Two Roads Diverged 2007 Portfolio Performance
It’s a new year, and time to assess the performance of my Two Roads Diverged Portfolio for 2007 and since inception. I feel pretty good about the performance of this portfolio. Since 2004, the Net Asset Value has increased from 100 to 143.57. That’s a 43.57% four-year return. On an annualized basis, the portfolio has returned 8.61% during that time as compared to 9.18% for the S&P 500. Returns have been muted for the portfolio due to a large proportion of the portfolio having been invested in treasuries during that time to meet personal cash needs that occurred in 2007.
In 2007, the NAV increased from 120.72 to 143.57, an 18.55% one-year return. This compares to a 6.30% return for the S&P 500, adjusted for comparable deposits and withdrawals.
Now, a chart for 2007:
The Portfolio at the Start of 2007
At the start of 2007, I intended to weight the portfolio toward stocks that had the greatest potential for future returns. These companies included Netflix (NASD: NFLX), Oyo Geospace (NASD: OYOG), and Yamana Gold (NYSE: AUY).
| Ticker | % Portfolio | NAV on 12/30/2006 |
|---|---|---|
| Treasuries due 5-15-07 | 16.89% | $20.39 |
| ADP | 13.83% | $16.69 |
| CTRP | 12.26% | $14.80 |
| MIDD | 10.29% | $12.42 |
| NFLX | 9.08% | $10.96 |
| AUY | 7.40% | $8.93 |
| DWSN | 7.16% | $8.64 |
| WM | 6.39% | $7.71 |
| SCSS | 6.10% | $7.37 |
| OYOG | 4.89% | $5.91 |
| JUPM | 3.78% | $4.56 |
| EBAY | 2.11% | $2.55 |
| Cash | 0.00% | $0.00 |
| Combined | 100.00% | $120.72 |
During the course of the year, the treasury bonds matured (and cash withdrawn from this account), I trimmed holdings in ADP, Ctrip, and Middleby while purchasing additional shares of Yamana, Netflix, and Oyo Geospace. I also decided to concentrate my holdings a bit as I was losing track of some of my shares. Ebay was hitting my intrinsic value targets with slowing growth, so Ebay was sold. Select Comfort was sold for tax loss purposes. Washington Mutual was sold prior to the complete deterioration of their business due to subprime losses. The strategy of adding shares to certain companies was somewhat of a wash. Netflix was as volatile as ever, but ended the year up a bit over year-end 2006. The story at Yamana was obscured by an incredible three way merger, resulting in a slight loss for the year despite gold ending above $800 per ounce. Oyo Geospace rocketed to well over $100 per share before falling back a bit at the end of the year.
Review of Stocks Held in 2007
I think it is important to look back at each holding during the course of the year. It’s a good way to learn discipline when investing. I think I am becoming more disciplined about my approach to investing. However, this is a gradual process. Below is a table summarizing stocks held in 2007.
| Ticker | Two Years | One Year | Six Months | Since Inception |
|---|---|---|---|---|
| SCSS | -58.14% | -55.12% | -60.33% | |
| WFMI | 2.02% | -19.44% | ||
| EBAY | -19.63% | 12.57% | -5.65% | |
| WM | -4.50% | -16.36% | -13.09% | -2.66% |
| Treasuries due 5-15-07 | -0.71% | -0.26% | -0.70% | |
| BR | 6.87% | 4.89% | ||
| NFLX | 0.36% | 6.20% | 37.29% | -0.18% |
| AUY | -3.11% | 14.99% | 7.25% | |
| ADP | 9.40% | 10.21% | -7.23% | 9.63% |
| OYOG | 24.71% | 1.58% | 38.78% | |
| MIDD | 54.42% | 28.08% | 48.34% | |
| JUPM | 25.83% | 5.36% | 66.21% | |
| DWSN | 96.16% | 16.35% | 68.82% | |
| CTRP | 85.41% | 46.65% | 96.33% | |
| Combined | 15.78% | 18.55% | 10.40% | 8.61% |
| Benchmark | 11.14% | 6.30% | -1.94% | 9.18% |
Select Comfort (NASD: SCSS): As indicated in a previous post, I have sold my entire position in the Two Roads Diverged Portfolio. Sales growth slowed throughout the year as the company issued warning after warning. Now it appears that growth may even turn negative. The housing slump has had a pretty severe impact on this company. The company is still profitable, making shares look like a bargain, but things may get much worse before they get better. Management continued to by back shares throughout 2007, and it now appears that they may need that money. This is anything but inspiring.
Whole Foods Market, Inc. (NASD: WFMI): I’ve always admired Whole Foods, and bought shares in 2007 at a price that looked fully valued. Soon after I purchased shares, it was revealed that the CEO was posting negative messages on Yahoo’s message boards about Wild Oats, a competitor that Whole Foods subsequently purchased. I don’t want to own any company where the CEO is engaged in such diversions. Plus, I think it takes a pretty twisted person to do something like that. My sell at a loss was a vote of no confidence in management.
EBAY (NASD: EBAY): I’ve always admired EBAY. What a terrific business model! Still, I paid a pretty full price for shares. Despite EBAY being a money printing machine, I fail to see how they can invest that cash in anything producing the kind of growth needed to justify their valuation. That was my thinking at the time, anyway. The Skype investment and subsequent write-down was a case in point. Again, sold a fully valued company at a small loss. Hopefully, I will approach future purchases with more discipline.
Washington Mutual (NYSE:WM): I loved the increasing dividend at this company, and added shares in a separate portfolio to be revealed later. I all the shares in this portfolio to concentrate my holdings a bit, raise some cash, and to reduce my exposure. Little did I know what was to come for this company. This sale looks prescient, but was purely a coincidence. I learned a big lesson here about banks and asset quality. Assets look great in a strong market, but it is difficult to determine how they will fair in a down market.
Treasuries due 5/15/07: I knew I’d need this short-term cash eventually as I worked in a poorly fitted real estate company held by a bank. Again, sometimes it is better to be lucky than good. Still, this is a testament to being prepared for a rainy day and not tying up cash you may need in volatile stocks. Even the stalwarts faced issues at the end of 2007. Each investment portfolio should suit the needs of the individual.
Broadridge Financial Services (NYSE: BR): I had minimal shares of this company that I received as a spin-off from ADP. I didn’t want to spend the time tracking it, so I sold. This seems to be the type of company that will do well when the stock market is headed up and a little less well when it is not. I did not invest the time to learn.
Netflix (NASD: NFLX): Wow! This stock has been incredibly volatile. They faced intense pressure from Blockbuster during the summer that turned subscriber growth negative. I knew Blockbuster could not sustain that pressure. They have since raised prices. Netflix has since recovered. I do have concerns about how large the rent by mail market really is, however. It also seems like whenever a competitor is pushed out, a new one emerges.
Yamana Gold (NYSE: AUY): Despite a steady rise in the price of gold and a dramatic increase in production at Yamana Gold, the stock price declined in 2007. This is largely a result of a three way merger hold down shares during the latter half of the year. The merger is now complete. It seems the market is waiting to see how it plays out. Barring a dramatic decline in the price of gold, the merger should prove to be very positive in the next couple of years.
Automatic Data Processing (NYSE: ADP): The value of ADP shares moved up roughly equal to their earnings growth in 2007. This is a bit misleading as they also spun off their brokerage business, Broadridge Financial. This was a stock dividend issued this year. ADP is returning capital to investors in the form of dividend and share buybacks with their steadily growing earnings.
Oyo Geospace (NASD: OYOG): The market price of Oyo Geospace shares demonstrated their typical volatility in 2007. The share price started the year under $57 per share, traded over $110 per share and ended the year at a little over $75 per share. During the year the company added manufacturing capacity which should lead to more earnings growth, but they failed to announce any new RCS (Reservoir Characterization System) contracts. There is a good deal of potential for this company, but without the large RCS contracts its growth may be very ordinary.
Middleby Corporation (NASD: MIDD): Middleby beat analyst estimates several times this year as they continue to be successful integrating new companies. This success as well as disruptive food preparation technology have propelled Middleby’s margins, earnings, and stock price. I sold a bit of Middleby stock toward the latter half of the year only to have them beat estimates and climb to new highs.
Jupiter Media (NASD: JUPM): I find it interesting that Jupiter Media started the year at $7.85 per share and closed the year at $3.82 per share yet it returned 28.83% (before taxes) for the Two Roads Diverged Portfolio in 2007. I did this without shorting the company. They have been at breakeven on an earnings basis, plus about $4 million per quarter in depreciation and amortization expenses. They have had very little earnings growth all year. Yet the stock has gone all over the place. I simply bought when I had a 25% discount to intrinsic value and sold when the price looked unreasonable (see the Getty merger talks that fell through).
Dawson Geophysical (NASD: DWSN): Dawson returned 96.16% for the Two Roads Diverged Portfolio in 2007. They did this with several breakout quarters where earnings surprises were significant. The stock actually pulled back a bit during the end of the year due to them holding off on crew expansion. Still, revenue per crew continues to climb. The growth story here isn’t quite over as oil hovers near $100 per barrel and natural gas up due to a cold winter.
Ctrip (NASD: CTRP): Ctrip continues to tell investors that they are forecasting 35% earnings growth even as they report 50%+ growth on a year over year basis. Earnings have propelled this company’s shares. The management team continues to execute brilliantly, but they also reward themselves with extensive options grants. The dilution annoys me, but I can’t complain about their performance.
Conclusion
Some undisciplined buys and trades hurt returns for this portfolio in 2007, but on the whole I am pleased with its performance. More importantly, I am comfortable with the quality of each company and their prospects for earnings growth in the future.
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