Year in Review: 2015 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.

I wanted to take some time to overview my portfolio's performance for 2015, 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 Morningstar web site's performance tabs for YTD or 2015 numbers on performance.  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 stocks are a part of.  To do this, I'm using Spider (SPDR) ETF index funds, 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.  First, I'm happy to say I was able to outperform the S&P 500 this year.  Below is a quick summary of my portfolio performance.  All cells highlighted in red and green are +/- figures based the proper comparison.  Cells highlighted in grey are closed positions.

2015 Portfolio Performance

2015 was a year of volatility in the markets.  That volatility was driven by a few things.  First, everyone has been waiting for a big correction because the market has been on the rise for the last 5 years now - over tripling from it's 2009 low.  Next, we had a few different geopolitical events rise or raise their ugly heads again.  We had Greece looking at default again, Brazil, Russia, and China all had economies which were falling out.  Then we had increased tensions in the Middle East due to growing strength of an extremist religious sect, which included various terrorist attacks like shooting down a passenger plane over Egypt, and shooting massacres in Paris and the US.  In the midst of all of this Russia walked in and forcibly overtook Ukraine as well.  While the US economy was finally starting to show strength and recovery, with unemployment reaching levels not seen since 2007 or earlier, inflation still low, housing starting to gain strength, oil prices continuing their decent from the last half of 2014, the FOMC finally deciding it was time to start raising key interest rates slowly at the end of the year, the rest of the world was suffering.  The US Dollar gained strength against most countries, the Euro neared parity for its first time ever, and all those countries that rely on oil and mineral exports for their economies to survive were suffering greatly.  This weak global economy continues to be a theme as we enter into 2016 and I am guessing will be one of the primary factors of overall market performance for at least the first half of the year.

The S&P 500 ended the year down 0.73%, whereas my portfolio ended up 6.59%.  Much of my portfolio's wins could be attributed to the buyout of NPS Pharmaceuticals, though it could also be said that I'd have ended up much more were it not for Encana and Ensco.  No point in shoulda, woulda, coulda.  This is just how it went.  60% of my stocks out performed the S&P 500 benchmark and only 40% of them out performed their sector.  Of the 4 stocks I have tracked to  an industry, half of them beat their industry, thought it's fair to note that On Semiconductor was basically in-line with the industry and Ionis Pharmaceuticals is still going through a phase of buying the position, so it was expected/hoped to under perform.  However, as I noted in my 2015 Trades post, I clearly missed an opportunity that would've proven exceptionally fruitful.  What does all of this show me?  Well, in some cases, it's better to be lucky than good, as was the case for NPS Pharmaceuticals.  I need to learn to get out of bad investments earlier, too.  

World View:
I think I'll start with the one I consider most easy, and that's oil.  Oil has taken a punishing beating over the last 18 months.  I'm certainly not a commodity expert, but I think we're approaching the end of all of the downward pressure.  There will be companies that go out of business, as the Saudi's likely desire, and people will have reduced their production so that there is not so much excess supply.  People will continue to try to catch the falling knife in the space for awhile and the companies that go bankrupt will likely burn these stocks pretty bad.  Overall, though, I think oil gets priced in the mid-to-upper 40s after all of that shakes out.  There may become an opportunity to buy high quality energy names, but only as a trade as they recover from being oversold to fair value.  I anticipate the energy sector to follow the path of the banks.  It'll be much more of a slow growth for years to come and even the best names will under perform the markets for periods of time.  While I've admittedly been burned by oil, it's not currently the reason I'm avoiding it.  I just see too much history that matches my experience from holding Citigroup.  We've reset back to an economy that can grow, in part due to the low cost of energy.  I expect this theme to stick around for some time, thanks to the technological advances that have made it easier to get at oil at a cheap rate.

My second theme I see is a growing US economy.  Millenials are leaving their parents basements and creating households of their own.  We're reaching a point where we're likely to start seeing some ongoing wage inflation, now that the overall jobs market is appearing to be healthy.  That said, there have been some big-named companies laying off large numbers of employees recently.  This could make for a rough set of results for January and February, potentially striking some fear in the markets that the FOMC will have to lower their rate increase again.  We may also start seeing some more infrastructure building and repairs, given a new transportation bill that has been passed by congress.  Rising healthcare costs and general consumer sentiment will be something to watch as they could negatively impact the results of our economic expansion.  It is also a Presidential election year, so it will be important to know which candidates are leading and what impact their policies may have on the market industries.  We saw in 2015 what Hillary Clinton can do to the healthcare industry with a few simple tweets.  I expect to see people gambling in similar fashion in the future months as they play "guess what the winner changes."

Sadly, I think war will be an ongoing theme.  The extremist factions, the general disarray in the Middle East, the ongoing dynamic that is Russia are all likely going to continue - perhaps escalate.  The US has gotten tired of fighting for everyone else and that has forced themselves to get armed.  Defense contractors are likely to have another good year, since all transactions are done in US dollars.  

A shift to going to where the earnings are growing will happen in 2016.  This might sound kind of odd to the pros out there, because in their eyes, that's what always happens.  I guess I'm looking at this a little differently.  In the last year, the FANG stocks (Facebook, Amazon, Netflix, and Google (now Alphabet)) were some of the biggest movers.  Meanwhile, the average US stock was down rather considerably.  Stocks, naturally revert back to their means, which indicates something about this divergence needs to change.  I'm thinking this happens a few ways.  First, those highly rewarded stocks will likely still grow, but I'm anticipating that it will be an under performance to the overall markets, and not necessarily all of them will continue to grow.  I think the rest of the market will recover some to bring the divergence back together, however, which companies will rely primarily on the impact of the US Dollar.  The more impact it has, the more you'll see that recovery from US-centric companies.  Should the rest of the world start growing again, then we'll see more impact from the US-based international companies.  The final option is that we see US-Dollar impact, but with slowing growth in the US overall, investments will start looking to companies based outside the US, though I don't think it will be the emerging markets, just yet.  I'm thinking more along the lines of Europe coming out stronger in 2016, essentially being next in line, after the US, to get through its recovery process.  I honestly anticipate a combination of options 1 and 3 more than anything, but any combination is possible and will likely change through the course of the year.  If my anticipation is correct, I think that will be more of a second half story for the year.

My Stocks - past performance and fit into my world view:
Citigroup (C; $51.75) - The stock under performed both the S&P 500 and its sector this year.  Most of that under performance came in the last 2 months, oddly.  Despite the Fed raising rates for the first time in years, the stock dropped after the news.  I did some research on the last 2 times the Fed raised rates after long durations of lowering or flat rates (1994 & 2003).  Oddly enough, both times the financial stocks didn't perform the best in the first year of those rising rates.  Also, being an international bank, I anticipate some dollar strength challenges as a possibility.  Were I only looking to the next 12 months, I might see myself as more of a seller of this stock.  However, my view is longer than that and while they may not be able to make as much money, they will always do better in a rising rate/expanding economy environment.  I'm looking for buy opportunities in the $47 - $50 range, if they happen.  The stock is considerably under valued compared to its peers based on tangible book value as well.  Should Citigroup provide solid to strong numbers for the fourth quarter and have a successful CCAR again, I believe the stock can at least reach a price that matches its book value.

Cedar Fair (FUN; $55.84) - Despite not filling my position, this stock has actually out performed the S&P 500 in 2015, though only by a fraction.  The stock, as a whole out performed its sector, but my purchases didn't happen until it reached its high and pulled back.  Had I owned stock on January 2, I could've done better.  This stock had a somewhat surprising move up in the last couple weeks of 2015 that will have to be watched.  The move feels a little bit artificial, though I cannot articulate why I feel that way right now.  Negativity aside, the stock has a few things going in its favor.  First, it's almost all based in the US and relies on US consumer strength, which appears to be favorable right now.  Secondly, while rates are rising, rates are still low this company's nearly 6% yield is valuable to those looking for yield growth.  Additionally, unlike the many energy related MLPs, it appears the company has the free cash flow to back up the payments for now.  If the decline in energy names has stopped, pressure we saw on a company like Cedar Fair may also be done - which could be a positive reason for the recent action.

Home Depot (HD; $132.25) - This is my second play on the US consumer and essentially my play on a household expansion theory.  Houses need to be sold, bought, and just plain maintained.  Home Depot has been the quintessential play on that theme.  After having risen over 29% last year, I can's say it's fair to expect the stock to beat the market again like that.  In fact, it is a little of a potential victim if markets turn sour at the beginning of the year.  Either way, though, I see the company having another strong year with its seasoned and second-to-none leadership team.  Given my world view, this may be one of few stocks that people continue to pile into due to the success the company has been able to maintain.

Honeywell (HON; $103.57) - Honeywell had another good year, showing how it can be consistent in challenging markets and how past investments continue to set them up for future success.  That said, the stock didn't perform as well as I hoped it would.  Is that my fault - did I expect too much?  I'm not sure.  When doing my historic investigations on rising rate environments, though, Honeywell wasn't a strong performer in the first year.  As multiples compressed, currency translation impacts occurred, earnings likely slowed down enough to make it difficult to offer a higher price.  It's also possible that we could see declines in markets that have been strong - like turbo and aerospace - due to the conditions.  That said, the guidance they provided was essentially in line with expectations.  Providing they can meet those expectations, I think we'll be fine - even if it means a generally flat year as multiples contract a point or two.  Should the dollar weaken or maybe just not strengthen, there's added potential for the company to benefit.  

Ionis Pharmaceuticals (IONS; $61.93) - A theme I didn't call our for 2016, but one that I feel I still see going is the advancements in medical science.  There, at least, seems to be an acceleration of the improved therapies, treatments, and research behind many troubling and often fatal diseases.  While in both previous times we had a rising rate environment, Ionis' stock performed horribly (yes, so bad I had to italicize the word), there are differences this time around.  Ionis has a large number of therapies in their pipeline now, and a number of drugs in stage 3, with many positive results to date.  There isn't really much of a catalyst until the second half of the year, where we might start seeing FDA panels for stage 3 reviews.  Maybe by the end of the year we start seeing approvals, but that's a tight stretch, as it could easily get pushed into early 2017.  So I honestly don't see a lot of upside to the stock without a story that breaks as something new and/or special.  I do see the stock performing mostly in line with other biotechs - maybe slightly lower, due to the lack of big events, but currently see a bright future that makes the stock worth holding onto.  I'd love a pull back or another correction to finish buying my position.  But if things start going down due to failed tests (in Ionis or another notable biotech company), death, FDA rejections, or other similarly impactful stories, the theme of biotechs may change.  I also see political rhetoric as another cause for downturn and will be something to watch carefully.  As rhetoric impacted the stocks in 2015, the same may happen again.  Should someone like Hillary win based on a policy of lowering healthcare costs, there may also be longer term trouble afoot.

On Semiconductor (ON; $9.80) - Here's a holding I maybe shouldn't even have, if I followed my plan I stated last year.  Clearly I didn't stick to that plan, though.  Now I'm holding onto this stock and I'm not quite sure what to think yet.  Technology plays tend to do well if the economy is growing, but this would be more of a world growth play than just the US.  This particular stock plays well into the automated car and other Internet of Things plays where sensors and cameras are necessary, but outside of that, it doesn't have a lot of advantages right now.  Add into that what appears to be a bidding war over Fairchild Semiconductor and I start to get wary.  An analyst recently wrote that they would be comfortable with a price of $24 per share.  I'm not sure anything above $22 is wise at this point.  It is also said that if this deal goes through, that On Semi could become a takeover target itself.  The balance sheet is fairly clean, though there will be some debt on it.  They are taking share and appear to be executing well, based off of the last conference call.  However, with rising rates, we might see a decrease in sales for autos - or prices need to drop.  That puts pressure on the internal components too.  Cellular devices are becoming a commodity, and the industrial sensors probably need a stronger world economy to take off more.  I see potential for growth yet.  I feel the company is still under valued some.  If they do get the Fairchild deal at a reasonable price, it's feasible for the company to get a potential buyout at a pretty good price.  Just think, though, if they buy out Fairchild at $22 and that company's market cap is at about a half of On Semi, why is On valued at $10 per share now?  Is the buyout too big, or is On valued too low?  If merged, what's the "right" value for the stock?   These are the many questions I see facing the stock in 2016.  It's also presenting some of the most risk in my portfolio, at this time.

Pepsico (PEP; $99.90) - Historically, Pepsico has done surprisingly well in the first year of a rising rate environment.  I do feel that some of that history needs to be credited to a growing global market base, which is still happening today, but not as easily.  The management team is strong, costs of both oil and corn have come down dramatically and I expect margins to be rising over the next set of quarters.  Dollar strength will continue to be a headwind for the company as revenue and earnings growth will hard to achieve due to translation - though the company does do a good job of calling out the core constant figures to help with that.  The dividend is still comfortable given this incredibly low rate environment - even if it is rising right now.  If rates are raised multiple times this year, this stock may become an under performer.  I would expect the multiple to depress from it's 21-22 range now down to the 18-20 range.  The  yield will also become a non-factor to owning the stock as treasuries will start providing comparable yields and more guaranteed returns.  That's not to say that this would be a stock to let go of yet.  It may under perform the benchmark, but the company may still perform well and it does provide safety to the portfolio, should we run into problems.  We'll have to see how things play out, but I'm not afraid to let go of this stock if I foresee a significant loss of capital coming.  At the same time, I'm not afraid to hold the stock just because it becomes stagnant for a year or two as things adjust to our new environment.