Welcome ORCL, Good Bye OXY

by admin on June 4, 2013

As the first half of 2013 comes to a close, I decided to take a step back and review my portfolio and key activities year-to-date. I have made a few major new investments this year, but for the most part am pleased with the results I’ve seen in the first half of 2013 from my ‘slow and steady’ approach to investing.

In April, I consolidated my portfolio and liquidated some of my holdings, not because of any deterioration in the underlying securities, but because I believed (and still do) that there are better opportunities available in the current market.

Some of the positions I closed at a gain were Coca Cola (KO), Pepsi (PEP), and IBM. Since selling these positions, Coca Cola’s stock is down -4.7%, Pepsi’s is up 1.7% and IBM’s is down -0.5%. In May, my only addition to my portfolio was Oracle (ORCL), which is already up 3.2% (I didn’t sell or decrease any of my positions in May).

I believe Oracle will continue to outperform the rest of the market for the remainder of the year for three main reasons:

  1. The exponential propagation potential of cloud computing systems and processes.
  2. Expanded loyalty base as it becomes increasingly difficult for companies to easily move their data storage from one provider to another.
  3. More frequent hardware and software updates due to mandatory upgrades typical of subscription models.

You can read a more detailed explanation of why I think Oracle is a good bet here. Two of the things I like most about Oracle is the company’s commitment to buying back stock, and the excellent return on equity (currently at 24.4%). Both of these factors are green lights for me when I buy any stock on the market.

In terms of my sellouts, I have few thoughts. I believe Coca Cola and Pepsi are great companies, but after a fantastic first quarter in 2013, they started to look a little bit too expensive as compared with other equities on the market today. The PE ratio of Coca Cola is 21.38, and Pepsi’s is 20.82. This is a +5 PE premium over Oracle, which I acquired at $33.27 with a PE ratio of 15.4.

So far this rebalance in my portfolio is working quite well. Over the last 30 days, my portfolio is up 4.1% while the S&P 500 is up 3.4%. This will be the second consecutive month where my portfolio has outperformed the S&P 500.
In 2013, my largest holding continues to be Apple (AAPL), which accounts for 11.5% of my portfolio. However, as we move into the second half of 2013, this is a stock that I have under close observation and have plans to downsize if the company doesn’t release any new products by 2014 (which I doubt they will).

Apple has an incredible market advantage when releasing new products and services, but in my opinion, it is taking the company too long to capitalize on this advantage. I think an Apple powered streaming music service that can compete with Pandora (P) and Spotify is long overdue, as is a new iPhone with NFC (near field communication) capabilities at a lower price point. The release of the Apple TV is taking too long as well, and in delaying the release, Apple is allowing their competitors to catch up. Samsung now offers smart TVs with Internet access and apps. If Apple doesn’t launch their version soon, people may get too comfortable using Samsung’s version and not care about what Apple has to offer. If Apple releases any product this year, that alone would be enough to take the stock to new heights (as any new product release almost inevitably does). I look forward to seeing how everything plays out this year. If things stay the same at Apple by December though, I may reduce my exposure in 2014.

As we move into the second half of 2013, a position that I will be closing is OXY. This month the company reached its historic average valuation. The PE 10 (current stock price divided by the average of the last 10 years of earnings per share) is 17.06, while its PE ratio is 17.37.

OXY’s price is 0.77% under its historical valuation, and based on my calculations, the fair price of OXY should be $95. This is fairly close to the current price of $94.27. The way I calculate the fair price is as follows:

First, I calculate the fair value of a company by combining two valuation methods. The first method is the PE valuation method. This valuation method corrects for any recent price appreciations or discounts by assuming that the value of the company will be in line with its historical valuations based on PE ratios. In the case of OXY, the fair price would be $76.56. (PE Ratio 5 year average 14.11 x earnings per share $5.42)

The second valuation method I use is the PS valuation method that applies a historical average of median Price to Sales Ratios to current trailing 12 months sales numbers. According to this method, the fair price of OXY would be $113.44 (PS ratio 3 years average 3.839 x Sales per Share $29.55)

I then average the fair value of both valuations – in this case, the PE valuation method ($76.56), and the PS valuation method ($113.44). The average of these two valuations is $95.

Since acquiring OXY in January 2013, the stock is up 18.33%. As I look ahead to the second half of 2013, I think now is the time to secure those gains. There are other stocks in the same industry with better opportunities right now. I look forward to scouting them out and sharing my findings in future posts.

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