The 187 Portfolio

The 187 Portfolio was developed in the year 2006. Prior to this date I relied on analyst reports and publicly available news to guide my stock investment decisions. I felt there must be a better way for me to assess, on a comparative basis, one stock choice over another. In designing a set of analytical tools, I focused on operating margins, cash flow growth, enterprise value as a function of EBITDA, Debt levels, Dividend levels, Net Cash, mid and long-term business forecasts, interest rates and the cost of capital. I blended these metrics together to weight one stock against the other and to weigh each stock against the market I had created of 187 stocks. Why 187 stocks? Very simple really. I began by selecting the companies I knew about, then I expanded into industry sectors, then I added diversity to try and represent the macro-market, and I eventually felt I had what I was looking for. At that point I had selected 187 stocks, a number without rhyme or reason, but a stopping point that became the foundation of comparisons and selections for the next 14 years. It is important to note that I track the 187 stocks on a daily basis. I do NOT however own an interest in all 187 stocks within the 187 Portfolio. Presently, I own 29 of the 187 companies.

I hope you learn some beneficial things by reading and digesting the thoughts I share about this portfolio of stocks.

August 10, 2020 10:15 AM: The Y-T-D return of the 187 Portfolio as if one share of each and every company was owned is 18.54%. Given the actual selective ownership of a limited number of the 187 stocks and the differential weighting and timing of actual purchases and sales, the 187 Portfolio’s actual Y-T-D return through August 10, 2020 is 39.51% (equities only, as crypto is separately evaluated under the Radar Fund tab).

I am astounded by the rate of inflation in stock prices. Fundamentally, based on historical measures, the current market is more over-priced than at any other point in history. Given these valuations, I have basically reduced my equity exposure, excluding shares owned in Gold Miners, to under 2% of my portfolio. If one wants to see the inflationary impact of the Central Bank policies you need to look no further than to equity prices. Should the day come when the FED no longer runs the printing press 24 hours a day seven days a week, the fall from artificially induced high prices will be crushing for those not nimble enough to find protection quickly. I would rather not play this game which is fundamentally broken. Gold miner shares is my preferred way to ride this inflationary wave, enabling a single sector to enrich me and one I should be able to quickly exit if and when the time comes to do so.

August 10, 2020 Current stock market over-valuation continues to expand. This measure is based on a constant cost of capital of 10% to provide an historical apples to apples comparison through the years. To bring prices into balance the blended cost of equity and debt capital that is effectively reflected in today’s stock prices is 6.79%. Clearly, the equity risk component of the cost of capital is priced at a very low historical level. Assuming the average cost of today’s debt is in the 4% area, equity, which historically has a 12 to 13% cost, is presently at a level meaningfully below trend (below 8%). In this environment, I would not misprice equity risk as it could a painful lesson.

The over-valued state at current prices and the current cash flow estimates for 2020 are exacerbated by the shrinking forward projections of future cash flow growth over the next three years.

Prior Posts

June 4, 2020 The continuing rally to higher prices within the stock markets defies gravity. Money is simply chasing stocks without fundamental backing. I remain mostly on the sidelines watching the rally and missing gains in the 187 Portfolio that could have been realized by ignoring my models that scream caution. The chart below compares the current price of the 187 Portfolio to the calculated value based on discounted cash flows. As you can see, the current price is approximately $30 higher than the fair value.

The Buy Sell Barometer on June 3, 2020 is screaming sell, yet the cash being everywhere has blinded rational investing. Be careful out there.

June 2, 2020 number of over-priced stocks within the 187 Portfolio

The equity market continues to disconnect from the societal and economic issues we are facing. Today, 99 of the 187 stocks within the 187 Portfolio are priced above their Discounted Cash Flow value using a 10% discount factor. This compares to an historic average of 66 stocks above their DCF value at a 10% discount rate.

The drinks being served by the Federal Reserve in the form of money printing at a phenomenal record pace is feeding the animal instincts. I understand that money everywhere will find a place to go, and in a world of TINA (“There is no Alternative”) stocks are the winner in this “pin the tail on the donkey” investment climate. I remain on the sidelines, with a small equity position, a large Gold and Silver Miner stock position, Cash and Bitcoin (as well as other Crypto, see the Radar Fund tab)

The Top 25 stocks within the 187 Portfolio based on composite comparisons of Price to Cash flow, CF projected Growth, Operating Margin, and Enterprise Value to EBITDA multiple.

May 28, 2020 Best Performers

May 21, 2020, the market internals look bad. The price decline across the portfolio is much greater than the declines in the indexes. Under the surface, there is stress.

The 187 Portfolio shows a decline that is close to 2X the index decline. The tide appears to be turning from the mad dash to buy anything and everything to one of smart money exiting.

There are 39 Advancing issues and 148 declining issues as of 11:15 AM. Be careful here. Having said this, it is fun to see Nabors Industries up 45% today. Happily I owned NBR after buying it during the collapse in the price of oil, and now I have sold it based on this strong rebound.

It is important to consider the current decline in the cash flow growth rate. I expect this to continue to fall as more forward estimates are taken down as the economic contraction becomes more evident from company revisions.

The Buy/Sell Barometer on May 20, 2020 is giving a strong anti-buy signal, which for me is a sell signal. With a Y-T-D return on equities of 16.8% as of today, I am liquidating positions today across the board, except for Gold Miners and Crypto. I will await its return to a buy signal before committing money back to the equity market. I would hope to see a return to the similar reading we had on March 23rd.

187 Portfolio Best Y-T-D Performers as of May 18, 2020

On a day when the equity markets are up 3 to 4%, I do find it interesting to see which strong companies are underperforming the market. Would you believe that Google, Amazon, Microsoft, Apple, etc are the underperformers?

May 14, 2020 The 187 Portfolio is now back to the area of the April 17th interim high. On April 17th, the 187 Portfolio Index stood at $24,456.71. This morning, the 187 Portfolio Index is at $24,572.09. Sadly, 72% of the stocks in the 187 Portfolio are priced below where they were on April 17th. Think about that, the overall index is in the same place but a majority of the components are below where they stood even though the overall index is flat. This means fewer participants in the Portfolio are seeing price gains yet the Index does not reflect that fact. In fact the larger dominant entities such as Amazon, Google, Apple, Microsoft, etc are carrying the market. That is not a good thing, and is reflective of an unhealthy equity market that depends entirely on the few vs the whole. It is time to wait for the big guns to be sold before considering buying equities. I need to see the loved stocks being sold, the stocks people do not want to sell, before I become a buyer. It is not time to change the overall investment structure I have in place, a structure that is primarily composed of cash, gold and crypto.

Within the 187 Portfolio, I often point to the number of stocks that are priced above or below their discounted cash flow value. When there are 125 or more stocks priced below their DCF value, I become interested in buying stocks. I become even more aggressive when that number is above 135 stocks. Today, the number of stocks priced below their DCF price is only 113. At that measure of 113, I am very happy being an observer from the sidelines. It does suit me just fine at this point in time.

As of 10:00 AM EST on May 14, 2020, there are 180 decliners and only 7 advancing stocks within the 187 Portfolio. Clearly the environment is one of selling and it is broad based.

May 7, 2020 Best Y-T-D performers within the 187 Portfolio

Strong performers are so important to our returns on investment. Unfortunately, there are too few with positive returns since 12/31/2019, as the listing above shows.

Keeping an eye on the important metric of price to cash-flow, I find I am not comforted by the expensive state of equities.

May 6, 2020 and the thin ice remains my primary concern. Consider that the April 17 interim high reached a value for the 187 Portfolio of $24,456.71. Today, as of the early afternoon, the price of the 187 Portfolio is $25,011.70. It troubles me that of the 187 stocks in the portfolio, 48% of them have lower prices than they did on April 17th. For me, that is a sign to be so very careful as the ice may not hold the collective weight of continued rising prices. A break in the surface could bring about a precipitous fall.

May 5, 2020 Buy them all. Of the 187 stocks in the Portfolio, today, as of this afternoon, we find 171 stocks advancing and only 16 stocks declining. Amazing that 91.4% of the 187 Portfolio were under-valued yesterday and today the market recognized that error and so everything, or almost everything, gets a bid higher. I do not know about you, but when all of the weight is on one side of the boat, and there is little new information available about the weather, I view that as an exceptionally risky place to be.

The Y-T-D stock returns pertaining to the 29 of the 187 Portfolio companies within my own stock investments plus my stock holdings in other companies that are outside of the 187 is 9.5%

UPDATED on May 3, 2020: May 1, 2020 and it is Ugly out there in the stock market.

Be very careful and for me, do not buy the dip. In a number of postings I have compared the current date’s activity and pricing to the April 17th statistics. They remain very troubling to me. Right now, at 11:11 AM EST, the 187 Portfolio is valued at the exact value it held on April 17th. Troubling is that 53% of the 187 Portfolio stocks are lower in price than they were on that April date. This speaks to a narrowing of breadth in the market, with fewer components supporting the aggregate price, and that is a recipe for a further decline in a bear market. From the sidelines I remain an observer.

I did buy some insurance late Friday in the form of S&P 500 Put Options.

April 29, 2020 Curious movements as I watch from the sidelines
A very strong equity market this morning. It looks like it has legs for the rest of the day.

Why do I use the word curious for this mornings action?

Consider that the best gainer today at roughly 10:30 AM EST, within the 187 Portfolio is Cleveland Cliffs, up 11.9%. This is a highly indebted enterprise with net debt as a % of Market Cap = to 133%. Whereas, Akamai is the weakest performer, down -6.8%. with a net debt to market cap of only 7%. Which would you rather own? Overall, there are 147 gainers today and 40 decliners. Additionally, while the market is higher than it was on April 17, 2020 (+3%), 21% of the 187 Portfolio stocks are below the price they closed at on April 17th. Yes, a very curious market.

It is of great importance I believe to identify those stocks that are below the April 17th close as of 1:30 PM EST today, April 29, 2020: A, ABT, ACGL, AKAM, AMZN, AON, AWK, BDX, BSX, EA, EW, FTNT, GE, JKHY, JNJ, KO, L, LRCX, MDT, MSFT, NBR, NEE, NFLX, NKE, NOC, NTGR, ORCL, OTEX, PEP, TIF, TRI, UNH, UPS,VZ,WORK
These are many of the strong, and yet……………………??????????

April 28, 2020 Be wary
As of this morning the Stock market is rising. The level of the 187 Portfolio has now exceeded the April 17 intermediate high after the March 23rd lows. The problem I see with this is that 28% of the stocks in the 187 Portfolio are at prices today that are below the April 17 levels. This is a relatively narrow rally, with many of the stronger companies not confirming the overall rise (AKAM, GOOG and MSFT as examples).

Additionally, the indicators I follow are all signalling an over-valued environment. The backstop from the Federal Reserve for the equity and the bond market is fueling the rally. It appears that there is little discrimination taking place in what is bought, and that is not a rational place for this investor to be.

There is a $16 difference between the Current price of the 187 Portfolio ($132) and the Discounted Cash Value ($116). No bargain.

April 22, 2020

So what does the 187 Portfolio have for us today? It is 10:23 AM: The best performer is Lam Research (LRCX) +8.2%; the worst performer is IRobot (IRBT) -4.7%. Total Advancers = 163 stocks; Total Decliners = 24 stocks

The 187 Portfolio is showing a weakening from where we started. Advancers are now 155 and Decliners are 32. Nabors (NBR) is the best performer up 13.6%. IRBT remains the weakest. Disruption in the oil patch shows as NBR down more than 90% since Dec 31, 2019, a clear reflection of its large debt obligation, is the % gain leader this morning.

The full year best performer remains Newmont Mining (NEM) up 39.7% for the year, as Gold continues to shine

April 21, 2020

I often look to what I call a Buy Sell Barometer to assess the overall 187 Portfolio as to whether it is overbought or oversold.

Below are two identical charts as of April 21, 2020, with one difference. The first chart shows the actual numbers as of this morning, and given the prices on this down day, I find we are still over-valued at a point of roughly -1,800 on the chart. The second chart is the exact same analytical tool, except I reduced the 2020 cash flow by 20% to compensate for the impact of the virus. That had a dramatic impact on the Barometer, pushing it to negative values never before seen. I then targeted a price reduction that would get me back to the buying opportunity that existed on March 23, 2020. That required price reduction to get to a point close to the 3,200 point on the chart is 45%!

CHART WITHOUT ANY ADJUSTMENTS

BAROMETER CHART AFTER -20% CASH FLOW ADJ AND -45% STOCK PRICE ADJUSTMENT

April 20, 2020

The current pricing of the 187 Portfolio puts it 26.2% above the closing price on March 23, 2020.

This is an impressive gain in under a month.

The 187 Portfolio is up 0.3% today while the DJIA and the S&P 500 are both lower as of 10:48 AM. This is occurring when only 42 of the 187 Portfolio companies are positive for the day. On a % basis it is the weaker debt laden companies that are advancing the most. In fact, some of the oil patch names are being bought. Of note, Antero Resources is up 23.7% on the day and Nabors Industries is up 7.4%. Strange with the further decline in energy prices, which makes me wonder if these may be targets for the larger more balance sheet strong companies.

Netflix is up 4.3%, Amazon is up 2.1%, while Google, MSFT, and Apple are modestly lower.

The Y-T-D Best Performers are:

April 19, 2020 (my Birthday)

There is a sense of optimism in the equity market given the bounce back that has taken place off of the March 23rd lows. I have participated in that optimism and as a result my asset values are higher today than they were at December 31, 2019. There is however a strong note of caution. Consider this:

1) The 187 Portfolio reveals that 83% of the stocks within the 187 Portfolio are lower in price than their December 31, 2019 price.
2) Without any adjustment for the Covid-19 impact, 17% of the companies forecasted lower cash flow in 2020 than in 2019. Many were forecasting a recession in 2020 or 2021, before the virus shut down the world’s economy.
3) The price to cash flow multiple for 2021 based on stock prices as of the close on April 17, 2020 is 22.80X. This is an unadjusted forecast that pre-dates the virus impact. The original projected cash flow growth rate for 2021 over 2020 was 8.61%. Current pricing reflects optimism greater than reality, let alone an adjusted reality for the negative impact of the virus.
4) Applying a simplistic haircut to the 2020 forecasted cash flows of 25% for the impact of the virus on the global economy, means the 2021 cash flow growth rate over 2020 would have to be 45% to maintain the price to cash flow multiple that exists at today’s pricing. Not much margin for error in the price we would pay today to own equities.

April 17, 2020
The equity market’s underlying strength is relatively weak for a market that is up as much as the DJIA and the S&P 500 are as of 11:00 AM this morning EST.

The 187 Portfolio consists of the following equities