Author: Felix Tong
Covestor model: Long Term Core Holdings
Disclosures: KO, USG, SNBC, GMCR, DMND, FSLR, OCPNY, WFC, UN, HINKY, WAG, INTC
Since I started the Long Term Core Holdings model, I have not found many opportunities to invest in buy-and-hold companies with predictable earnings — the Coca-Colas (KO) of the world.
The market usually rewards them with rich multiples which make it difficult to obtain market beating returns. Instead, I have made purchases that have had more of a deep-value tilt.
The portfolio made purchases of USG Corp. (USG) and Sun Bancorp (SNBC), recognizing that these companies are extremely underpriced due to their businesses being levered to housing.
Other stocks I have been looking at that have also fallen into this category are Green Mountain Coffee Roasters (GMCR), Diamond Foods (DMND), First Solar (FSLR) and Olympus Corp. (OCPNY). I have written about DMND and OCPNY on previous occasions.
Although the Long Term Core Holding portfolio stock allocation mainly consists of deep-value stocks, my preference when investing is to buy and hold wide-moat companies with predictable earnings. This is preferable since the low turnover of this type of portfolio will produce low transaction costs and tax efficiency. These companies have the ability to profitably reinvest in their businesses allowing the shareholders to have their returns compound over time without having to make buy and sell decisions.
Based on traditional valuation metrics such as P/E ratios, there have not been many opportunities since I began this portfolio to open positions in these types of companies.
Currently the portfolio contains a 10% position in Wells Fargo (WFC), a stock I consider a buy and hold position.
Recent volatility, along with increased earnings, have brought valuations in several companies to a level I would consider investing in.
Among the companies I am the most interested in are Unilever NV (UN), Heineken NV (HINKY), Walgreens (WAG) and Intel (INTC). I am looking into diversifying some of the Long Term Core Holding portfolio away from deep-value stocks into the buy-and-hold wide-moat stocks I mentioned above.
A position that immediately jumps out at me is my nearly 60% portfolio position in USG. Although I have complete confidence that the stock price of USG will fly upwards when housing turns around, this overweight has brought a level of volatility I believe is uncomfortable to many people.
In the coming weeks and months I will be focusing my analysis on the possibility of diversifying the portfolio, while working to retain the growth potential of the current portfolio.
