Model Portfolio

US-Large Portfolio Transactions – September ’17

By September 11, 2017 No Comments


1) Delisted: Reynolds (RAI). Reynolds was delisted at the end of July, following its acquisition by British American Tobacco. This acquisition was finalized on July 25 when British American Tobacco officially acquired the remaining 58% of Reynolds.

2) Delisted: Whole Foods Market (WFM). At the end of August, Whole Foods was delisted following its acquisition by Amazon.

3) Sector rotation: Foot Locker (FL). We reduced our exposure to the Consumer Discretionary by one position. Despite its high SPscore of 65%, a remarkable slowdown is evident in Foot Locker’s economic performance. The intrinsic value has consecutively decreased over the past 2 quarters, something that hasn’t taken place in at least 5 years. The economic value added has also dropped down to its end of 2014 – beginning 2015 level. Foot Locker’s stock price suffered enormously following the announcement of Nike and Amazon’s partnership at the end of June. Due to the growing trend of online shopping and the increasing popularity of Amazon, Foot Locker may continue to encounter difficulties in its business model which is mainly focused on in-store sales.

4) Merger: Dow Chemical (DOW) and DuPont (DD). On August 31, the merger between Dow Chemical and DuPont was finalized, resulting in the formation of a brand-new company, DowDuPont (DWDP). Given that this new company does not possess any historical financial data, there is a lack of information needed to effectively analyze the stock.

5) Sector Rotation: C.H. Robinson Worldwide (CHRW). We reduced our exposure to the industrials sector by one position. C.H. Robinson was sold mainly due to the decrease of its EVA for 4 consecutive quarters. In addition, the return on invested capital decreased from 24.6% to 19.2% over the last 12 months, bringing it to its lowest level in at least 5 years. Free cash-flows have also diminished, falling from $415M to $121M in 12 months. C.H. Robinson may be reconsidered for our portfolio if the company can stabilize its EVA and bring back its return on capital to where it was between 2012-2016.


1) Sector Rotation: Cigna Corporation (CI). We increased our exposure to the Financials sector by one position. Cigna, a health insurance company, holds one of the top scores in its sector. Its intrinsic value has been steadily increasing with a foreseeable trend, and the EVA rebounded in the past 2 quarters, following a 3-quarter decrease between March and December 2016. Free cash-flows generated are high, which could allow the company to quickly reduce its long-term debt, or to repurchase some of its shares. It seems that there is a higher priority on the growth of the company rather than the increase of dividends, which hasn’t occurred in 10 years.

2) In replacement of Reynolds (RAI): Vector Group (VGR). Vector Group is one of the smaller players in the Tobacco and Real Estate industry, with a market cap of $2.8B. Its return on capital is relatively high at 16% and its EVA has been stable over the past 5 years. However, the company’s ability to maintain a high dividend is to be monitored. The earnings per share do not cover the dividend payout, but it never did in the past 10 years. That did not stop the company from continuing to increase dividends regularly. The “weak” company earnings in comparison to the dividends payout are partly due to the depreciation in real estate assets, a segment which generates approximately 40% of the revenues.

3) Sector Rotation: Tyson Foods (TSN). We increased our exposure to the Materials sector by one position. Tyson Foods operates in 4 main market segments: poultry, pork, beef, and pre-cooked meals. The company is ranked as #1 in its sector, thanks to its intrinsic value and EVA which constantly and linearly increase. The gap between the stock price and intrinsic value reflects an upside potential of approximately 50%. This gap is one of the greatest encountered in the past 5 years. The company generates high free cash-flows that allow it to aggressively increase its dividend without increasing the risk: the payout ratio is of only 18%. Tyson Foods has also done important stock repurchases over the past 3 years.

4) Sector Rotation: T-Mobile (TMUS). We increased our exposure to the Telecommunications sector by one position. T-Mobile is one of the leading American telecommunication companies experiencing strong growth. Revenues increased from $10M in 2013 to almost $40M in the last 12 months. Taking the industry average into consideration, its return on capital of 8.5% is acceptable. Since the last 2 years, the free cash-flows have turned from negative to positive and are increasing, which is a good sign. In the beginning of September, T-Mobile announced a partnership with Netflix (NFLX), which could draw new clients. T-Mobile will offer a free Netflix subscription to clients who activate 2 or more phone lines.

5) In replacement of Whole Foods Markets (WFM): Clorox (CLX). Clorox, founded in 1913, produces and sells cleaning products marketed towards the retail and professional segments. The company is in its maturity stage, the revenue growth being of only 2% per year. On the other hand, the profit margin is increasing consistently, resulting in a constant EPS growth. The free cash-flows are positive and rising, which allows the company to increase its dividend. The average dividend growth rate has been of 6% per year for the last 5 years, and the current dividend yield is 2.5%. Due to its high and stable return on capital (21.6%), the economic value added has been increasing very steadily since June 2014, which demonstrates Clorox’s stability.