Monday, July 15, 2013

Portfolio Balance

Since the Chump IRA has had a nice run over the past year (1 year performance through May stands at 24.28%), I thought it was time to take a look at balance and diversification.  Here is the portfolio sorted by size of holding, with some additional metrics for consideration:

The number of positions is now at 32, the average size of position is 3.13%, and the current yield for the entire portfolio is 2.87%.  I sorted the holding by position size, coloring all holding above the average size as yellow, and all holding below average green.  17 positions are above average size, 15 are below, with 8 positions above 4%, and four positions below 2%.

I don't feel obligated to keep all my positions the same size.  I tend to add to undervalued positions, and NOT add to overvalued positions.  Sometimes positions get large (AAPL, INTC, AFL) simply because I see a good stock at significant undervaluation.  I see no reason to reduce these positions while the under/or slightly over valuation persists.  Conversely, I also have some small positions that won't grow until they become a better value; KO has been a small holding for the entire last year, it's just too expensive.  Similarly, O is overpriced at these levels, but remains small in the portfolio, so I'll keep it and add to it down the road (perhaps WAY down the road).

Next, I calculated today's "blended" PE and compared it to the PE for the stock over the past 5 years, or the 5 year average PE.   This is a nice simple look at valuation.  A negative number indicates under fair value, a positive is above fair value.  I colored everything 15% or more above fair value yellow (caution), and every stock with a negative/under valuation green.

Using just position size and valuation, I see a couple of large positions that are overvalued;  MDT, JNJ, EMR, MO, ADM.  Next I looked at current yield, and rate of dividend growth for the past 5 years.

MO is okay due to it's nice yield and low beta, I leave it alone for now.  EMR is okay for now with a yield of 2.8%, but I'll keep an eye on valuation.  JNJ and MDT are also worth keeping an eye on, especially JNJ due to valuation.  ADM will also be one I watch closely for continued overvaluation.  I'm hesitant to cut any of these back for two reasons:  1) I like each of these excellent companies, and all are dividend Champions (MO not actually due to spin off of PM, but they have an incredible dividend philosophy).  2)  I don't have any great alternatives for investment at this time.

Looking at this list, HAL jumps out as a stock I'm not crazy about for the long haul.  They have a stingy 1.1% yield, and have very low growth in the dividend.  If it runs further in value, I'll likely trim or sell this name, and use the proceeds to reinvest into my smaller positions that are still at or below fair value.  My target names for additional investment within the portfolio are:
  • BBL
  • DE
  • KSS
  • PM (on dips)
  • KO (on big dip)
That's all for now,


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