Monday, December 30, 2013

Year End Look at the Portfolio - Part 1

As an excellent year in the stock market comes to a close, it's time to look at the portfolio and consider my strategy for 2014.  In the next several postings, I'll be looking at valuation for my current holdings, size of each, performance review vs. benchmarks, review my rules for the portfolio, and put together an action plan for early 2014.  I'll also take a look at my watch lists for stocks I may want to add or swap into the portfolio.

In part 1 here, I ran an analysis of current PE vs. past six year normal PE as initial screen of the holdings.  This first chart shows holdings that are still undervalued, and if not oversized already, I may add to some or all of these holdings:

The names highlighted with the green boxes look very attractive.  The others are less attractive, but not so overvalued that I'd consider trimming... yet.

From this list, I still like the technology names highlighted, VMI and DE.

In addition the stocks above, I'll list my REIT and MLP type stocks below, separately showing historical and current P/FFO vs. PE, a better measure for cash flow investments like these:

KMI (and KMP for taxable accounts) still looks like a great investment.

On the other side of the coin are the holdings that are looking more expensive.  They are shown here, with red highlighting showing those that are particularly overvalued:

In particular, I'll look carefully at the size of ADM, MO, WAG, DOV, GD, and JNJ and trim these names down to smaller % of the portfolio, or sell them completely.  I need to review my rules and think about each for the long term.  I'm unlikely to sell without a suitable replacement for each, but am mindful that I have several candidates in for investment within the portfolio.

That's all for Part 1.



Wednesday, November 20, 2013

John Deere

John Deere is trading up today around 2.64% at the time of this writing.  DE reported 4th quarter earnings today, and the report was great.  Here is a summary from the 8K:

Exhibit 99.1
(Filed herewith)


Ken Golden
Director, Global Public Relations

Deere Announces Record Fourth-Quarter Earnings of $807 Million

§                 Fourth-quarter income rises 17%; earnings per share up 21%.
§                 Full-year earnings reach record $3.54 billion.
§                 New products, additional capacity help expand global customer base.
§                 Forecast calls for income of $3.3 billion in 2014.

MOLINE, Illinois (November 20, 2013) — Net income attributable to Deere & Company was $806.8 million, or $2.11 per share, for the fourth quarter ended October 31, compared with $687.6 million, or $1.75 per share, for the same period last year.
For fiscal 2013, net income attributable to Deere & Company was $3.537 billion, or $9.09 per share, compared with $3.065 billion, or $7.63 per share, in 2012.
Worldwide net sales and revenues decreased 3 percent, to $9.451 billion, for the fourth quarter and increased 5 percent, to $37.795 billion, for the full year. Net sales of the equipment operations were $8.624 billion for the quarter and $34.998 billion for the year, compared with $9.047 billion and $33.501 billion for the same periods in 2012.
“With our strong financial results in the fourth quarter, John Deere has wrapped up another year of impressive achievement,” said Samuel R. Allen, chairman and chief executive officer. Income for the periods was higher than in any previous fourth quarter or full year, he pointed out. “During the year, Deere continued with a record number of product introductions and completed seven new factories, in Brazil, Russia, India and China. These products and additional capacity are essential to helping the company expand its global customer base and realize its long-term business objectives.
“Deere’s performance is a testament to our ability to execute our business plans, which stress the rigorous management of costs and assets,” Allen stated.

The Chump IRA bought DE three times in May, once in June, once in July, and once in August.  Each purchase was a 1/5 position.  My average cost stands at $86.02.  The FAST Graph below shows a continued  undervaluation (black price line), with a fair value target price of around $130 per share (orange PE=15 line).

Reprinted below is a more thorough summary from today's WSJ.  It looks like DE and its competitors will face headwinds next year due to falling commodity prices around the globe.  DE is definitely a long term play.

Deere's Profit Rises Despite Lower Sales

Results Top Expectations Even As Demand for Farm Machinery Shrinks

Updated Nov. 20, 2013 11:03 a.m. ET
Deere DE +2.42% & Co. said its fiscal fourth-quarter earnings rose 17%, but the company forecast lower sales in 2014 as demand for farm machinery shrinks throughout the world.
The world's sales leader in tractors and harvesting combines topped fourth-quarter expectations. The company's sales and profit outlooks for 2014 also were better than anticipated, providing a measure of relief for investors bracing for sharp decline in farm equipment demand.
Deere's results provided further evidence that the prolonged run of elevated demand for farm machinery is ending as prices for corn, soybeans and other farm commodities retreat, providing farmers with less money to spend on equipment.
The Moline, Ill., company expects industrywide sales of farm machinery in the U.S. and Canada in 2014 to be down 5% to 10% from 2013. In South America, a particularly strong market in 2013, Deere expects sales to slip by 5% to 10% next year. Meanwhile, in western Europe, the company anticipates a 5% decrease in industrywide farm equipment sales.

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Deere expects its own sales performance to be better than the industry, predicting a 6% decline in agricultural equipment sales with most of that drop coming from the sale of the company's landscaping distribution business.
For the fiscal year starting Nov. 1, Deere forecast earnings of $3.3 billion, or roughly $8.55 per share. Analysts had been expecting profit of $3.04 billion, or about $8 per share. Some analysts said they're skeptical of Deere's more optimistic forecast.
"We believe Deere's outlook sets up for disappointment as the year progresses," said Lawrence De Maria, an analyst for William Blair & Co. "We believe the overall fundamental outlook for agriculture is especially vulnerable over the next few years."
The company expects improvement in its construction equipment business in 2014 after disappointing results in 2013. Deere forecast a 10% increase in construction and forestry equipment from 2013, as an improving home construction market in the U.S. drives higher sales.
For the fourth quarter, construction equipment sales slipped 8% to $1.52 billion, while profit decreased 2% to $118 million.
Fourth-quarter sales of farm machinery dropped 4% to $7.1 billion, but profit rose 7% to $996 million, as higher prices for equipment helped to offset lower production volumes.
For the quarter ended Oct. 31, Deere reported a profit of $806.8 million, or $2.11 a share, up from $687.6 million, or $1.75 a share, a year earlier. Revenue, which also includes the company's financing unit, decreased 3.4% to $9.45 billion, with unfavorable currency-translation impacts of 2%.
Analysts polled by Thomson Reuters expected per-share earnings of $1.89 and revenue of $8.68 billion.
—Tess Stynes contributed to this article.
Write to Bob Tita at

Monday, November 4, 2013

Happy Birthday! The Chump IRA is One Year Old

If you go back through the old posts, you'll see that the portfolio was completed in mid-September 2012.  So I'm using the end of September as the start point for the portfolio, September 30, 2012.
My brokerage has updated the performance of the Chump IRA through September 30, 2013, so my one year performance is in the books!  Here is the result:

Chump portfolio = 20.17%
S&P 500 over the same timeframe = 19.34%

So, in my first full year, I beat the S&P.  That puts me in the top very low percentile of all money managers on the planet!  Ha.  I expect the delta to grow over longer periods, since I'm getting smarter (perhaps with the exception of shorting TSLA).

I've learned a few interesting things along the way, here are some that come to mind immediately:

  • Beating the S&P isn't that easy
  • Managing your own portfolio isn't that hard
  • FAST Graphs makes stock evaluations much easier and faster
  • High quality companies bought below fair value outperform high quality companies bought at or above fair value (in general)
  • Picking and buying undervalued stocks is easy; selling overvalued stocks is very hard

If you look at the "All Holdings" blog from September 11, 2012, you'll see all the holdings in the portfolio at that time, ranked by EYE ratio, or earnings yield estimate.  This is a FAST Graph metric that combines PE ratio, estimated five year growth, dividend yield, and future cash flows to estimate excess return above 10 Year Treasuries (risk free return).  A higher number is a good measure of undervaluation and/or potential returns.

Worst EYE Ratio 1 YR Return Best EYE Ratio 1 YR Return
1 KO 2.70% 1 CLF* -45.51%
2 MO 8.38% 2 HAL 44.26%
3 MCD 8.31% 3 AFL 32.71%
4 WMT 2.64% 4 CMI 46.49%
5 JNJ 29.67% 5 COP 26.83%
*Closed position on February 4, 2013 for a loss of only 3.67%

A look at the lowest EYE ratio (Worst Valuation) vs the highest EYE ratio (Best Valuation) bears out the premise.  I took small positions in the 5 worst valuations, and full positions in the five best. I sold CLF before a major collapse in the stock, and so, overall returns were very good for portfolio as a whole.  With the exception of CLF and CMI, which I sold recently due to overvaluation, I still hold all of these stocks.  My positions in JND and MCD are near full positions, but I'm still underweight KO, MO, WMT.

Here are the holdings today, and the EYE ratios, which mostly lower than back in 2012!

That's all for now,


Kohl's Upgrade (Why you should never follow analyst recommendations)

Hooray, UBS has upgraded Kohl's.

Kohl’s Upgraded at UBS 
UBS reported that it has raised its rating on Kohl’s Corporation (KSS) from “Neutral” to “Buy,” and has given the company a $69 price target. This price target suggests a 14% increase from the stock’s current price of $56.85. Analysts have upgraded the stock due it its turnaround strategy and operating improvement. KSS currently has a dividend yield of 2.46%.

Great news right?  Well, sure, for those of us who've been holding the stock for many months/years, yes.  For new investors, not so much.  Here is a one year price chart for KSS:

Barron's printed an article last weekend about Kohl's (see previous post on this), and since then, the stock is up 12%.  The Chump IRA bought shares almost exactly a year ago after some bad news and analyst downgrades, then added to the position a few days later on a further dip.  Since then, I've been re-investing the dividends.  At today's price above, I'm ahead 34.8% on the KSS investment.

Kohl's is still trading below fair value, so I'm holding the position, but adding now after the recent run-up in price is much more risky than doing your own research and buying when the news is bad, and the stock is down; pretty much the opposite of the what the analysts are recommending!  Analysts add stocks to the recommended lists after they've run up in price.  That way, when they advertise, they can make claims like "Our list of recommended stocks is up X% year to date, and up X% over a one year period."  Technically true, but they don't mention when they recommended, nor do they give performance numbers since they recommended the stocks!  What a racket.



Friday, November 1, 2013

Walgreen (WAG)

WAG has been a great investment in the Chump IRA.  I started a position in WAG on August 13, 2012, and that original investment is up 69% at today's close.  I added two additional purchases in mid september 2012 to make it a full position in the portfolio.  I trimmed the WAG position twice this year due to the size of position coupled with a rising PE, but today, it's still the largest position in the portfolio at 4.5%, and I hold shares in my taxable account as well.

After today's run up of over 2%, I decided to look again at the valuation and possible trim of the position next week.

Here is a FAST Graph for the past 20 years, and shows why I like the company so much:

With few exceptions, earnings and dividends just keep marching forward.  As you can see by the black price line, the price followed the market PE of 25 until the recent recession, then underwent a compression, and has more closely followed the orange eps growth line ever since.  That eps growth line is drawn at 15%, so when the PE rises above the 15 level, the stock tends to correct downward;  at least this has been the pattern since 2008.  Now look at the FASTGraph for the past six years:

When the stock got up to a recent PE 19.5, I trimmed the position.  I did this again after the little dip, then return to PE 19.5.  Today, the PE based on the trailing years earnings is up to 21, ripe for a return toward the orange earnings line a PE=15.  It may be time to trim the position again next week.  I'll wait and see what next week brings, and continue to monitor.

That's all for now,


Monday, October 28, 2013

Kohl's (KSS) Article from Barron's

A positive stance on Kohl's.  The KSS position, started last fall, is up over 28% in the Chump IRA. Here a couple of FASTGraphs reflecting a continued under-valuation.  I'm planning to continue holding the position.

Interesting, the article says the stock hasn't done much the past three years, with anemic growth between 3% and 4%.  That's true, if you bought three or more years ago, the stock was not undervalued!  But I bought in the fall of 2012, when it was clearly trading at a discount, and still is today.  This shows the importance of entry price.  

Here is the article from Barrons:

Coming Back to Kohl's

The retailer's shares could rise 20% as management improves inventory levels and merchandising. The quest for more national brands.

As retail stocks go, Kohl's has been about as interesting in the past three years as a pair of khaki pants. On second thought, the khakis win this contest: Shares of the midpriced apparel, accessories, and housewares chain have risen all of 3.6%, to $54.74, in this span, while the Standard & Poor's 500 has surged 48%.
Kohl's, which operates 1,158 stores in 49 states, has been hampered by lackluster merchandising, inventory imbalances, and constricted profit margins. Bearish investors cite the company's inability to recruit and carry the most desirable brands.
Eric Risberg/AP Photo
Kohl's operates 1,158 stores across the country, including this unit in San Rafael, Calif.
Yet, skeptics could be surprised in the next year as Kohl's finally begins to live up to its retail motto, "Expect Great Things." A constellation of merely good things, including improvements in the merchandise assortment, private-label programs, and the online business, as well as cost-cutting, could result in modest revenue growth and higher pretax margins, which in turn could lift the shares (ticker: KSS) by more than 20%, into the mid- to high-$60s.
The bullish case for Kohl's, based in Menomonee Falls, Wis., begins with the retailer's shareholder-friendly capital-allocation policies. From 2010 through 2012 the company bought back $4.6 billion worth of shares, shrinking its market capitalization by 30%, and it plans to continue shopping. It also initiated a dividend in 2011, which it has raised steadily to a current $1.40 a share. The stock yields 2.6%.
THESE MOVES PROVIDE "a fair amount of valuation support," John Linehan, head of U.S. equity at T. Rowe Price, told Barron's in a recent interview ("Why a Pro Likes Apache, Southwest, and Kohl's," Sept. 16). The Baltimore-based money manager owned nearly 12% of Kohl's as of June 30.
Making nice to shareholders gives management some breathing room. While Kohl's declined to make its top executives available for interviews, the company acknowledged in recent conference calls with analysts that it knows there is work to do.
Kohl's earned $986 million, or $4.17 a share, in the fiscal year ended Feb. 2, down from $4.30 in fiscal 2012. Revenue rose 2.7%, to $19.3 billion, as sales at stores open at least a year inched up just 0.3%. But sales growth came at the expense of profitability: Gross profit margins contracted to 33.3% from 36.2% a year earlier, pressured by markdowns.
Kohl's is expected to earn $4.24 a share in the current fiscal year, and $4.65 in fiscal 2015, reflecting operating improvements. Investors have their doubts, however, as the stock fetches just 11.6 times the fiscal 2015 earnings estimate, a 30% discount to the department-store industry. In the early 2000s Kohl's was considered a stock-market darling, with a P/E above 30.

Friday, October 25, 2013


Microsoft had a nice quarter, and stock is up over 6% today.  The Chump portfolio bought shares last August, October, and February.  The position is up over 14%, and now comprises 3.7% of the portfolio.  Shares are still priced at a discount, so I'm holding and enjoying the 3.3% yield.  Here is a FAST Graph (yesterday's lower close price), and a nice overview article from today's WSJ.


Microsoft Bucks the Trend

Software Maker Boosted by Sales to Businesses; Consumer Results Also Improve

Updated Oct. 24, 2013 9:06 p.m. ET
Microsoft Corp. MSFT +6.24% bucked a recent trend among major sellers of technology to corporations, posting double-digit percentage increases in both revenue and profit.
The Redmond, Wash., software giant demonstrated it is taking advantage of its long-standing foothold in business software to expand into new nooks of corporate technology. By contrast, rivals such as International Business Machines Corp. IBM -0.38% andOracle Corp. ORCL +0.27% encountered sales hiccups in recent months. Microsoft's business strength offset declining sales of personal computers to consumers and sent Microsoft shares up 5.7% in after-hours trading.
"You view it as a victory this quarter given what we've seen as the malaise across tech," said Daniel Ives, an analyst with FBR Capital Markets FBRC -0.24% & Co.
Microsoft said it sold more than twice as many Surface tablets than in the prior quarter. The company is trying to expand beyond PCs and servers. Getty Images
For the first fiscal quarter, ended Sept. 30, Microsoft said revenue from software and other services sold to corporations—which generate roughly two-thirds of Microsoft's gross profit—increased 10% compared with the same period a year earlier.
Microsoft said its "cloud," or Web-friendly, business sales more than doubled, though they remain a small slice of overall revenue. The advances in the cloud were led by Office 365, a new version of the familiar workplace software that Microsoft has refashioned to run online. Revenue from a trio of established software products, including the Exchange corporate email service, rose by a double-digit percentage, Microsoft said.
"It was a great start to the fiscal year," said Amy Hood, Microsoft's chief financial officer, on a conference call with analysts Thursday. The company said it expects the trends to continue in the current quarter ending Dec. 31.
Microsoft had less success selling to consumers, but even those sales improved from prior quarters. Revenue from products and services sold to consumers, which include PCs and the company's Surface tablet and Xbox videogame systems, rose 4%. Microsoft said it sold more than twice as many Surface devices than it did the prior quarter—an important development for a product that had a rocky sales start.
Consumer-division revenue rose despite a 7% slump of Windows software sales for consumer PCs, and a 23% slump in Office sales to consumers.
Overall, Microsoft posted net income of $5.2 billion, or 62 cents a share, compared with net income of $4.5 billion, or 53 cents a share in the same period a year earlier. Analysts had expected earnings of 54 cents a share, excluding some items; on that basis, Microsoft's earnings in the latest period were 63 cents.

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Revenue surged 15.7% to $18.5 billion, well exceeding analysts' expectations of $17.8 billion.
Microsoft still faces big challenges in new computing areas including the Web, tablets and smartphones. Adapting the company to those changes soon will fall to a new leader.Steve Ballmer, Microsoft's CEO since 2000, announced in August he plans to retire within a year. The company offered no update on the search for a successor.
Microsoft is trying to diversify its business away from PCs and computer servers, but the shift isn't easy. Microsoft's Windows operating system, the backbone of more than 90% of the world's computers, gave the company a foothold to sell more of its software. Including tablet computers and smartphones, however, Microsoft software powers roughly only 15% of the world's computing devices, according to research firm Gartner.
PC sales have fallen year-over-year for six consecutive quarters, including a 7.6% decline in the three months ended Sept. 30, according to research firm IDC. Ms. Hood said, however, "the general PC market turned out better than we expected," particularly in developed markets. IntelCorp. INTC +1.72% , which makes most of the chips that power Windows computers, likewise said in recent weeks that it saw improvements in the PC market after the long industrywide sales slump.
Write to Shira Ovide at