I suppose it’s my turn to provide a quick take on the current make-up of ATG’s portfolio and thoughts on specific equities. While I have a few regrets (such as not buying Royal Caribbean at moMANon’s behest in hopes of buying a little cheaper and not picking up a larger entry position of Whitewave Foods), overall I’m happy with the current makeup of our portfolio and the various trades over its first 6 months.
OZM- At 16% of invested capital, Och-Ziff is our largest holding in the portfolio, more as a result of picking up more shares on weakness than overt confidence. I am extremely interested to see how their third quarter earnings pan out on November 4- the beauty of this stock is that they distribute most of their earnings as a dividend and it’s priced so cheap that their funds only need to gain a few ticks above 0% to generate adequate profits. The downside is that that they primarily play in international alternative investments, an area where getting a few ticks above 0% is no easy task in today’s environment. I’m a HOLD on this one.
ESV- Admittedly, I keep getting this stock wrong. It has been the worst performer of the ATG portfolio, with an unrealized loss of 13.5% to date. Plummeting oil prices coupled with concerns about over supply in the offshore rig industry have outweighed positive earnings results, a stable balance sheet, attractive dividend yields, and continued backlog of revenue for the company. Perhaps this is my version of the Ackman-Herbalife complex, but I’m convinced that ESV is destined to turn around- today’s earnings announcement of a solid beat and 3.2% gain is a good start. It’s hard to find a best-in-class company that generates ample profit, cash flow, and trades at a price below net book value of assets, even after excluding intangibles. I’m a believer in Ensco, but keeping a HOLD rating relative to the ATG portfolio given our large position.
GOOGL- I like monopolies, low leverage, strong revenue growth, and cutting edge technology investments at a price equal to the average S&P P/E ratio. STRONG BUY. We’ll be adding more soon.
VNM- Vietnam index, this is a tough one. I like this play a lot in the long run, but I’m annoyed by the nature of emerging market ETF’s like this where local players can anticipate the ETF buys for particular stocks in advance and move the market (increasing the ETF basis); I’m also cautious about emerging markets in general over the next couple of years. I think we’ll see a lot of volatility here and will need to buy on dips/ maybe sell on big upswings over the next year or so, hence the HOLD/ WATCHING WITH CAUTION rating.
HTZ- Hertz is a fascinating story, not too dissimilar to WTW: incredible overall market demand drivers for the industry but company-specific misteps and under-performance. If you missed my prior post on Hertz, check it out for more detail on why I’m intrigued, including how Carl Icahn bailed my ass out of the initial trade. We’re back in now that the stock has plummeted from $31/ share to around $20 share and has removed their CEO. While there may be some short-term turbulence as they eventually re-state their earnings and name a new permanent CEO, I’m extremely bullish on this stock over the next 12 months. STRONG BUY.
DE, PHM, DNOW, CLNY- I’m going to pull a Bill Simmons and group all these stocks together because (i) I’m lazy and (ii) they all share the similar characteristic of being what I consider relatively safer, industry leading stocks at attractive P/E ratios that I don’t lose any sleep over. We’ll buy on dips but they also aren’t likely to sky-rocket any time soon. The overall theme is increased importance on agricultural equipment/ farming efficiency, eventual millennial movement towards starting families and moving into new homes, continued energy/ oil industry growth in the US via a Warren Buffet supported spin-off, and attractive risk-adjusted real estate returns via a super smart shop that plays in both debt and equity (including rental residential).
WTW- In the last 3 months, Weight Watchers notched a staggering 53% gain from $19.25/ share to $29.42/ share before dropping 13% today despite a healthy earnings and revenue beat (but a 12% reported loss in overall membership). We’ve done well on this stock, and any reader of this blog knows that I’ve been cheer-leading it for over a year (admittedly more in bad times than good).
After reading the earnings transcript, the clear strategy set by new CEO Jim Chambers, and witnessing the measureable improvement of Weight Watcher’s technology presence (app integration with fitbit, iphone6, jawbone, etc.) I remain a steadfast believer in the stock.
The only caveat is that I actually did a little “gonzo investment research” and joined a new weight watchers group through my company to see what the program was like from the inside. I lasted one meeting- out of the total 18 people in attendance, there were literally 17 women staring down the 1 man with total disdain. I knew that Weight Watchers was overwhelmingly women, but I never fully appreciated the company’s challenge in attracting men to their onsite meetings until being there in person and feeling the awkwardness. I was very impressed by the initial Simple Start program and could immediately see the benefit of their group weight loss approach, but I think the programs need to be separated by gender if they ever hope to gain critical mass from the dudes. They also need a dude sponsor that men can actually relate to: Jonah Hill or Seth Rogan need to get fat again!!
In the past 10 days the S&P 500 has dropped over 3% over Russia/ Ukraine tension, Argentinian bond defaults, fighting in the Gaza strip, improving GDP numbers that could trigger an unwinding of quantitative easing, and who knows what else. Anyone who claims to fully understand the complexities and future implications of each of these events should be thrown in a padded room (or given a spot on CNBC Squawk Box).
This is the bad news- aside from diversifying across asset classes or dollar cost averaging, there is very little an investor can do to anticipate and guard against these unforeseen events.
Now for the good news- Despite all of these events and the recent drop, the S&P 500 is still up 5.5% on the year and plenty of stocks continue their upward march as the economy improves and earnings improve. This little 3% “hiccup” from macro and geo-political uncertainty may provide some discount shopping opportunities.
Here’s my take on discount shopping in times like this:
This is a “sale” opportunity and not a “clearance” rack. Make sure you buy quality companies that you believe in over the long haul just in case that sale turns into a clearance after you buy and a patient holding period is necessary.
Start with looking at the stocks you already own and know well: buy more of the stocks you still really like that have taken a hit, but make sure you re-visit their financial position and prospects for growth.
Look for companies that are actually on sale at the moment and have dropped materially from their highs (or have below-market P/E ratios). For example, I’ve been waiting for an opportunistic time to open a position in Disney (DIS) because I love the company, have a 3 yr old daughter obsessed with Tinkerbell, and I believe they have incredible staying power, but their stock price has not been affected at all by the geo-political and macro noise over the past month. I’ll have to wait on Disney until the next sale or clearance opportunity.
Based on the criteria above, ATG has taken an entry position in John Deere (DE), added to its position in Ensco (ESV), and will likely be adding to its position in Google (GOOGL) and Whitewave Foods (WWAV). We are also looking harder at airline and transportation stocks for sale opportunities.
It’s no coincidence that all the companies listed above are long-standing companies with huge competitive advantages in what I believe to be high growth industries. Can you imagine a (near) future with increased capital spending on agriculture, energy consumption, continued dependence on online marketing/ e-commerce, more demand for non-dairy organic substitutes and increased travel for commerce and pleasure?
The ATG Investment team has finally gotten off its ass and opened its joint investment fund. On a monthly basis we will update the positions and share true performance of the fund in the “Current Portfolio” tab of this blog. On April 17 we established initial positions in 7 different securities and allocated a total of 25% of the available capital to these stocks. Over the next several months we intend to slowly build up the investment fund to approx. 80% invested in the market with 20% in cash as a buffer. The investment allocations of each security are reflective of our perception of current price- for example, WWAV has a smaller allocation than ESV currently due to the recent run up in its price before we established an initial position. If pricing dynamics change 30-60 days from now, we will adjust the allocation to try and take advantage of pricing and build a more favorable basis in any given security. We plan to limit the total number of different investments at any given time to around 10. Our logic is that its enough to provide meaningful diversification but not too many to lose focus or dilute the ATG team’s best overall ideas.
Without further adieu, below is the initial ATG portfolio:
OZM (Och-Ziff), ESV (Ensco), CLNY (Colony Financial), WWAV (White Wave Foods), and PFF (iShares Preferred Shares ETF) have all been discussed in prior ATG posts. GOOGL (Google Class A) was a bit of an impulse, last minute add to the portfolio in light of their recent modest price drop. Any portfolio should have some high quality tech exposure, and GOOGL is probably the most reasonably priced of the high growth names at 17x 2015 forward earnings.
VNM (Market Vectors Vietnam) is an ETF that tracks the Vietnamese stock market. Both Maverick and moMANon have had the opportunity to visit the country before and are in agreement that this is our favorite emerging markets bet right now (and favorite southeast Asian cuisine option). I’m sure an ATG post is forthcoming laying out our argument for the opportunity.
Overall we’re trying to build a portfolio that balances attractive yield (PFF, ESV, OZM, CLNY) with higher growth/ beta securities (VNM, WWAV, GOOGL) in hopes of beating the S&P 500 and earning positive returns even if the market ends down for the year. We are also trying to stay true to the original ATG principal that any security we pick is one that we’d be comfortable holding for several years to ride out any wild, unpredictable market moves.
As always, we welcome any feedback or thoughts as we build up the portfolio and share the performance publicly. To avoid any misunderstanding from potential readers, I want to make it clear that the ATG Fund represents only a portion of the ATG team’s respective personal investment strategies. Any responsible personal investment strategy should have diversification among various investment classes (stocks bonds, real estate, etc) and have a meaningful percentage of diversified index/ mutual fund holdings in addition to any individual securities. For any readers who’d like to talk more about an overall investment strategy, write us a message and we’ll be happy to share our thoughts.