Year in Review: 2014 Portfolio Performance

Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Begin Text Here I wanted to take some time to overview my portfolios performance for 2014, then have a brief conversation regarding the holdings I currently have and my future plans as I get a clean slate to start anew and attempt to outperform the performance of the S&P 500 index.  Before I begin, I want to establish some common thoughts throughout this post.  First all gain/loss percentages discussed are based upon either feedback from my portfolio tracking software or by pulling up tickers on the Google Finance web page and looking at 1 year charts as of Jan 1 2015.  Numbers I state have the chance of being off a few percentage points compared to reality.  I will be doing various comparisons of my stocks against the performance of the S&P 500, excluding dividends.  Additionally, I'll be comparing the performance against the sectors which the stocs are a part of.  To do this, I'm using SPDR ETF index funds which represent each sector as these ETFs are known to track extremely close to each of their respective sectors.  These sector performances likely include the benefit of dividend yields whereas my stock performances will not include any dividends they paid.  It will not be 100% apples to apples comparisons, but it will be very close and respectable to the purpose of this discussion.  To learn more about these ETFs, please go here.  Below are the ETFs and their sector which will be discussed.

Additionally I'll have a couple ETF/Index funds that will represent specific industries.  Not every industry has solid ETFs to compare against, so I'll only call them out where it seems fitting.

We'll start with assessing my portfolio as a whole, then break it down into the individual stocks I hold as of December 31.  As I indicated in my 2014 Trades, 2014 was not kind to me as a stock picker.  I significantly under performed the S&P 500 benchmark gaining only 3.07% compared to the S&P's 12.4%.  That's some deep under performance.  I clearly was prepared for a rising rates environment and it didn't hit us.  I was also hurt by over exposure to the energy sector (I had 3 holdings all somehow tied to the sector equaling well over 20% of my portfolio), and I was hurt by not being disciplined with my holdings of NPSP, which was hit hard early in the year and basically took all year to recover and profit.  During the course of the year I removed 2 holdings (John Deere and Broadwind Energy) and added 1 (Ensco PLC).  I'm still heavier in the energy sector than I care to be at this point, but in an improved position from where I once was.  I will make some more adjustments as I enter 2015 to better balance my position.  Additionally, I intend to play less to what I think will happen with rates and pay more attention to over arching themes in the market and try to adjust based on that.  Rates will be a factor, but I can't allow myself to position only based on that, which I feel I did a lot for 2014.  I also hope to be better prepared to make more moves to limit losses or lock in gains.  Both being actions I lackted that I feel hurt my portfolio last year.  Finally I intend to get my portfolio down to 5-7 "invested holdings" meaning that's how many stocks I actually hold with skin in the game.  I may hold more than that, but only if it's because I've taken out my investment and still have shares to let run (playing with the house's money, if you will).

Let's dig into the individual stocks themselves now, starting with Citigroup (C).  Citigroup had a weak year, returning only 3.54%.  This was well below both the S&P 500 and it's sector (13.49%).  The stock had a number of hits against it, a failed CCAR, lower interest rates, and numerous legal fees due to investigations.  These events took and held it down from late winter into later summer.  Since then the stock has been on the rise.  I believe we'll see investors fight to work out balances between risks and rewards of financial concerns in Europe - which appear to be popping up again, what happens with interest rates, and what happens with this year's CCAR.  I see more upside potential than down in the long term with an improving balance sheet and higher rates somewhere in the future.  For now, I continue to hold based upon that long-term view.

The next stock to discuss is Encana (ECA).  This stock started the year strong - going up 30% in the first half of the year.  Then the oil collapse hit and the bottom fell out.  It ended the year down 22.94%.  Not only did this stock under perform the S&P, but it was even demolished by its sector (-10.34%)  If that isn't painful, I don't know what is - especially since I was already down on the stock in the long-term.  I did sell half of the position near the highs on the year, but that money went to another oil stock, similarly impacted by the sudden drop in oil prices.  I am still too heavy into a sector I don't anticipate rapid growth from in the near-term and intend to jettison this holding early in 2015 to re-balance my portfolio.

Ensco PLC (ESV) is the stock I bough some shares of with the proceeds from my sale of Encana.  This, too, is an energy and oil play and it was demolished by the crash of oil prices.  I'm not fully positioned here, but I had enough of a position that it still hurt - a lot!  Ensco ended the year down 47.08%, and it is down 34.4% from the cost basis I set with my initial purchases.  The one positive this company has going for it, currently, is that has a 10% yield.  I believe the current price levels are a combination of what has happened with oil prices as well as a very strong belief that the dividend will be cut.  If that happens, see how the stock responds.  Get out if it drops hard, hold on or maybe even buy more if the stock barely moves to the news.  I get a sense that the worst is priced in and the company has done a lot to try to assure they wouldn't have to find themselves in a position to need to cut the dividend.  The other thing to watch will be estimate cuts - both by the company on sales as well as analyst price cuts.  How the stock reacts to those will be telling as well.  On the negative side, I bought Encana just before the price plummet in natural gas a few years ago.  It never recovered.  The same could easily happen here, though as long as the dividend holds, there's more upside push than there was with Encana, who cut theirs.

That was an awful lot of bad in my portfolio, when you look at those numbers.  That doesn't even include losses incurred from holdings I got rid of.  These are the key reasons to under performance - especially when not properly diversified.  How about something to be a bit more proud of?  Home Depot (HD) was a huge winner for me this year.  It returned 28.58% which handily out performed both the S&P and its sector (8.87%).  It also out performed its retail industry index, which returned 9.64%.  It's unfortunate that this stock was never fully positioned and is a lower holding size in my portfolio.  Management has been conservative - knowing that home buying and building doesn't appear to be strong.  Despite that, people have more money and it appears they're very much interested in remodeling, repairing, and getting more energy efficient in their homes and they're spending accordingly.  The stock has grown its earnings at over 20% per year for the last few years and it's trading at about 20 times earnings.  If they can maintain that growth, there's strong upside to the stock yet to come.  If earnings start slow, this stock has a lot of down side to it.  While I believe 2015 looks strong for Home Depot, I do not want to get euphoric and need to be ready to take some gains if the story changes.

My core holding of all core holdings in my portfolio is Honeywell (HON).  I can't describe how well this stock continues to treat me.  While it did under perform the S&P, it still returned 9.63% on the year and beat its sector (8.79%).  This company continues to grow earnings at at 10%+ pace and has been extremely consistent with its performance and messages the nearly 5 years I've held it.  Those factors alone will allow it to get a premium multiple to other stocks in its sector, but I also expect the company will continue to grow its dividend and now has enough cash on its balance sheet that this could be a year with a number of acquisitions that will allow the company to keep growing.  I feel like almost every year I've held this stock you will see a point in time where the stock pulls back 8-10%.  As long as nothing in the story has changed, these are nothing more than great buying opportunities.  If I have any fears with this stock right now, it's the fact that I feel I have little to fear.  Keep challenging the story and thesis to make sure nothing is being missed, but don't fight the trend either.

My speculative holding has been NPS Pharmaceuticals (NPSP).  While shooting up nicely 2013 into 2014, it suffered tremendously when interest rates reached 3% on the 10-year Treasury and we saw a sector rotation out of high growth "at any cost" and high yielders.  The stock suffered, down as much as 30% at points in the year, but recovered nicely in the last quarter, finishing up 20.64% on the year.  While this beats the S&P, it didn't beat out it's sector (23.47%) or its industry (34.27%) indexes.  Thus it was an under performer.  I believe it has positive catalysts to start 2015 strong and once we get a verdict on their new drug, we'll be better able to assess where the stock might go next.  The biggest lesson learned through this stock is you can't stay glued to highly volatile stocks like this one.  If you get huge gains in short order, take some profits to protect to the down side - especially if there is something that could impact the story behind the stock via either the company or the sector which it participates in.  These stocks can go down just as fiercely, if not more so, than they go up.  Protecting those gains you get is paramount to your portfolio's success.

On Semiconductor (ONNN) had a solid year returning 22.94%.  This beat the S&P, its sector (16.22%) but slightly under performed its industry (29.61%).  Semiconductors were on a wild ride this year.  There were points that the stock was down and I almost sold out, struggling to deal with the stock's gyrations.  I've continued to research the company and the stock and started finding patterns to the stock's performance.  While 2014 looks as though it's an especially strong year for tech, I anticipate it will pull back over the summer again in 2015 - simply because that is the general pattern.  I'm likely, however not guaranteed to play the stock in this fashion.  Similar to the speculative biotech stocks, tech stocks like this one can swing wildly and you need to take profits when appropriate.  The stock will likely pull back violently at some point and you'd be given an opportunity to repurchase at that point.  As such, this particular tech stock is more of a trading vehicle than a long-term investment.

Finally, this takes us to Pepsico (PEP).  For a consumer and packaged goods company, it's really hard not to be impressed with its 14.33% jump in 2014.  This edged out the performance of the S&P and beat out its sector performance (13.19%) which was surprisingly better than the S&P as well.  This isn't common - especially when you are seeing the economy grow.  However, the low-rate environment also was unexpected and left people fleeing for yield and consistent growth.  I do not expect the same kind of performance in 2015, though I do expect to see some accelerated revenue growth due to margin increases.  The management team has performed well and even if there is an activist investor pushing to "unlock more value," I believe we're looking at a solid performer.  Geopolitical issues with Russia are a little bit of a concern, as is the rising US Dollar impact to earnings.  If you add in rising rates, I think you'll need to get out.  This stock is trading over 18.5 times earnings, but was recently over 20 times earnings when it traded above $100 per share.  Since then, the technical charts seem to be flashing warning signs that could cause me to at least lighten my holding, if not blow out for now.  If the US economy really is breaking out, you're likely to see a rotation out of this group and into more cyclical names.  Don't get caught holding the bag if you see the signs of this.