Model Portfolio

US-Large Portfolio Transactions – June ’17

By June 6, 2017 No Comments

Sells: 

– William Sonoma (WSM) – Market Trend. Decrease of our number of positions (-2) in the consumer discretionary industry. William Sonoma is still considered undervalued against its intrinsic value, but the latter seems to have reached a ceiling in early 2016. The TTM NOPAT has decreased for the first time in 5 years, and the total EVA has also been slowly trending down since early 2016. We could re-initiate a position in WSM in the next quarters if we see a trend reversal, but for now we prefer not taking a chance to keep a position in a potential “value trap”.

– Scripps Networks (SNI) – Market Trend. Decrease of our number of positions (-2) in the consumer discretionary industry. Even though its SPscore is still high, we decided to sell SNI mainly because we find the intrinsic value and EVA a little too volatile and unpredictable. They both dropped a lot in the last 2 quarters and the long-term trend is stable, at best.

– Wells Fargo (WFC) – Market Trend. Decrease of our number of positions (-2) in the financials industry. Our evaluation of WFC Vs. USB was very close, and we decided to keep USB. Wells Fargo’s return on capital has slightly gone down in the past 3 years, while USB’s is a little more stable and marginally higher. Same scenario when looking at the EVA for both companies: slight decrease for WFC, stability for USB.

– Discover Financial (DFS) – Market Trend. Decrease of our number of positions (-2) in the financials industry. We decided to sell DFS, one of our oldest position in the US-Large model. Its NOPAT doesn’t grow anymore like it used to and has hovered around 2.3B – 2.5B over the past 5 years. The problem is that the company had to invest a lot of money to maintain the same level of NOPAT, which means the return on capital is slowly decreasing. Both the intrinsic value and EVA are currently on a slightly negative trend.

– Skyworks Solutions (SWKS) – Market Trend. Decrease of our number of positions (-1) in the information technology sector. Our evaluation of SWKS Vs. AVGO was also very tight, and we decided to keep AVGO. Both companies show a very similar profile and are growing quickly. We gave the edge to AVGO, which should start benefiting a lot from their recent acquisitions in the next quarters.

Buys:

– Lyondellbasell (LYB) – Market Trend. Increase of our number of positions (+1) in the materials industry. LYB is ranked #1 among American large caps – Materials. The intrinsic value is increasing nicely and the return on capital is high and stable. For the first time in 5 years, the future growth value (FGV) is negative, which means the stock currently trades at a discount. The free cash-flows are always positive, the company regularly increases the dividend and buys back shares.

– Whole Foods Market (WFM) – Market Trend. Increase of our number of positions (+3) in the consumer staples industry. WFM’s intrinsic value has steadily and linearly increased over the past 5 years. While the stock was considered overvalued between 2012 – 2016, it is not the case anymore. The free cash-flows are positive, EVA is now growing after a slight decrease in the end of 2015. If the economic indicators and the intrinsic value continue to improve at this rate, the stock should follow.

– Reynolds American (RAI) – Market Trend. Increase of our number of positions (+3) in the consumer staples industry. RAI is ranked #1 in its sector – American large caps. The return on capital is at its highest level in 5 years, at 16%, which contributed to the strong intrinsic value and EVA growth over the past 4 quarters. Even though the stock has had a good run over the last 6 months, we believe there is still a good upside potential.

– Kellogg Company (K) – Market Trend. Increase of our number of positions (+3) in the consumer staples industry. The company is known as a reliable dividend grower, with a strong dividend growth history dating back to 1973. The company has increased its dividend each year except between 2002-2005. The EVA has been increasing over the past 2 years, free cash-flows are always positive and the company also buys back shares.

– Johnson & Johnson (JNJ) – Market Trend. Increase of our number of positions (+1) in the health care industry. JNJ is also one of the strongest dividend growers, with a perfect dividend growth history dating back to 1972. All the indicators we analyzed are good except for the EVA, which is stable since September 2015 while we would like to see it increase in a perfect world. The company seems to be on the right path; the TTM NOPAT started to increase again after 3 years of slow decline.

The five new positions entered the portfolio with a 3.7% weight.