The 2020 Portfolio is Here!

“Earn as much as you can.

Save as much as you can.

Invest as much as you can.

Give as much as you can"

- John Wesley

The Portfolio

Year-To-Date the portfolio is up over +29%. Dividends were responsible for adding about 1.1% to the overall gain. I'll post the final number tomorrow after the close.

Our benchmark index, the S&P 500 is up over +28% YTD.

If you're an investor looking for diversification and growth, and you'd like to know more about the way I build a portfolio; please feel free to email me. clay@claybaker.com

2019 Recap

This morning the portfolio remains up over 29% YTD, while our benchmark is declining below 29% in todays sell-off. It looks like we'll finish the year just ahead of the S&P 500 for the 4th year in a row.

At the beginning of 2019 the portfolio lagged the market but picked up steam in the middle of the year as more and more investors pulled their money out of the stock market. By early November outflows reached a historic $1.1 trillion dollars. We Stayed Invested. The portfolio remained ahead of our benchmark until the end of the year. During the last three weeks of November investors realized the mistake they made and started coming back into stocks. In December we got the Santa Claus Rally, a China trade deal, a weaker dollar which improves exports, and interest rates remained low giving an extra boost to stocks. In short the market got everything it needed to keep rallying higher. In the last few days of December the S&P caught up to our portfolio. Today looks like a sell-off by institutional investors. Overall I thinks its a very orderly sell, no panic selling taking place.

Where could I have done better? I assumed that a trade deal with China wasn't going happen in 2019 and that kept me out of semi-conductor stocks; with the exception of NVIDIA and ASML. Semi's were a big winner in 2019 and are likely to continue to perform well in 2020. The other area where I could have done better was to get more exposure to technology companies that are operating in the cloud. Companies that offer cloud based software solutions performed exceptionally well because when companies need to improve productivity they turn to these software solutions to improve earnings, make themselves more efficient and better systems help retain the best talent. In retrospect I wish we had more exposure to those companies. This isn't Monday morning quarter backing, I looked at Coupa (+140.07%), Avalara (+134.29%), Adobe (+46.21%), Twillio (+12.46%), ServiceNow (+61.12%), and others. I thought they already looked expensive at the beginning of the year and just got more expensive and over bought.

The 2020 Portfolio

For 2020 I'm selling several companies to raise cash and move on to where we can hopefully find better returns. Don't get me wrong, a 29+% return is incredible for a market that averages about 9%; but our objective is to outperform the market, otherwise you should just own an index fund that delivers market returns. The Vanguard S&P 500 Index fund (VOO) has delivered just over 28% and the Vanguard Total Stock Market Index fund (VTI) has also delivered just over 28%.

I actually think all of the companies in the portfolio will do well over the long term but are likely to be market performing stocks, not outperforming stocks. I discuss the sells more below and will discuss the buys in future posts. We will keep our index fund, our gold position and our one water utility along with 15 of our existing holding, and I'll be adding some new holdings. My hope is to consolidate further if some of this years holdings reach or exceed my price targets. I'll say that again; I may sell some stocks before the end of the year if they provide a good profit. Ideally I'd like to be holding 20 stocks.

I'm selling the following companies:

  • Xylem XYL

  • Tilly's TLYS

  • BioSpecific Technologies BSTC

  • MixTelematics MIXT

  • Sony SNE

  • Royal Caribbean RCL

  • ASML Holding N.V ASML

  • Insperity NSP

  • Cabot Microelectronics CCMP

  • Monolithic Power Systems MPWR

  • Progressive Insurance PGR

  • TD Ameritrade AMTD

  • Constellation Brands STZ

  • Visa V

I've put in limit prices for my sells and all have hit their sell prices this morning.

I'm Buying the following companies:

  • Coherus BioSciences CHRS

  • Virgin Gallactic Holdings SPCE

  • Uber Technologies UBER

  • Avalara AVLR

  • CyberArk Software CYBR

  • Pulte Group PHM

  • L3Harris Technologies LHX

  • Market Access MKTX

  • MedPace MEDP

  • Teleflex TFX

  • Twilio TWLO

  • SolarEdge SEDG

  • Biogen BIIB

  • VBI Vaccines VBIV

  • Generac GNRC

  • Chipotle Mexican Grill CMG

  • Boeing BA

  • Advanced Micro Devices AMD

  • Facebook FB

The portfolio will be updated soon to show the sales and all the new companies I want to buy. I've included my buy around prices in a new column. With valuations this high I'm looking to take 50% positions at lower prices, so today's sell-off is a gift to the portfolio and I expect more gift days to come. In particular, earnings season will start in mid-January. With valuations high and expectations high I'm expecting a lot of companies to miss or just meet analysts estimates. That could cause a broad market sell-off that would give us a great opportunity to buy much lower.

I'm Keeping these companies:

  • BioDelivery Sciences BDSI

  • American States Water AWR

  • NVIDIA NVDA

  • Nabriva Therapeutics NBRV

  • Goldman Sachs GS

  • Amazon AMZN

  • CVS Health Corporation CVS

  • Northrop Grumman NOC

  • Veela Systems VEEV

  • MasterCard MA

  • Edwards Lifesciences EW

  • Home Depot HD

  • Amarin AMRN

  • Fox Factory Holdings FOXF

  • SAP N.V SAP

  • Vanguard Total Stock Market Index Fund VTI

  • SPDR Gold Shares GLD

Why I'm selling these stocks

Xylem XYL: This has been a terrific stock for us producing a +22.75% gain. It's now trading at over 28X earnings in a market that's at 16-17 times earnings, and forward earnings are not that impressive. Since the dividend is less than 1% I'm not inclined to stay in this one any longer.

Tilly's TLYS: We have a whopping +52.78% gain on Tilly's and I don't want to risk that win, let's ring the register and move on. Tilly's trades below the market multiple at just 14X, but there's a reason for the low multiple; retail is hard and the competition is fearce. There's nothing particularly unique about their product offerings and often stores are empty, which means Tilly's has to fight on cost cutting and offering promotions. With no dividend and competition from Walmart, Kohl's and Amazon for many of the same brands I'm not as bullish on this name.

BioSpecific Technologies BSTC: Frankly I had hoped for a lot more out of this company. We have just +6.28% gain for the entire year. I own this company personally and I am not selling my shares as I think something may happen over the next two years. But for the blog I need to find a more probable biotech company. If you own it and can keep it I think that's reasonable.

MixTelematics MIXT: We're down -5.60%, this investment just hasn't performed. With a Price to earnings of 20.50 it's just too expensive for the lack of results. However, forward earnings are looking better but are going to be at a market multiple. That's not impressive enough.

Sony SNE: We did great with Sony in 2019, up +44.15%. For 2020 I'm not as bullish on this name. While it trades below market right now on a P/E basis, share volume has been low, the dividend is only $0.37 (0.54%) and the beta is well above the market making it too volatile to keep, especially since 2020 earnings are expected to decline.

Royal Caribbean RCL: What can I say, we nailed this one, up +44.06% and we collected a 2.33% dividend for 4 quarters. I wish we had owned a lot more. The stocks trades at just under a market multiple and while earnings are expected to improve, the improvement is not significant. I'm also wondering how much money people will spend on travel in 2020 given the uncertainties around the election. I'm ringing the register and taking our win.

ASML Holdings ASML: This is the biggest winner of the year up over +100%. I like the company, I'd like to keep the stock, but my discipline tells me to capture that 100% gain and wait for the price to pull back a bit. I didn't buy nearly enough of this company when it was cheaper. Selling at over 42 times earnings it's not particularly expensive for the semi conductor sector and earnings are projected to improve in 2020 by 10 points to a 32 multiple. I may regret this decision but I'm going to place my bet on the chip makers that use ASML equipment for 2020.

Insperity NSP: I had a target price of $90 and NSP nearly reached $80. With a gain of just +8.58% and a dividend that's lower than the 10 year bond, I have to move on. This company is trading at 23X earnings and projects a modest increase next year. While we didn't lose money on this investment, I could have picked a better stock for HR and workforce optimization. Any of the cloud productivity stocks identified above would have been better calls.

Cabot Microelectronics CCMP: We're up +61.23% on CCMP and collected $1.68/share in dividends. Year-to-date the stock is up +49%, but our buy was at an exceptional low when it looked oversold to me. Thank you Cabot. Cabot is now trading at a P/E of 105 with a forward multiple that will be about at market. Cabot sells all the consumable stuff that's used by semiconductor companies. While I do expect CCMP to continue to do well, and management projections for forward earnings are impressive, I'm betting that customers have stocked up and 2020 will be a decent year but not a year of out performing.

Monolithic Power Systems MPWR: We're ringing the register on MPWR with a +64.27% gain and we collected a small dividend of 0.89% ($1.60). MPWR makes a lot of the stuff that's behind the electronics you use every day. Currently the P/E is at 77.94 and forward earnings are projected to be 37X. That's a big improvement in earnings. MPWR could be worth holding onto as analysts will have to reprice and either raise their estimates or get out. For now we're collecting our win. If this stocks pulls back significantly I'll probably come back to it.

Progressive Insurance PGR: I caught this stock when it was oversold and we got lucky with a +28.72% gain. It trades at just 13.5X earnings, and management is projecting the same for 2020. With a tiny 0.56% dividend and slow growth, I have to close this one out. PGR is a decent hold for a long term investor as insurance companies tend to be highly reliable stocks.

TD Ameritrade AMTD: TD Ameritrade was a great stock for the portfolio. We're up +34.33% for the year. When Schwab went to zero rates AMTD plummeted and I made an aggressive buy at lower prices. Soon afterward Schwab announced that they would be buying TD Ameritrade and the stock soared. We are not in the business of arbitrage, so I'm taking our win. If you own the stock and want to own Schwab, which I think is reasonable, just hold your shares and wait for the deal to complete.

Constellation Brands STZ: We have a gain in STZ of over +21%, not bad for a beer company. I had higher hopes that the investment in Canopy Growth Corp would stimulate the business more, but unfortunately the whole cannabis sector is in decline. STZ pays a nice 1.58% dividend or $3.00/share and earnings should improve significantly in 2020. However, I'm looking at the broader picture and just don't see where growth comes from unless Constellation makes more acquisitions to improve both revenues and earnings. This is a reasonable long term hold but I'd like to make room for a company that can outperform.

Visa V: What can I say except thank you to Visa for the +47.81% gain. I'm selling in order to consolidate more into MasterCard which is my preferred financial in this space. Visa is great and delivered every quarter so I wouldn't decry anyone who wants to hold both Visa and MasterCard. Both Visa and MasterCard trade at similar P/E ratios and forward P/E's are roughly the same degree of improvement. Neither Visa or MasterCard pay significant dividends, these are companies to invest in for the appreciation in the stock. Right now I'm betting MasterCard wins in 2020 and freeing up some cash will allow us to take a bigger stake in MA as I think many of the initiatives that MA has established will start to pay off in 2020.

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

I hope that 2019 was a happy, healthy and prosperous year for all my readers. I'm very optimistic about 2020 and beyond as the U.S economy continues to deliver data that confirms strength, even in the face of mounting headwinds. One of my first predictions for 2020 will be that the S&P 500 reaches 3500-3700, I'll write a specific post on how I get to those levels at a later date.