Robert C. Merton is perhaps one of the most brilliant financial theorists in the world.  He received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives, Merton’s research focuses on finance theory, including life-cycle finance, optimal intertemporal portfolio selection, capital asset pricing, pricing of options, risky corporate debt, loan guarantees, and other complex derivative securities. No doubt, he is an incredibly brilliant man, but at the same time, he was the principal of Long-Term Capital Management, a speculative hedge fund that collapsed in the late 1990s after losing $4.6 billion.  Not only was he extremely smart, but all 15 of his partners were super smart too.

Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM’s capital was composed of funds from the same financial professionals it traded with. After its collapse on September 23, 1998, Goldman Sachs, AIG, and Berkshire Hathaway offered to buy out the fund’s partners for $250 million, to inject $3.75 billion, and to operate LTCM within Goldman’s own trading division. The offer was stunningly low to LTCM’s partners, because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave Meriwether less than one hour to accept the deal; the time period lapsed before a deal could be worked out.

Unfortunately similar to the case of Robert C. Merton and LTCM, the stock market is full of smart people and companies doing stupid things… the list is long: Jeff Skilling of Enron, Bernard Madoff, AIG, Lehman Brothers, Fannie Mae, Freddie Mac, and so on.

As Warren Buffett mentioned in this great speech–what is important are the qualitative factors of a person, because everyone has the intelligence to do just the right thing.

When asked about Long-Term Capital Management just 4 weeks after the final call to agree on the bailout, Warren Buffett recounted one of the most valuable lessons I have ever heard in financial advice: [click to continue…]


Oil Pump2014 is coming to an end, and if anything is becoming crystal clear at the end of this year it is that economies around the world are deeply and intrinsically linked.

Since June a roller coaster of events has pushed up the price of the Dollar in Russia by 38%. This is the biggest increase since 1998 when the Russian Ruble plummeted to historic records. The main reason for Ruble’s current fall is the drastic and quick decrease in oil prices. At least 35% of the Russian economy is funded by oil, without that income, Russia would have a deficit close to 10%. This emerging problem is even more dramatic for smaller economies such as Venezuela and Colombia. In Venezuela oil accounts for 95 percent of export earnings, when you combine this with gas earnings, it’s 25% of Venezuela’s gross domestic product. In Colombia the situation is also becoming very critical. Oil makes up between 20% and 30% of Colombian exports and accounts for 4% of its GDP. To put this emerging crisis in perspective, the Colombian 2015 national budget was calculated with an oil price of $98 per barrel, the price per barrel is now at $70 and trending lower, which means Colombia is now facing a budget deficit of $3.6 billion in 2015.

If oil prices continue to decline, these governments will get hit badly setting off an unfortunate chain of events. First currency and government bonds will decline, as investors lose confidence in these governments and start pulling out money and hold off on any new investments. As their currencies lose value, exporters across industries will begin to receive less money for the same goods they are producing, and as a consequence they will spend less in their own countries. When they spend less, the whole economy is impacted and social unrest can emerge (which we have already seen in Venezuela). Eventually these economies will enter into recession and an austerity programs will be necessary. All this will happen while at the same time the US consumer economy benefits from cheap oil prices, and Americans start to spend more on a broader range of non-essential goods or services. These economies that benefited from the economic crisis in US that started in 2008, now see how things can go south quickly. As the US economy recovers and the Dollar strengths, these economies will start to feel the pain.    

Considering that oil prices will stay low for a while, I see a difficult 2015 for these international economies, and related energy stocks. Oil companies’ prices will continue to go down (although not as quickly as in Q3 2014). But eventually they will stabilize. Sooner or later investors will realize how cheap these stocks have gotten and they will start accumulating again. The price of these stocks will recover when the US economy improves further and the Central Bank starts increasing interest rates. That is expected to begin by June 2015 if everything goes as planned. As the US economy gets healthier, productivity will increase along with demand for more energy. Ultimately, this will drive oil prices and energy stock prices up and that will be the perfect moment to cash out.

We won’t see this happening in the next few months, it may even take a couple of years to get there, but ultimately the gains can be rewarding. With that in mind I will continue to hold to my positions in the sector for quite some time. Specially because dividends are high, and I’m positive they won’t go much lower than where they currently are. If the Venezuelan economy collapses, that alone would be sufficient to send stock prices up again. Every time there is a major economic crisis in a top oil producing country, oil prices tend to increase quickly.  By the simple logic of the economics of supply and demand when a top producer is out, this means less available supply and higher prices.

In 2015 the energy sector will play a key role worldwide, which will definitely benefit the US, but there is one important principle that we still need to keep in mind… Too much of a good thing, is almost always a bad thing.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 43.8%, versus the S&P 500 68.1%. The return of the S&P 500 in November 2014 was 2.45%, as compared with 1.65% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 5.89% as compared with 11.86% of the S&P 500.


In November Ralph Lauren (RL), Apple (AAPL) and Adidas (ADDYY) performed well. They were up 12.2%, 10.12%, and 10.10% respectively. As I mentioned here Ralph Lauren is a strong brand with little debt and a clear international strategy for expansion. Apple continues to be having a good moment after releasing the new and very well received iPhone 6 in September. They also announced the new Apple watch for next year, and it seems that they are building a new momentum. Finally Adidas is recovering after the stock decline among European stocks in September and October. Adidas is -40.8% YTD due to continuing weakness of emerging-market currencies as compared with the Euro (in particular the Russian Ruble as Russia is one of the most profitable regions for Adidas), and restructuring at TaylorMade-Adidas Golf. It may take some time to recover, especially as the Russian economy contracts in 2015, but I believe it will be worth the wait. Adidas is a strong brand with a wide international presence.


In November, my worst performing stock was Ecopetrol (EC), down -24.3%. Because of this, my portfolio underperformed the S&P 500 for the month. Ecopetrol is one of the largest oil conglomerates in the world that has been affected because of the drop in oil prices and devaluation of the Colombian currency.  Patience will be required before we see this stock climbing back to the $60’s of 2012. I outlined above why I plan to hold on to it for a while longer. It also doesn’t hurt that the company is paying a healthy dividend of 11.6%.   

Acquisitions in November 2014

No positions were added in November

Liquidations in November2014

No positions were liquidated in November


Why I increased my investment in Energy?

by admin on November 7, 2014

Stock Ecopetrol ECWhile there has been a lot of talk these days about the energy prices, specifically about oil and gas prices, two of my largest holdings are in this sector (Ecopetrol EC and Lukoil LUKOY). In October, I increased my position in Ecopetrol, so the question is why?
In order to explain why, first we need to answer a few questions:

  1. Why are oil prices going down?
  2. How low they can go?
  3. When can we expect to see a rebound?

Why are oil prices going down?
The media has covered this point rather frequently lately so I’ll keep this brief. There are basically two major factors that are currently impacting the price of crude oil worldwide. The first is the spread of Ebola in Western Africa and other parts of the world, and the second is that the US has overtaken Saudi Arabia as the biggest oil producer in the world. Oil extraction from shale formations across the US in places like Texas, Pennsylvania, and North Dakota has caused a surge in supply, which combined with restrictions on exporting crude is curbing the price of West Texas Intermediate, America’s oil benchmark.

How low they can go?
I don’t think prices can go much lower for few reasons. First of all, if prices go too low, a couple of things will happen:

  1. Hydraulic fracking drillers will be under considerable pressure and financial stress. The reason for this is simple, these companies spent more money than they brought in during the boom, and they made up the gap by borrowing. This was fine as long as the oil sells at a high price. When suddenly crude oil becomes inexpensive, their margins decline and they won’t be able to get as much money for their product as they originally though. This industry is massive in the US and Canada, and putting them under pressure is not in the best interest of the US government. If crude oil prices continue to go down ($75 or less), companies that rely on fracking will have a very hard time repaying their debt.
  2. If prices of oil go down much further, this has the potential to very negatively impact not only the US economy, but also the economies of major worldwide power houses like Russia. For many countries, the low price of oil directly translates into economic woes – including, most dramatically, the possibility of a contracting economy. According to a recent article in Bloomberg Businessweek, if pricing remains under $104 a barrel, Russia will face a drop in its gross domestic product by up to 1.5 percent. Prices are currently below $90. If an Economy as big as Russia’s suffers, then other countries around the world will also feel the pain.
  3. There is also a very strong linkage between oil production growth, economic growth, and wage growth across a range of US states. Annual investment in oil and gas across the country is at a record $200 billion, reaching 20 percent of the country’s total private fixed-structure spending for the first time. If this industry gets hit too hard for too long, that will impact other market segments, and the US economy in general. Low prices are good, but prices too low for too long will not be good news for anybody.

If we look at historical prices of oil vs gas, we see that they move in tandem. Oil prices vs gas prices behave very similarly to stock prices vs earnings. They can deviate from the mean once in a while, but at the end of the day, they will eventually always need to correct course. By looking at the graph below comparing % price change between oil and gas, you can easily see a strong correlation. If oil prices increase too quickly when compared with gas prices, there will always be a correction. That’s what happened in 2008, and that’s what is happening now. Based on the graph below, oil prices may go lower, but we are certainly near the bottom of this trend. I don’t think the current low prices will be sustainable for much longer.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

When can we expect to see a rebound?
Now that the US is the biggest producer in the world, I don’t expect huge increases in oil or gas prices anytime soon. Gas prices will rise as soon as the economy improves. When that happens, energy stocks will outperform any other market segment, but we may still be a couple of years away from that moment. In the meantime, you can collect strong dividends from most of these companies.
So to answer the question, why did I increase my exposure in the energy sector? I would say:

  • Prices won’t go much lower than current levels because it is not good for the economy or for the fracking companies that the US government is trying to protect. It is a big sector that if it hits a recession has the potential to drag the entire economy down. Certainly nobody is interested in that.
  • These companies pay healthy dividends, in the order of 3% and above. So even if stock prices don’t go up for a while, I’ll be happy to wait a couple of years while collecting the dividends.
  • PE ratios are very low when compared with other segments of the market making this an excellent opportunity to take advantage of before the economy improves and prices start to rise.

Summary Portfolio Performance
Since inception (01/19/12), the model is up 42.9%, versus the S&P 500 63.2%. The return of the S&P 500 in October 2014 was 2.32%, as compared with -2.84% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 0.47% as compared with 0.91% of the S&P 500.

In October Apple (AAPL), American Express (AXP) and Bed, Bath & Beyond (BBBY) performed well. They were up 7.2%, 2.8% and 2.3% respectively. Apple continues to have a good moment after releasing the new and very well received iPhone 6 in September. American Express is doing an excellent job targeting more diverse audiences, and is currently paying better dividends than MasterCard (MC) and Visa (V). PE ratio, and Price to Sales is also way lower than its competitors.

AXP PS Ratio (TTM) Chart

AXP PS Ratio (TTM) data by YCharts

Bed, Bath & Beyond (BBBY) continues its recovery after the big drop that it faced this year from January to May. Although the company still down for the year -15.1%, since August the stock has increased 10.4%. Price to sales ratio is only 1.1 and the company has no debt.

In October, my worst performing stock was JC Penny (JCP), down -24%. Because of this single position, my portfolio underperformed the S&P 500 for the month. After reaching $11 in August, the stock took a hit and is currently trading at $7.20. This stock is extremely undervalued at the moment. Price to Sales ratio is 0.1. Very low compared with the 7.2 of Macys (M). I’ll keep this holding in my portfolio, but I know that the recovery will take at least 1 year more. Yearly revenues from the company are finally increasing, after deep declines in 2012-2013. I expect this stock to have a very good 2015.

JCP Revenue (TTM) Chart

JCP Revenue (TTM) data by YCharts

The other company that took a big hit in October was Ecopetrol. For the reasons mentioned above in this article, the whole energy sector is suffering lately. I think this sector crisis is at the bottom and I also expect Ecopetrol to do very well in 2015, especially if the economy sees an improvement.

Acquisitions in October 2014
I added Adidas (ADDYY) to my portfolio, the stock has been down -45% this year, but this is a great company, with a global presence and very well diversified. The stock has been dragged down by the European Stock market, which is not having a great year. I expect this stock to recover very quickly. Price to sales is 0.7, nothing when compared with the 2.9 of Nike (NKE). Adidas has not been this cheap in many years.

I also added Copa (CPA), a very interesting airline company operating in Latin America that was “unfairly” hit because of worldwide Ebola concerns. Many airlines have been down because of this, offering great entry point opportunities. This is a stock that I won’t hold for long. As soon as the stock is up 20% I plan to get rid of it.

Liquidations in October 2014
The only position I liquidated in October was Wells Fargo (WF). Great company that I had to sacrifice in order to take advantage of better opportunities on the stock market.


The legacy of Larry Ellison at Oracle

by admin on October 9, 2014

Larry Elllison of Oracle Larry Ellison of Oracle

Larry Ellison will be remembered for founding one of the most successful companies of our times. Only time will tell if he will also be remembered as king of the acquisition. Ellison, of course, was a specialist in product engineering, but he was also an excellent salesperson to corporate clients and extremely good in analyzing whether potential acquisitions made sense. In a tech world full of acquisition disasters (the aQuantive acquisition by Microsoft sounds familiar?), Larry Ellison shone brightly by completing many successful acquisitions and integrations.

Larry’s acquisition strategy was to buy software companies that were selling complementary products, and then incorporating the acquired functionality into Oracle’s main product line. This allowed him to offer its clients and prospective clients products with very rich feature sets. Since for a long time Oracle was exclusively a software company, this strategy helped Larry lock his clients into Oracle’s true profit center—the business of selling software updates. Once Oracle’s software has been put in place, it cannot be switched out easily—it becomes an integral part of a company’s business processes and the switching costs to the client are enormous.

The $10 billion 2005 acquisition of PeopleSoft was transformative for Oracle. Prior to that, Oracle had been known only as a database company (i.e., the electronic “containers” that hold data). PeopleSoft was a producer of application software (i.e., the programs employees use to capture or enter data that will be stored in a database). After the PeopleSoft acquisition and subsequent purchases of application software providers Siebel (2006), Hyperion (2007), and BEA (2008), Oracle became a major player in the field of enterprise application software. Oracle’s 2010 acquisition of computer/server maker, Sun Microsystems extended its product footprint into hardware. While some in the investment world derided the acquisition, I believe it has had an extremely beneficial effect on the Oracle’s profitability.

Oracle worked for roughly the first twenty years of its existence on increasing the functionality and user acceptance of its database products. It began its foray into developing application software internally in the late 1990s. However, considering that the firm ended up buying PeopleSoft a few years’ later, we can presume that management decided that it was easier and quicker to develop a presence in application software by buying existing competitors rather than building it from scratch. Existing competitors have well-established client bases to whom Oracle’s primary database products could also be sold.

These are some of Oracle’s most successful acquisitions, carefully planned and executed by Larry Ellison:

  1. i-flex in Banking and Financial Services: August 2005 for $900 million
  2. MetaSolv in Communications: October 2006 for $219 million
  3. Siebel Systems in CRM: January 2006 for $5.85 billion
  4. Hyperion Corporation in Enterprise Performance Management: March 2007 for $3.3 billion
  5. Agile Software in Product Lifecycle Management: May 2007 for $495 million
  6. Sun Microsystems in Hardware: January 2010

I expect Oracle’s acquisitions of Endeca, RightNow, InQuira and Taleo in 2011 will further add to its software revenues. In the near future Oracle may be targeting even more interesting acquisitions such as Workday (WDAY) or Salesforce (CRM).

Being successful in acquisitions in any industry it is not an easy task.  During the last shareholder meeting of Berkshire Hathaway, Warren Buffet said that mergers and acquisitions are often so bad, because big companies have people working full time solely to look for these deals, and they are compelled to complete some, even if ultimately they don’t make much business sense. That’s their job and that’s why they are being paid. From the outside at least, it appears that the acquisition culture at Oracle is different, all their acquisitions make good business sense, and they are implemented in a timely manner – ostensibly without market or stakeholder pressure. This is the biggest legacy of Larry Ellison at Oracle, and a culture that Oracle must work hard to preserve. As long as Oracle continues to make smart acquisitions, they will go far.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 46.7%, versus the S&P 500 57.7%. The return of the S&P 500 in September 2014 was -1.55%, as compared with -3.30% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 7.21% as compared with 6.70% of the S&P 500.


In September Bed, Bath and Beyond (BBBY), and Google (GOOG) performed well. They were up 2.4%, and 1.0% respectively. BBBY continues its recovery after the big drop that it faced this year from January to May. The fundamentals of the company are still strong and I’m sure this is one of the stocks that will continue trending up for the remainder of 2014. In one day in September BBBY was up 7.4% and saw eight positive estimate revisions suggesting that more solid trading could be ahead for the company.

Google (GOOG), continues to amaze me, recently a new project was announced that will include the creation of giant TV’s. The project is led by Mary Lou Jepsen, a former Massachusetts Institute of Technology professor best known for co-founding the One Laptop Per Child Project, an ambitious but ultimately unsuccessful project to give cheap laptops to tens of millions of children in poor countries.

Ms. Jepsen has also co-founded three startups around display technology. The most recent, Pixel Qi, specializes in low-power displays that can be read in direct sunlight. She now heads the display division inside Google X, Google’s futuristic products lab. With so many interesting products in the pipeline, Google is a one to hold for a long time.


In September my holdings in oil companies did poorly. Lukoil (LUKOY) was down -8.3% and Ecopetrol (EC) -9.6%. Those two stocks led to the underperformance of my portfolio vs the S&P 500 this month. As the economy recovers worldwide, I expect crude oil prices to go up and these stocks to recover rapidly. The positive side of the story is that these two companies pay the best dividends in my entire portfolio. LUKOY currently pays 5.73%, and EC 7.5%. Both stocks reached a 52 week lows in September. I don’t have plans to hold to these positions long term, because the dynamic of the petroleum is changing worldwide – especially as technology improves and the US is able to extract more resources from home at a better price. Since 2008 domestic oil production in the US has increased dramatically, reversing what was nearly a three-decade decline. That has some predicting that the U.S. could overtake Saudi Arabia as the world’s largest petroleum producer in coming years.

In 2011 the U.S. produced 5.66 million barrels of crude oil per day, according to the Department of Energy’s Energy Information Administration. By next year the agency projects that production will increase 21 percent to 6.85 million barrels per day. Add in products like natural gas liquids, biofuels, and processing gains at refineries and that number increases. This may put some pressure on international markets and prices likely will stabilize for a while. I expect these stocks to recover some ground in the last quarter of this year.

Acquisitions in September 2014

No positions were added or increased in September.

Liquidations in September 2014

No positions were closed in September.


Intel LogoIn 2013, Intel underperformed the Nasdaq index by 12.7%, and investors became concerned about the end of the era of Wintel domination. The Wintel alliance was virtually unstoppable from the 1980s to 2000. In April 2013, the research firm IDC issued an alarming report saying that world-wide shipments of laptops and desktops fell 14% in the first quarter from a year earlier. That was the sharpest drop since IDC began tracking this data in 1994 and marked the fourth straight quarter of decline – IDC Expects PC Shipments to fall by -6% in 2014 and Decline Through 2018.

Investors have been betting on mobile and tablets to fill the gap, but it doesn’t appear that the numbers investors were hoping for will ever materialize. As we know Intel does not have a strong mobile presence, Qualcomm has dominated this market segment for many years. The market for tablets and book readers has cooled down and it doesn’t appear that they will ever achieve the volumes investor were looking for.

Regardless of this ‘crisis’ in the PC industry, I believe Intel still has a lot of potential. Investors should stop looking to PC shipments as a means of assessing a potential investment in Intel. What is now driving the growth at Intel and will become the next big things are wearables, servers, and the Internet of things. While these three are still nascent product categories, Intel is already playing a big development role in each of them.


“Wearables” is still a new product category, but one that Intel has a vested interest in. Earlier this year, the company acquired wearable maker Basis for around $100 million. Some day soon the term wearables will no longer only be synonymous with wristbands. Applying technology to fashion is just beginning to emerge as a new approach to integrating technology products into our daily lives, and so far we have only seen the tip of the iceberg.


The global demand for datacenters and servers is growing exponentially. As cloud services become more available and affordable, servers will play an increasingly critical role. Cloud, networking, high-performance computing, and enterprise revenue all grew more than 15% in the second quarter of 2014 for Intel. The company’s data center business also had a strong second quarter with 19% growth year-over-year leading to all-time record revenue $3.5 billion. The server processors division is now the most important division at Intel – generating 26.9% of the total revenues, 5.7% more than notebook processors (21.2% of total revenue) and 12.8% more than desktop processors (14.7% of total revenue).

Internet of Things

Finally, the Internet of Things is another area where Intel could see a lot of growth in the near future. This business segment grew 24% YoY in the second quarter of 2014. The Internet of Things division is growing fast as Intel brings intelligence to more and more devices. The “Internet of Things” division now generates 8.5% of total revenues for Intel.  While this may seem like a small percentage, keep in mind that this is a category that was basically non-existent just a couple of years ago.

Intel makes up 3.41% on my portfolio, but this is a position that I will most likely increase in the near future. I see big opportunities for Intel down the road and I really like the senior management of this company. Additionally their dividends, stock buybacks, and cash flow all meet my standards.

Below the performance of other positions in my portfolio

Summary Portfolio Performance

Since inception (01/19/12), the model is up 53.4%, versus the S&P 500 62%. The return of the S&P 500 in August 2014 was 3.77%, as compared with 3.89% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 10.87% as compared with 8.39% of the S&P 500.


In August JC Penney (JCP), Ralph Lauren (RL) and Apple (AAPL) all performed well. They were up 15.1%, 8.6%, and 7.2% respectively. JCP continues on its road to recovery by focusing on discounts and promotions to bring back customers. They are also adding more items to the company’s portfolio, while private labels are making a comeback in JCP stores. These strategies appear to be working well as sales are increasing and losses are dropping.

Ralph Lauren (RL) continues to perform well.  The company has beaten analyst EPS estimates in each of 4 most recent quarters. Ralph Lauren’s balance sheet looks great, with $15.55/share in cash and short-term investments.

Finally, Apple (AAPL) is up, ahead of the release of the bigger and better iPhone 6 and perhaps other new products that could boost sales.


In August Lukoil (LUKOY) was down -0.5% and was the only position in the negative territory for the month.  As the conflict in Ukraine persists, most likely Russian stocks will continue to underperform in the market. The company is very cheap based on different valuation standards, so as soon as the conflict is over, I expect this stock to fly really high.

Acquisitions in August 2014

In August 2014, I didn’t add or increased any positions in my portfolio.

Liquidations in August 2014

No positions were closed in August.


As Warren Buffett used to say, “Only when the tide goes out do you discover who’s been swimming naked.” That adage applies perfectly to the apparel sector right now. Although the industry has had a terrible year, one of its major players is still financially strong with incredible competitive advantages, and a solid global presence.

To give you a quick snapshot of the sector, here is how some of the major players have done YTD in 2014.

  • Aeropostale (ARO) down -64%
  • Guess (GES) -15.4%
  • Express (EXPR) -14.9%
  • Urban Outfitters (URBN) -2.94%
  • Abercrombie & Fitch (ANF) -19.84% and
  • Bebe Stores (BEBE) -46.7%

While Ralph Lauren (RL) is among these players and is also down -11.5% YTD, it is a company like no other in this sector. Below I’ve listed just a few of the reasons why I believe Ralph Lauren is a great buy.

Ralph Lauren (RL) is a company committed to investors

If you’ve been following my posts, you’ll know that I like companies that respect and value investors. The best way to identify a company that does this is to see if company practices are in line with shareholders’ interests and benefits. Two clear examples of this are the continuous payment of dividends and periodically repurchase of shares. Ralph Lauren has a history of both. The company currently pays a healthy dividend of 1.15%. In the recent past, June 2012, the company doubled its dividend, and then again in December 2013 the company increased the dividend by 12.5% (from $0.40 to $0.45). Over the past 10 years the company has been buying back stock consistently.  Currently, Ralph Lauren has 88.7 million shares outstanding, as compared with 105.5 million in 2006. The company repurchased 3 million shares of its common stock during FY13 utilizing $450 million of authorized share repurchase programs at an average cost of $149, and returned an additional $128 million to shareholders via dividend payments.

Ralph Lauren is conquering the world 

Although Ralph Lauren is a global brand, design is centralized managed in New York City. The company has diverse design teams comprised of different merchants representing key regions around the world that work side-by-side in a highly collaborative manner. These teams conduct global line reviews and plan global buys. They work intimately with their respective brand teams across sales, logistics, and marketing in order to inform their planning with real-time feedback on sales trends, product performance, and marketplace dynamics. This business strategy creates product and company consistency around the world and connects consumers more closely with the brand.

The company’s management has articulated a goal of generating equal revenues from the Americas, Europe and Asia. Currently, nearly two-thirds of overall company revenue comes from the Americas, while Europe and Asia contribute 20% and approximately 10% respectively to the top line. The trend for RL’s international revenues has been generally positive over the last 10 years. International revenues have gained about a 13% share in the company’s consolidated revenue mix. The company is now focused on grabbing market share in high-potential emerging markets, such as Greater China and Central and Eastern Europe, by targeting each market with the optimal mix of retail, wholesale, and licensed distribution. While this expansion will take years to consolidate, I believe Ralph Lauren is on the right track.

Ecommerce expansion

Currently, RL’s direct-to-consumer activities encompass a broad range of global retail formats, both physical and digital. The physical formats include Ralph Lauren, RRL, Denim & Supply, Factory, and Club Monaco stores, as well as concession shops and licensed stores across Europe and Asia.  These physical locations showcase RL’s brand messages and product assortment. However, the fastest growing distribution channel for the company over the past several years has been the e-commerce segment. I expect this momentum to continue as the internet offers the consumer the convenience of pre-selection research and access to more products than in physical retail formats. Due to the the growing importance of these online stores, e-commerce has been an area of significant investment for the company. RL has greatly expanded the distribution centers for its North American e-commerce operations, launched e-commerce efforts in South Korea, and is now handling online transactions in 10 European countries.

At the end of 2012, e-commerce sales stood at $624 million. If RL’s e-commerce channels continue to record strong growth, the company will have the opportunity to make long-term changes to save operating costs (such as rental/leasing costs), boost profits, and yield more returns. The company may also consider closing some of its redundant brick-and-mortar stores. A maturing e-commerce channel also allows Ralph Lauren to reach new regions with significantly fewer investment in brick and mortar establishments.

No Debt

Low or no debt is one of the best indicators of a company’s endurance, success, and management strength. A company has no debt, is like if you didn’t have a mortgage, auto, credit card, or student loans to pay. It is a beautiful and enviable position to be in. RL has virtually no debt.  Current company debt stands just $300 million – this is small for a company that is generating $156 million from operations and $4.03 Billion in shareholder equity. Debt to equity ratio is just 0.074 and never has been above 0.6 – speaking very highly of how the company has been managed over the years. As I’ve said before, I have nothing but love for companies with no debt – it is a quality I very much admire.

More than just a clothing brand

Ralph Lauren is growing to be more than just a clothing brand. It is now a lifestyle alternative for audiences around the globe. The company is investing in restaurants and hotels, expanding the brand to new categories where they can reinforce its image and philosophy.  The Polo store on 5th Avenue is just one example. The store will open a restaurant a restaurant in 2014. This is not the first foray into restaurants for RL.  The brand’s Polo flagship in Chicago has a restaurant across the street, and the company’s Paris flagship store also houses a restaurant within the courtyard.

For all these reasons Ralph Lauren is a quality company that I plan to hold for years to come. The company is stronger than any other competitor in the apparel industry and its market capitalization ($13.87 billion) is larger than that of all the competitors mentioned at the beginning of the article combined.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 48.0%, versus the S&P 500 55.9%. The return of the S&P 500 in July 2014 was -1.51%, as compared with -1.14% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 0.99% as compared with 0.65% of the S&P 500.


In July Bed, Bath & Beyond (BBBY), Intel (INTC) and JC Penny (JCP) all performed well. They were up 10.3%, 9.7%, and 3.6% respectively. BBBY continues to recover after hitting 52-week low on July 26th, the company is solid financially and continues to expand. I plan to keep BBBY for the rest of 2014. INTC was up in July mainly because they beat earnings and revenues estimates. This was driven by solid demand in its core server and PC markets (which many “experts” thought would be dead by now). Gross margin rose from 58.3% to 64.5%. Meanwhile, marketing, general and administrative expenses declined 5% and fell from 16.9% to 14.9% of revenue. These factors led to a whopping 41% surge in operating income as the operating margin expanded 21.2% to 27.8%. INTC is another stock that I’ll keep for the remainder of the year given that the company continues to pay excellent dividends (2.65%) and the mobile and tablets still have a lot of potential. Finally, JCP slowly continues to recover after facing quite a bit of turbulence in previous years. The company is so undervalued that even if the recovery takes time, any downside is very limited. Price to book value is only 1.02 as compared to Macys (M) at 3.42, and price to sales ratio is ridiculously low at 0.2 as compared with Macys (M) at 0.79. Companies take time to turn around, so I expect to hold to this stock for at least another 20 months.


In July American Express (AXP) was down significantly (-7.2%). Regardless, YTD the stock is performing better than competitors Mastercard (MA) and Visa (V). American Express is undertaking a big expansion to become a more inclusive brand and not an exclusive one. These efforts require large investments in new technology, infrastructure, human capital, and marketing that can affect EPS in the short term. If the stock goes down significantly, I may get more of it. I am a firm believer in the new American Express strategy and they certainly have all the necessary talent and resources to execute well.  The other stock down significantly in my portfolio was LUKOY (-6.7%), mainly due to investors avoiding Russian securities, especially after the Malaysian Airlines Plane that was taken down over a conflict zone on July 17th.

Acquisitions in July 2014

No positions were added or increased in my portfolio.

Liquidations in July 2014

No positions were closed in my portfolio.


Picking up a bargain in June

July 3, 2014

In June, shares of Bed Bath & Beyond (BBBY), one of the most efficiently run companies around, dropped by 5.7%. Year to Date, its shares have dropped 28.53%. This is one of those very rare opportunities to invest in a great company selling at a very good price. Price to sales is just 1.049 and […]

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Apple is back but questions remain

June 4, 2014

On September 21, 2012 Apple reached $700 per share for the first time, only to go back down to $390 six months later. The company has had a fantastic run since 2010, but its current price of $628 is still under the $700 of those glory days in 2012. Apple invests huge amounts of money […]

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JC Penny (JCP) still volatile, but on track to beat the S&P 500 in 2014

May 12, 2014

In my February letter to investors I explained why I was increasing my position in JC Penny (JCP). Since that post, the stock has continued to be very volatile in 2014 with double-digit gains and drops depending on the day. This is always the case when companies are having trouble, and in the short term […]

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My JC Penny (JCP) and Ecopetrol (EC) holdings are paying off

April 1, 2014

In my February letter to investors I explained why I was a believer in the JC Penny (JCP) rebound. I cited some cases throughout history where struggling companies have rebounded, making millions for smart value investors. Warren Buffett did this in the seventies with Geico. By 1974, the company was not fairing well. The government […]

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Increasing my position in JC Penny

April 1, 2014

In February, JCPenny (JCP) had a stellar month, up 23%. While this stock is extremely volatile right now and not paying dividends (two points of concern for me), I think JCPenny is on the right track for recovery, and that the stock may soar later this year or in 2015. This is an investment I […]

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