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Conservative Total Return Portfolio- Bends But Doesn’t Break!

Summary Post-market swoon, the CTR portfolio has strong income and good upside potential. HOG was sold for a profit, while SBGI and TUP are new additions. CTR (equal weighing) yields 3.7% with a 9.6x forward PE. I introduced the “Conservative Total Return” or CTR portfolio in August 2014 and try to provide monthly updates. The volatility of the market delayed writing by a week. However, after taken my lumps, and tweaking the portfolio, I actually feel better about the holdings (than in recent months). The general philosophy of my ‘picking’ method has allowed me to cumulatively beat, since 1999, the S&P 500 by a healthy margin. As the market has “evolved”, so have the holdings. While the investments in the CTR are conservative, the portfolio is dynamic (as is the market and its “favorites”). Every single stock owned in July and held into August is down. After reviewing the metrics, forecasts, and upsides I feel good to great about each position. The upside potential of holdings are material (average forward PE is only 9.6x), dividends for most of the portfolio are a very strong (I get paid if I have to wait) average of 3.7%. General Electric (NYSE: GE ), which I believe in, is probably the most vulnerable to being swapped out due to being nearly fully valued. That being said, I am reluctant to exit a stock that is on the verge of executing on management’s strategy (industrial focuses, “smart factory” and Alstom synergies). Since the last update, I added to existing positions in Apple (NASDAQ: AAPL ) and International Business Machines (NYSE: IBM ). I sold Harley Davidson ((NYSE: HOG ) $58.95) for a nice profit, not because I dislike HOG, but because macro changes in China and the emerging markets made me a little less confident about near-term sales. Fortunately, this decision was made prior to the market swoon. I also added three positions to the portfolio, in 1) an attempt to diversify (the recommendation of a number of readers) and 2) take advantage of two great companies with material upside potential. The additions were Goodyear Tire (NASDAQ: GT ), Sinclair Broadcasting (NASDAQ: SBGI ) and Tupperware (NYSE: TUP ). GT is geographically diversified, operationally strong, has a very strong position in the growing US market and is really cheap. SBGI holds leading positions in local broadcast stations throughout the United States and is well positioned to grow through 1) enhanced retransmission fees, 2) cost savings and consolidations, 3) sale/valuation of excess spectrum and 4) the projected doubling of political advertising for the 2016 election cycle. I lamented not buying SBGI after great earnings, when the stock tanked in the downdraft of cable-oriented worries, and pulled the trigger when the stock hit recent lows. TUP was acquired because it offers a stable and logical growth plan supported by macro-demographic trends. The stock pays a huge 5%+ dividend and will benefit from any combination of currency improvement and market execution. Notwithstanding the short-term, this stock should perform well over an extended period as the middle class in emerging markets is growing. Even though I modify my positions, I do not trade on a whim. Therefore, while I may “swap” positions in the near future, the trades will be made more on long-term merit and less on temporary market anomalies. I continue to be interested in increasing financial exposure, but do not want to buy more JPMorgan (NYSE: JPM ) due to a good sized position, but am more concerned about foreign exposure from the other bank I have been stalking – Citigroup (NYSE: C ). The Conservative Total Return Philosophy The essence of the CTR method is to combine a strong value bias with flexibility, opportunism and an ability to assimilate and respond to new information. The core philosophy will always be the same; however, as the economic cycle grows older, identifying the appropriate time to “harvest” becomes increasingly important. In assessing the prospects for all of the portfolio members, I feel good that the risk-reward dynamic is positive and, on a risk-adjusted basis, market beating (taking into account the strong value provided by dividends). Feedback from readers has been a partial motivator in my broadening my market segment exposure. The Individual Stocks The core stocks in the portfolio are (alphabetically): American Airlines (NASDAQ: AAL ), AAPL, Blackstone (NYSE: BX ), Discover Financial Services (NYSE: DFS ), Ford (NYSE: F ), GE, General Motors (NYSE: GM ), GT, IBM, JPM, KKR & Co (NYSE: KKR ), Siemens (OTCPK: SIEGY ), SBGI and TUP. (click to enlarge) Source: Yahoo! and TDAmeritrade As the above chart confirms, my positions have a strong bias toward dividends, reasonable valuation and a moderate (in most cases) PEG. Below are comments summarizing my interest in the equity. The chart also contains the appropriate metrics (valuation, fair value, potential gain). As you can also see, the positions held since the last report are all down (HOG, the only position sold, was sold for a nice profit). Holdings Apple ( AAPL )- AAPL did not thrill during Q2 earnings and was further hit during the market downturn. Atypically in recent times, AAPL has room to run with catalysts being 1) new/exciting products introduced during a recently announced early September meeting, 2) continued confidence on iPhone sales and 3) any positive feeling from payments or the watch (both have been either ignored or derided). Blackstone – BX was sold and re-bought. It is best of breed, well-funded and poised to profit from market distress and volatility (especially in energy and China). The harvest of US residential is viewed by the author as a positive. Discover Financial – DFS should be worth more. The stock has had some execution challenges but is still cheap and poised to benefit from a growing US economy (and the gas tax cut, which got a ‘jolt’ with the recent drop in gas prices). Ford – F is doing very well. The F150 is a hit. Yes China is slowing, but Europe is recovering and the US economy continues to do well. While not quite as cheap as General Motors , F offers nice appreciation potential and is a good “partner” to GM in the portfolio. The ‘market’ must stop hating the autos for F to realize ‘fair value’. General Electric – The recent pullback made GE a better value, however, it is the most ‘fully valued’ of the portfolio holdings. I believe catalysts include a weaker dollar, conclusion of the Alstom deal and longer term include Alstom synergies and the merging of industry and technology (Predix/Brilliant Factory initiative). Goodyear Tire – A new holding. Basically a well-managed company, diversified that is benefiting from an improving US and European economy (more cars, cheaper gas = more miles driven = faster tire replacement). General Motors – Even more than F, GM is the stock everyone loves to hate. GM is down 20% since the last portfolio update. Looking at the numbers, the risk/reward looks very favorable. As with F, China is concerning, but solid progress in Europe and the US should continue. Low gas prices for the foreseeable future put a backstop on highly profitable truck and SUV sales. I believe analysts are too focused on China (less than 10% of profits last quarter) and not focused enough on profitability. Harley Davidson – Sold at a profit. Concerns over China and a bump in price combined to create an environment where I exited at a nice profit. Still love this iconic brand. International Business Machines – IBM continues to disappoint, including a weak second quarter. However, limited China exposure, the US dollar weakening and management continuing to make progress combined with a 3.5% dividend leaves me optimistic about better performance over the next few quarters. JPMorgan – JPM is my favorite bank to own. The stock pulled way back and is in a strong position to regain $70 and perhaps hit $80 after the market stabilizes and the Fed increases rates (now most likely +/- Q1 2016). Siemens – Continues to be a play on recovering Europe and a weak US dollar. After GE and Honeywell (NYSE: HON ) have performed and appreciated, SIEGY remains a “show me” laggard. It may take a while, but SIEGY should deliver appropriate total returns through the investment period. Sinclair Broadcasting – A stock I owned a couple of years ago and am excited to own again. The Company owns TV stations in major markets. Local TV, offering local programming like news, is not subject to the same cord-cutting pressures as an ESPN. The Company owns valuable spectrum, is rationalizing recent acquisitions and will recognize huge profit increases from a record 2016 election season. Independent observers expect advertising to double from the 2012 cycle, with the share devoted to television +/- constant with the previous cycle (social media gains at the expense of direct mail). Tupperware – The Company is well managed and simply is focused on expanding distribution to its core emerging market markets. The emerging markets have a long, strong secular trend of an expanding middle class. TUP will ride that wave for many years. Short-term, a weakening US dollar the successful execution of some management expansion initiatives will grow the stock. The monster 5%+ dividend is sustainable and allows investors to get paid to wait. Position Summary In my opinion, the positions provide an increasingly diverse balance of innate conservatism, multiple and earnings driven appreciation potential and exposure to a more mature stock market. The recent market drops creates buying opportunities and additional reward given the risk (reduced by the lower stock prices). Please keep in mind that my portfolio also consists of actively managed real estate, index funds (international, emerging markets and domestic) and bond proxies. This is shared for readers who previously thought the noted stocks were 100% of my investments and lacked diversity (if that were the case, I would agree). The CTR is a portfolio of stocks that in my opinion are conservative (strong reward vs. risk bias) and well positioned to outperform with below-average risk. I own all of the stocks in the CTR (I also own other positions which I consider speculative or otherwise inappropriate to recommend). I appreciate any feedback on individual securities and recommendations on equities to add to the CTR. This article reflects the personal opinions of the author and should not be relied upon or used as a basis in making an investment decision. Investors should always do their own due diligence prior to making an investment decision. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long AAPL, AAL, BX, KKR, SBGI, GE, GM, F, FT, IBM, DFS, SIEGY, JPM. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Clean Energy Fuel – The Turnaround Has Begun

Summary CLNE has shot up 17% in a week after announcing new refueling agreements and the construction of CNG stations for a number of transit agencies. Despite the drop in oil prices, natural gas is still cheaper than diesel to operate truck fleets, which is why CLNE’s gallons delivered has increased and it is improving capacity. CLNE could see a turnaround in natural gas pricing as LNG exports from the U.S. gather steam, and this will have a positive impact on its financial performance. Clean Energy Fuels (NASDAQ: CLNE ) is in turnaround mode. Over the past week, shares of the natural gas fueling company have appreciated over 17%. A key catalyst behind this jump is Clean Energy’s announcement that it will be constructing of compressed natural gas (CNG) stations for Arlington Transit (NYSE: ART ) in Arlington County, Virginia, along with a number of other transit agencies and new contracts. In addition, Clean Energy has won more contracts in the transit segment, as I will discuss later in the article. This spike has come as a relief for investors, as Clean Energy has struggled so far this year due to weak natural gas prices. In fact, in the second quarter reported earlier this month, Clean Energy had missed Wall Street’s estimates on both earnings and revenue as its revenue dropped 11.5% year-over-year and losses widened. But, will Clean Energy be able to sustain this newly-found momentum going forward? Let’s find out. Advantage of natural gas over diesel is a catalyst The decline in natural gas prices over the past year has created pressure on Clean Energy’s financial performance. In addition, the drop in oil prices has reduced incentives for fleet owners to switch to natural gas. As a result, Clean Energy’s top and bottom lines have taken a hit. However, we should not forget that natural gas is still a cheaper alternative than diesel. This is shown in the following chart: (click to enlarge) Source: Clean Energy This is the reason why Clean Energy is encouraged to continue building its fueling network in the U.S. despite the drop in natural gas prices, as it is still cheaper than diesel. As such, in the last two quarters, Clean Energy’s NG Advantage unit has reported 10 million gallons of volume growth. Encouraged by end market demand, the company has elected to expand its station in Milton, Vermont, to add 30% more contracted capacity. In fact, this is the second significant upgrade of that station in the past year to meet increasing demand for contracted volumes. In addition, the company has signed a number of new contracts that will allow it to sustain volume growth. For instance, Clean Energy has entered into a bulk fuel sales agreement with PG&E, under which it will supply 1.5 million gallons of LNG. In light of such agreements, Clean Energy has opened 15 truck-friendly stations in 11 states in the first half of the year. Going forward, it will open another 10 stations by the end of this year, extending its network to a total of 208 truck-friendly stations across 31 states. This clearly indicates the confidence that Clean Energy has in its business, as the company believes that the price advantage of natural gas over diesel will act as a tailwind in the long run. Moreover, according to CEO Andrew Littlefair, “Despite lower oil prices, Clean Energy continues to add fueling partnerships across all our transportation markets. No matter if they are with a school district, municipality or trucking company, managers of large fleets are looking for a cleaner fuel that reliably costs less and does not have volatile price swings. Natural gas continues to meet their needs.” Improving natural gas market dynamics could be a tailwind Going forward, Clean Energy Fuels could also benefit from an expected improvement in natural gas prices. A key role in the resurgence of natural gas prices in the U.S. will be driven by LNG exports to areas such as Europe. Recently, Cheniere Energy (NYSEMKT: LNG ) announced its plan of supplying LNG to central and southeastern Europe by bringing a floating regasification tunnel to Croatia. Now, Europe is a key market for LNG exports as the EIA believes that imports of LNG into the continent will double in the next five years. This will act as a catalyst for natural gas prices in the U.S. due to a drop in inventory levels. Additionally, the initiation of LNG exports from the U.S. on a big scale will help producers benefit from higher prices abroad , as “gas sells at for $7 in Europe, and over $10 in North-East Asia, four times more expensive.” Hence, as the oversupply of natural gas in the U.S. comes down and demand increases due to switching from coal to gas-fired power plants, prices will improve. In fact, over the long run, the EIA sees natural gas prices rising at an impressive clip as shown below: (click to enlarge) Conclusion Hence, the probability that Clean Energy Fuels will be able to sustain its momentum in the long run appears to be strong. Natural gas enjoys an advantage over diesel in terms of cost and emissions, which is why Clean Energy is seeing an increase in demand for the fuel. As such, investors should consider staying invested in Clean Energy Fuels as it can continue delivering upside in the long run. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Fund Manager Briefing: TwentyFour Corporate Bond

By Jake Moeller Lipper’s Jake Moeller reviews highlights of a meeting with Chris Bowie, Portfolio Manager, TwentyFour Corporate Bond Fund , on August 26, 2015. The new TwentyFour Corporate Bond Fund is the sister of the highly successful (and Lipper Award-winning ) TwentyFour Strategic Bond Fund . Launched only in January 2015, the fund is designed to perform against a relative benchmark (TwentyFour will shortly launch an absolute return bond fund) and is not slavishly devoted to maintaining a high yield. Mr. Bowie is a fund manager obsessed with liquidity. “You won’t find any private placements or unrated securities in this portfolio,” he stated. “I like quality and I want a small, compact portfolio.” Indeed, this fund is refreshingly compact. With only 70 securities, it is very small compared to some of the large corporate bond funds occupying the U.K. market, and Mr. Bowie doesn’t expect his fund will likely hold a significantly larger amount of holdings. In a credible move TwentyFour has recently stopped marketing its Strategic Bond Fund (at £750 million) to new clients in order to prevent pressure to increase the number of lines. TwentyFour has undertaken to similarly protect the Corporate Bond Fund from capacity constraints, should that need arise. The fund is designed along similar lines to Mr. Bowie’s previous Ignis Corporate Bond Fund , with an emphasis on delivering risk-adjusted returns across all sources of alpha, including duration and yield curve, stock selection and assets, country rating, and sector tilts. Mr. Bowie has an excellent pedigree in all aspects of corporate bond management and carries an enviable performance track record, once ranked by Citywire with the fourteenth best Sharpe ratio of all funds globally. Table 1. Composite Performance* of Chris Bowie from December 31, 2008 to Present within IA £Corporate Bond Sector Quartiles (click to enlarge) Source: Lipper for Investment Management. As a former computer programmer, Mr. Bowie has built his own system for examining risk/return that gives him some unique insights, particularly in constructing his credit buckets. “My system calculates a risk-adjusted return metric for every single bond,” he states. “This examines the last three-year cash price volatility for a bond and compares it to its current yield. If a bond is yielding 5%, but its three-year cash price volatility is 7%, that is quite a poor investment. If it is yielding 4% but has cash price volatility of 2%, this is much more attractive.” The fund has a very large position in BBB-rated securities at a whopping 44% (compared to the sector average of 38%) and a large component of BB-rated debt (16%), mainly around the five- to ten-year part of the curve. Mr. Bowie is also keen on corporate hybrids, with a 12% exposure there. “They’ve been good for us,” he states. “We have been selectively overweight for a while now.” Using his proprietary value system, Mr. Bowie cites the example of his preference for a Barclays Upper Tier 2 position that appears to have the wrong cash-price volatility for its rating. “It’s a no brainer!” he states. “If you buy the Barclays BBB on the same yield, you’ve increased your cash-price volatility three times for a single notch improvement in credit rating.” Table 2. Comparative Performance of Various Asset Class Proxies since 2000. (click to enlarge) Source: Lipper for Investment Management. Past performance does not guarantee future performance. For a fund manager whose week has just commenced with the “Black Monday” selloff in global markets, Mr. Bowie is strikingly calm and composed. “It’s not yet a solvency event,” he states. “This is a big question about growth.” While his tone is reassuring and his longer-term investment thesis is relatively intact, he does concede the crisis has warranted a few changes to his positions. He has just increased the duration of his portfolio from 7.1 years to 7.4 years (the sector average is 7.5 years) on the back of the selloff in Treasuries on Wednesday, August 26. This has created a partial hedge against the credit risk in some of his higher-beta names. He has also sold a small amount of his AT1 (additional Tier 1) bonds to further bring down his beta. “We expect further short-term volatility in equities markets,” he states, “and we don’t want to be selling bonds into the cash market. But we do want to mitigate some credit volatility.” While Black Monday hasn’t forced a redesign of Mr. Bowie’s overall strategy, it has placed emphasis on the outlook for inflation. “Until a week ago I thought the most likely thing was that the Fed would raise rates in September, the Bank of England following suit in Q1 next year, that we would have a normal recovery where inflation starts to gently rise, and we would see wage pressures elevate.” he states “But now, I’m wondering with what’s happened to oil and volatility and the noise out of China whether deflationary risk is more of a threat.” This concern comes despite Europe’s supportive quantitative-easing program and increasing business confidence and is also reflected in the fund’s duration increase outlined earlier. Table 3. Proportion of IA Sterling Corporate Bond Sector by Fund Size Ranking Source: TwentyFour AM. Data as at April 2015. The fund currently holds 14% exposure to gilts and supranationals. Mr. Bowie is well aware of outflows from competitors’ funds in the sector and the potential for investors to undertake a broader rotation out of corporate bonds. The gilt position and the high level of highly rated names is protection for him, should this occur. He argues, however, that corporate bonds should be an ongoing component of investors’ portfolios, with the long-term performance profile (even including 2008 – see Table 2, above) measured by the iBoxx Non Gilts BBB Index since 2000 offering considerably better performance with lower volatility than equities. He notes also that there are some headwinds for the asset class, but an active fund that examines the drivers of volatility is best placed to protect capital. There are many things going for this new launch. TwentyFour is a vibrant fixed income specialist that has made a canny hire in Mr. Bowie. His pedigree is strong, and-although he is running what is currently a defensive portfolio-his unique processes bring a fresh dynamic. Furthermore, the concentration of flows in the sector (see Table 3, above), with 70% of the entire sector contained in the ten top funds, should be of concern to all investors. A small and nimble fund has much to offer. * The composite is constructed in the private asset module of Lipper for Investment Management as follows: Ignis Corporate Bond Fund from 31/12/2008 – 30/6/2014, IA £Corporate Bond sector from 1/7/2014 to 13/1/2015 & TwentyFour Corporate Bond from 14/1/2015 onwards.