knows what will happen, I’m just along for the ride.

2nd Quarter Performance 2019

Reminder my 10K Portfolio started with $10,000 on and was bench marked against the SPY at 285.06 which as of the open on 7/1/19 stood at 293.

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

Portfolio value $10,620.89:             6.93                          2.78                         4.14

My portfolio has continued to do well and I now outpace the SPY by over 4%. Let’s not get too ahead of ourselves, I am still shy of the 1 year anniversary of the portfolio. I’ll chalk this up to luck, but if I can still be beating the market 5 years from now, I’d like some credit! I am unlucky and perhaps a bit stupid for when I started the portfolio. Had I waited just a few months, that nearly 7% return would easily be double that amount.

More important than the stock returns however, the performance of my portfolio companies have been quite good. Let’s take a look at what’s been going on.

Best Performers

MSFT- Under Satya Nadella’s leadership, Microsoft continues to dominate. They may have taken a break from growth in the early 2010’s, but they are back and hungrier than ever. You would think that a company with a market cap over 1 trillion would have trouble growing. Right now, that couldn’t be further from the truth. This past quarter, MSFT grew operating income by 25% and diluted EPS was up 20%(both YoY). Buoyed by their cloud division, Azure, Microsoft’s dominance looks inevitable. Azure had revenue growth of 73% compared to last year. The company also now sits on a treasure chest of 131 billion dollars of cash and short term investments. Their balance sheet is rock solid and they are well positioned for years to come.

ODFL- Old Dominion Freight Line is much smaller than Microsoft, but their recent success is no less impressive. This past quarter they were able to grow EPS 23.3%, while also reducing the overall share count by 1.5%. It is almost always a good sight when you see EPS growing rapidly and the overall share count falling. You can get in trouble if the company is paying a price well above intrinsic value for those shares, but I do not believe this to be such a case.  I now own a greater percentage of a company that is performing excellently. Debt levels remain almost nonexistent and I feel comfortable holding onto this company well into the future. I am down about 7% in the company even though the market has gone up and the company has performed extremely well. This is probably a pretty good indicator that ODFL is trading at an attractive price.

Worst Performers

LEA- Unfortunately, not all of my companies have been great performers. Lear Corporation has had a couple of bad quarters in a row and my holdings are now down almost 20% in the company.  Sales were down 5% and adjusted EPS fell from 5.1 to 4. These are never good signs, I like to see companies going in the opposite direction. GARP investing is about finding growth, not watching sales fall. Lear is being impacted by the cyclical nature of automotive sales. We seem to have hit a peak and auto sales have fallen in recent quarters. On the bright side, the company continues to drive down the share count. On a P/E basis the company looks pretty cheap, trading around 8.5 but that isn’t necessarily a good enough reason to hold onto the company.

HII – Unlike Lear, Huntington Ingalls was able to grow revenue, up 11% YoY. It wasn’t all good however, operating income fell from 191 million to 161 million. This was primarily due to lower margins and how penchant expenses are accounted for. Either way, earnings were down considerably. The company also took on a substantial amount of debt and the balance sheet doesn’t look nearly as strong as it used to. Not all is bad though, HII did win some crucial contracts and the backlog now stands at a record 41 billion.  The company remains a high moat competitor with long term contracts locked in. I just have to wonder if this is the best investment opportunity available.

For the time being I am going to hold onto these companies and monitor how they do in the next quarter or two. Should things not improve, don’t be surprised if I sell out of one or even both of these. I like the future prospects of HII more at the moment, but they still need to be paid close attention. I don’t care how much a stock moves in the short run, if the business doesn’t perform up to expectations it may be time to move on. I would rather put my money into a company with better industry tailwinds.

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