Quarterly Portfolio Update – Q2 2019

(4/1/2019 – 6/30/2019)

Strategic Asset Allocation

  • YTD my investment portfolio IRR is approximately 14.1%, lagging the S&P 500 which has exploded on the year, increasing by 18.5%. I am confident the portfolio is well positioned to outperform in the long-run and in down markets. I don’t pay much attention to benchmark returns, especially over the short-term, but I think it can useful to check in periodically.
  • With elevated equity markets I continue to try to keep over 10% of my portfolio in cash that I can put to work during the next market downturn.
  • Given historically low interest rates resulting in historically rich corporate debt markets and my current age (younger than 30) I continue to keep a very small position in fixed income. About 6% of my investment portfolio is allocated to domestic (U.S.) fixed income. I gain this exposure through index funds in my retirement accounts and slightly increased my monthly allocation as I would like to get this to about 8% by the end of 2019. I continue to monitor this asset class as economic stress tends to hit the corporate debt markets first and is often a leading indicator for equities.
  • I have a roughly 24% allocation to emerging market and international equities combined. This is on the high end of my Strategic Asset Allocation range. I’m typically comfortable at about 20% in foreign equity exposure. I won’t be making any changes here unless the allocation breaches 25% for an extended period (1-2 Quarters) given the level of US equities. Since I’m allocating new funds elsewhere, this allocation should tick down over the coming quarters.
    • I continue to like a slightly higher exposure to emerging markets equities as they have been hammered pretty good over the past couple of years. Since January 2018 the iShares MSCI Emerging Markets ETF (EEM) is down 18%. This is likely due to being on the receiving end of a trade war with the U.S. According to Lazard Asset Management, emerging markets continue to trade at discounts of about 23% compared to developed markets from a P/E standpoint (as represented by the MSCI World Index).
  • 67% of my investments are held in a tax-advantage retirement account, the remaining 33% are held in a taxable brokerage account.
  • 56% of my investments are considered “Passive”, 33% are “active”, and the remaining 11% are held in cash.

Satellite Portfolio

Q2 Dividend Increases

  • AAPL + 5.6%
  • BAC +20.0%
  • CAH + 1.1%
  • CLX +10.4%
  • KR +14.0%
  • WPC +0.2% (Quarterly increases)

* 2019 total dividend income has increased 17% over the 1st half of 2018. The portfolio dividend yield and yield-on-cost are 3.1% and 4.2%, respectively.

Q2 Buy/Sells

  • Sell – SOUHY
    • My position in South 32 LTD was established when BHP Billiton decided to divest some of its non-core assets in May 2015. The company focused on the production of Alumina, Aluminum, Manganese, Silver, Zinc, Lead and Nickel. I sold the position in April for a 26% gain. The position was an extremely small percent of my portfolio (<1%) and after the run up in price I thought I could better allocate the funds elsewhere.

Noteworthy Q2 Position Updates

  • BAC – The Federal Reserve gave Bank of America the go-ahead with their intended capital plan following the completion of the 2019 Comprehensive Capital Analysis and Review (CCAR). The dividend was increased by 20% to $0.18 per share and the Board of Directors has approved $30.9 billion in share buybacks over the next year ($0.9 billion in repurchases would offset shares awarded under the company’s stock program).
  • BNS – Scotiabank received approval to repurchase up to $24 million of its common shares (~2% of outstanding shares) over the next year.
  • BBL – BHP Billiton has been riding the iron ore rally in 2019 and is up roughly 20% YTD (Iron Ore prices have jumped about 65% YTD). It is now the 7th largest position in the Satellite Portfolio at 6.5% and represents about 10% of my annual dividend income. This is a bit higher than I like for a very cyclical company that is highly correlated to commodity prices. I may harvest some profits and look to trim this position over the next few months.
  • WPC – W.P. Carey is up 30% YTD and has now become my largest position at roughly 7% of the Satellite Portfolio and producing 7.4% of the portfolio’s annual income. W.P. Carey’s real estate portfolio is primarily comprised of single-tenant office, industrial, warehouse, and retail facilities located around the world. They are highly diversified and are run by a superior management team that has repeatedly demonstrated the ability to generate strong returns on capital. I have no intentions of trimming this position but will not be adding for the time being. WPC hit their all-time high in mid-June at a price of $65.54.

Credit Ratings

Moody’s %
Aaa 6.56%
Aa1 6.88%
Aa2 0.00%
Aa3 2.05%
A1 4.39%
A2 0.00%
A3 10.50%
Baa1 30.27%
Baa2 26.07%
Baa3 3.16%
N/A 10.12%
100.00%


Odd Lot Tender

  • Interesting Odd-Lot Tender with Twin River Holdings, Inc. (TRWH). The tender is a Modified Dutch auction with a minimum tender price of $29.50. The current market price ($27.35 at time of writing) is not attractive enough for me to purchase shares, however, I will be monitoring this over the coming weeks to see if Mr. Market provides me an opportunity to enter the trade and make a nice return in a short period of time. I will entertain the idea of purchasing shares (99 shares or less) if the price drops below $27.00. The offer expires July 25th. More details can be found here: TRWH Odd-Lot Tender

Other

CAH and CVS continue to be laggards in the portfolio (-39% and -29%, respectively) due to uncertainty around government intervention in the healthcare industry and the impact that may have on future earnings potential. However, these stocks are very cheap on a historical basis and the best prices are usually offered when investors are fearful about the future. I will be re-visiting my valuations to see if they potentially warrant some averaging-down over the next few quarters.

There is an updated portfolio overview in the Author’s section as of June 30th, 2019.

Questions/comments?

-Pennybags

UPDATE: Twin River Worldwide Holdings, Inc. Modified Dutch Auction Tender Offer

Twin River (TRWH) announced that they were purchasing two casinos from El Dorado Resorts (ERI) today. The stock is currently trading at $27.25 and is down 5.05% on the day. According to their IR department, the tender is still on track to close on the 24th. We have yet to hear what Standard General plans on doing, but at an 8.25% spread between the market price and worst-case tender price, I believe that there is some value here. I have established a position in my portfolio.

– Porcupine