Tickers for the Current Portfolio Reshaping

I haven’t written about my portfolio management methods in a while.  I’ll be writing on this a few more times over the next week or so.  The eighth rule of my investing is:

Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

First I have to get new ideas.  I have two sources for that:

  • My industry rank study.  Within those industries chosen, I run a screen that uses financial strength, valuation, and growth potential to highlight promising names.  Of the 34 current names in the portfolio, the screen chose 10 of them, out of 79 suggested names.
  • Trolling around on the web and talking to friends.  When I hear a promising idea, I print it out or write it down, and put it in a pile to wait for the next reshaping.  This helps me to forget who suggested it and why, so that I am forced evaluate it independently.  If I don’t fully understand it, I will not know when to buy more or sell it.  That generated 40 additional names.

Anyway, here are the tickers for the replacement candidates:

ABFS ACM AEP AFL AMGN APA APC APOL ATPG AXS BCE BDX BHI BRY BT CAG CALM CAM CDI CL CLX CNQ CPO CVS DFG DLM DO EGN ENR ESLT FDP FISV FLIR FRX FST FTO GD GLRE GMXR HAL HOGS HRL HSII IP JBL KELYA KEX KFT KHDHF LLL LNC LPX MDT MDU MET MMM MOG/A MOT MRO MUR MWV NBR NEMNLC NOV NVDA OCR OII OSG PCCC PG PRU PXD PXP RAH RDS/A RE REP RIG RNR RTN SJM SPR SU SUN SXT TDW TDY TEG THS TK TLM TMK TMO TRH TRP TSO TTI UNM V VZ WAG WAT WMT WPP WY YUM

I will run my quantitative model on these companies versus the current companies in the portfolio, and kick out companies I now own that score poorly and buy some the score well.  This procedure is not absolute; there are often bits of data  that the quantitative factors ignore.  But when all is said and done, I buy companies that I think are better than those that I am selling.

This also forces me to review the whole portfolio, and be dispassionate about what gets sold.  It also forces me to take things slow, and not make hasty decisions.

What factors exist in my scoring model:

  • Valuation – Earnings, Book, Sales
  • Momentum
  • Earnings Quality
  • Sentiment indicators — neglect, volatility, etc.

I change the weights over time.  I ask myself, “What is working now?” and, “What has or hasn’t been working for too long?”  What working now should get extra weight, while leaning away from ideas that are too popular, and leaning toward those that are unfairly tarred as dead.

But this is only an aid and a guide.  If I put something into the portfolio, it has to pass my qualitative reasoning tests, which admittedly are subjective, but encompass my reasoning as a businessman.

In short, that is what I do.  I hope to give you an update in a few days to explain how this practically worked out in this reshaping.  If you have other tickers that you think I should consider please let me know in the comments, and I will toss them into the mix.  Thanks.

1 Comment

  • ljoneill says:

    David

    There are a lot of tickers that look potentially interesting, but no need to flood you with additional ideas. However, one that is new to me that keeps popping up is a small Argentine utility, Pampa Energia (ticker: PAM). It sells below BV (0.7x), has had significant growth in CF from Ops, and while it has had to spend a significant amount of CapEx such that FCF has been negative historically, it is now turning positive. I haven’t really looked into the fundamental story behind it at this point, but on a valuation basis it seems like it has potential. It’s also a way to tap into the growth of emerging/frontier markets in a potentially less volatile way. The stock has essentially been flat to slightly down since starting to trade as an ADR last October. One final thing. It’s not terribly liquid (40K shares per day), so no institutions will be able to load up on it. However, the biggest institutional owners at this point are Eton Park (great value hedge fund), Ruane Cunniff (Sequoia Fund), and SAC Capital. Pretty good company to be keeping, it seems.

    No positions for me, just curious how it plays out in your system.