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Summary The portfolio of good company businesses is doing 6.87% better than the Dow average year-to-date of -9.71%. The 24 businesses of The Good Business Portfolio comprise 99% of the portfolio, with the other 1% cash, and the average total return of 33.24% over the Dow average return. Create a portfolio that is balanced, not income, not dividend growth, not bottom-fishing, not value, but balanced among all styles. Of the 24 companies in the portfolio, 18 beat the Dow average for total return and 6 missed the total return over the test period of 32 months. For the second-quarter earnings season, 20 companies beat or met the expected earnings and 4 missed the expected earnings. This article gives a review of the second-quarter earnings and YTD performance of the Good Business Portfolio. Earnings data will be looked at for 5 of the top positions in the portfolio. Guidelines (Company selection) The intent in the Good Business Portfolio guidelines is to create a portfolio that is a large cap balanced portfolio between the different styles of investing. Income investors take too much risk to get their high yields. Bottom-fishing investors get cat fish. Value investors have to have a foresight to see the future. These are guidelines and not rules. (For a complete set of guidelines, please see my article ” The Good Business Portfolio: All 24 Positions “.) They are meant to be used as filters to get to a few companies on which further analysis can be done before adding the company to the portfolio. So, it’s alright to break a guideline if the other guidelines indicate a Good Company Business. I’m sure this eliminates some really good companies, but it gets me a short list to work on. There are too many companies to even look at 10% of them. You see from the portfolio below that I want a portfolio that is defensive, provides income and does not take significant risks. I limit the portfolio to 25 companies, as more than this is almost impossible to keep track of. At present, I have 24 companies and have an open slot awaiting General Electric (NYSE: GE ) and Hewlett Packard (NYSE: HPQ ) spin-offs. Portfolio Performance The performance of the portfolio created by the guidelines have year in and year out beat the Dow average total return for over 23 years, giving me a steady retirement income and growth. The table below shows the portfolio performance for 2012, 2013, 2014, and YTD of 2015. Year Dow Gain/Loss Good Business Beat Difference Portfolio 2,012 8.70% 16.92% 8.22% 2,013 27.00% 39.70% 12.70% 2,014 6.04% 8.67% 2.63% 2015 YTD -9.71% -2.84% 6.87% In a great year like 2013, the portfolio did fantastic. In normal years like 2012 and 2014, it beat the Dow by a fair amount. So far this year, the portfolio is being defensive at 6.87% total return gain above the Dow average loss of -9.71%, for a slight loss. Dividend companies and defensive businesses like Johnson & Johnson (NYSE: JNJ ) give the portfolio a downside beta of less than 1.0. Companies like Walt Disney (NYSE: DIS ) and Boeing (NYSE: BA ) provide growth in a good year like 2013 (an up market) for a beta greater than 1.0. 24 Companies In The Portfolio The 24 companies and their percentage in the portfolio and total return over a 32-month test (starting January 1, 2013) period are shown in the table below. I chose this time frame, since it included the great year of 2013 and the moderate years of 2014 and 2015 YTD. The Dow baseline for this period is 22.89%, and each of the top six easily beat that baseline. The next 18 have six companies that did not beat the Dow baseline, but still are great businesses. I limit the portfolio to 25 companies and let the winners grow until they reach 8-9% of the portfolio, and then I trim the position. BA and HD are now in trim position. I start the companies at a base percentage of the portfolio of 1% and add to the position if they perform well during the next six months. At 4% of the portfolio, I stop buying and let the company percentage of the portfolio grow until it hits 8% – then it’s time to trim. In the portfolio, only one company is actually losing money over the 32-month test period – Freeport McMoran Inc. (NYSE: FCX ). This is my full list of the 24 Good Businesses. I hope to write individual articles on some of these businesses as time permits. Dow Baseline 22.89% Company Total Return Difference Percentage of Portfolio Cumulative Total 32 Months From Baseline Percentage of Portfolio Home Depot (NYSE: HD ) 89.07% 66.18% 8.75% 8.75% Boeing 73.50% 50.61% 8.46% 17.22% L Brands Inc. (NYSE: LB ) 113.34% 90.45% 7.74% 24.96% Johnson & Johnson 38.09% 15.20% 7.59% 32.55% Walt Disney 97.88% 74.99% 7.50% 40.05% Altria Group Inc. (NYSE: MO ) 76.76% 53.88% 6.75% 46.80% Harley Davidson Inc. (NYSE: HOG ) 18.55% -4.33% 6.60% 53.39% Eaton Vance Enhanced Equity Income Fund II (NYSE: EOS ) 45.15% 22.27% 6.06% 59.45% Philip Morris Intl. INC. (NYSE: PM ) 1.71% -21.18% 5.55% 65.00% Cabela’s Inc. (NYSE: CAB ) 1.65% -21.24% 5.66% 70.66% General Electric 24.32% 1.43% 4.74% 75.40% McDonald’s Corp. (NYSE: MCD ) 15.22% -7.67% 4.65% 80.05% Automatic Data Processing (NASDAQ: ADP ) 37.45% 14.56% 4.13% 84.18% Ingersoll-Rand plc (NYSE: IR ) 39.77% 16.88% 2.42% 86.60% Hewlett-Packard 89.58% 66.70% 2.31% 88.91% Omega Health Inv. (NYSE: OHI ) 53.32% 30.44% 1.69% 90.60% Mondelez (NASDAQ: MDLZ ) 65.21% 42.32% 1.64% 92.24% Novartis AG (NYSE: NVS ) 58.54% 35.65% 1.62% 93.86% Texas Instruments (NASDAQ: TXN ) 46.23% 23.34% 1.33% 95.19% AmerisourceBergen (NYSE: ABC ) 132.33% 109.44% 1.14% 96.33% Kraft Heinz Corp. (NASDAQ: KHC ) 67.93% 45.04% 0.81% 97.13% Alcoa (NYSE: AA ) 5.95% -16.94% 0.87% 98.00% Freeport McMoran -63.21% -86.10% 0.72% 98.72% Hanesbrands Inc. (NYSE: HBI ) 218.64% 195.75% 0.34% 99.06% Average 33.24% Recent (Last Two Months) Portfolio Changes and Comments McDonald’s is being trimmed, as the total return for the past 32.0 months is below the Dow average total return. MCD is now 4.65% of the portfolio, and will be held at this total percentage until signs of a turnaround are seen. Short-term out-of-the-money covered calls of 2-3 weeks are also being used to generate income while we wait for the turnaround. The objective of the Good Business Portfolio is to embrace all styles of investing, Alcoa was increased to 0.8% of the portfolio. The change into a manufacturing business will take some time and is a move in the right direction. At the current stock price, it has good risk-versus-reward possibilities. Hanes Brands has been increased to 0.34% of the portfolio, and is just a starter position that will be increased slowly until it gets to be a full position at 4% of the portfolio if the growth continues. Eaton Vance Enhanced Equity Fund II was increased to 6.06% of the portfolio; I need more income, and EOS is the portfolio’s way of buying a diversified group of tech companies when the market dips. I trimmed Home Depot down to 8.75% of the portfolio from 9.0%. HD is a great growth business, but you must have some diversification and not let any position get too high. HD will be trimmed again when it reaches 9.0% of the portfolio. One comment: I have never bought commodity companies before, and both AA and FCX have disappointed me. A new guideline is being added to guideline 7 “to avoid commodity companies, metals and oil/gas”. It just seems too much risk in the face of uncontrolled world events to predict what the price of a commodity will be in the future. Second-Quarter Earnings Season For the second-quarter earnings season, 15 of the portfolio’s companies beat the estimated earnings, while 5 met the earnings estimate and 4 missed the estimate. A short summary of earnings for some of the companies is below. Boeing’s earnings were good at $2.31 before it had to take a charge against the tanker program. In the last month, the company delivered 14 787 planes – 4 more than planned. This should lead to a great earnings report in October. Revenue also beat by $320 million. Last year, Boeing got above 10% of the portfolio, and I trimmed it a little to get it below 10% of the portfolio. Walt Disney’s earnings beat expected by a few pennies at $1.45, compared to expected earnings at $1.42 and last year’s earnings of $1.28. Revenue missed by $130 million. Mr. Market did not like this, and the major factor was that ESPN lost 300,000 subscribers and Walt Disney went down 10%. The market recently took another 10% off Disney. I have a full position in Walt Disney and think it’s a screaming buy at its current price of $100.97. The Star Wars toys are already on sale and are expected to have sales of $500 million alone. Disney gets a share of this through licensing fees, and the movie is still to come in December. Home Depot’s earnings met expectations at $1.71, compared to last year’s earnings of $1.52, for a great gain year over year. Revenue beat by $110 million. HD is the portfolio’s largest holding at 8.75%. As the housing market continues to perform, HD will grow with it. It will be trimmed when it reaches 9% of the portfolio. I love HD, but must not be a pig. Johnson & Johnson beat expected earnings at $1.71, compared to expected earnings at $1.68 and last year’s earnings at $1.66. Revenue beat by $30 million, and the company projected forward earnings of $6.10-6.20 for the year. JNJ is in a defensive business. Its problem is the strong dollar, but the company continues to see moderate growth and pays a 3.5% dividend, which has been increased and paid for 48 years. JNJ is 7.59% of the portfolio, and should be in all portfolios. L Brands just beat expected earnings by a penny at $0.68, compared to expected earnings of $0.67 and last year’s earnings of $0.63. Revenue missed by $30 million. In August, LB announced an 8% sales increase year over year. It pays a fair regular dividend of 2.4%, but has been paying a special dividend for the past few years. Alcoa had a mixed report, with earnings of $0.19 missing the expected earnings of $0.24, but the revenue beat by $110 million. The transformation of the company is starting to take effect, and I will wait at least two more quarters to see if it’s a turnaround or sell this small position. I always like the earnings season, since most of my Good Business companies have increasing earnings. Conclusion The 10 guidelines referenced in the article give me a balanced portfolio of good companies that are large cap and can grow their revenues, earnings, and dividends for years. They have the staying power to fix whatever goes wrong. In each case, the company has the size and good management to fix the problem. The portfolio has growth companies, defensive companies, income companies and companies with international exposure, giving it what I call balance. Of the 24 companies presently in the portfolio, six are underperforming the Dow average in total return over the 32-month test period. All six companies are being hurt by the strong dollar, since they are multi-national and have a large portion of their income coming from foreign operations. It is my intention to write separate comparison articles on the individual companies. The Beta for the portfolio in a down market is less than 1.0 and in an up market is greater than 1.0, and this makes the Good Business Portfolio is a money maker that beats the Dow average over time – what more can you want? Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before making any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own. Disclosure: I am/we are long BA, HD, JNJ, DIS, LB, HOG, CAB, MO, PM, MCD, HPQ, GE, FCX, EOS, ADP, IR, OHI, HBI, NVS, KHC, MDLZ, AA, ABC, TXN. (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. Scalper1 News
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