The return of the S&P 500 in 2013 was a whopping 29.6%. This is something we haven’t seen in the stock market since 1997 when the S&P 500 delivered 31.01%. This is good news for investors, but a reminder that we all should be cautious because we are still far from being out of the woods. Financial problems continue at all levels – in banks, the private sector, and the government. In the past, when the stock market reached new heights, the following year was a disappointment. We saw this in 1980 when the stock market delivered 25.77% only to drop -9.73% in 1981. It was the same story in 1989 when it returned 27.25% only to drop to -6.56% in 1990. Although there is a kind of euphoria in the market right now, this is due mostly to the monetary policies of the Central Bank, which are keeping interest rates at 0%. The minute that interest rates begin to rise however the stock market may start to shake – especially in this still fragile global economy. My goal for 2014 is not to get carried away by the euphoria, and instead to stick to my conservative allocation strategy. Things could go south at any point in 2014, as there is a lot more that has to improve before we see real economic prosperity.
Here is where my portfolio is at in the beginning of 2014: the Dividend Paying Large Caps portfolio was up 2.76% in December as compared with a 2.36% gain for the benchmark S&P 500 Index (SXP). The portfolio outperformed against the market for a second consecutive month in December, the main contributors to this positive performance were:
Sprint (S) +28.13%
The stock added an additional 28.13% in gains on top of already high 24.67% gains in November. In these two months combined, the increase of the stock price has been 52.8%. I’m planning to sell this stock in January and cash out on these gains. When a stock suddenly increases at this rate in such a short period of time, it will most likely go down soon after. Don’t get me wrong, I still believe Sprint (S) is a good stock, but I don’t want to be greedy, and I want to get out while my profits are still high. YTD the stock is already down -6.67%. Since this stock doesn’t pay dividends and it is the smallest position in my portfolio I’ve decided to close it.
Intel (INTC) +8.87%
While the dominance of Intel in the tech world is being questioned, I still believe that Intel is a great company. Intel is one of the few technology companies truly committed to their investors, which I appreciate. The company has one of the biggest dividend payouts in the industry at 47.31%. This means that Intel is basically distributing half of its earnings back to investors, which is truly remarkable. The dividend yield is also one of the highest in the industry at 3.54%. On top of that, Intel continues to buy back its stock at a healthy rate. In 2014 I don’t expect the stock to fly, but don’t expect it to sink either. As long as the company continues showing a healthy respect for investors, I’m perfectly comfortable continuing with my position. After all, Intel is the kind of company that could come up with a breakout product or a great acquisition at any point.
Oracle (ORCL) +8.42%
Oracle is my favorite stock for 2014. The company is buying its stock back at unprecedented rates – always a good trend for investors. In June 2013 the company doubled its quarterly cash dividend to 12 cents a share per quarter and said its board approved an additional $12 billion in buybacks. The stock is fairly priced at 16.08 PE, especially considering that the average PE ratio over the past 10 years has been 30. In some areas the company is beating direct competitors such as IBM. Last year when the company reported fiscal Q4, CEO Larry Ellison remarked on the results, “Exadata, Exalogic, Exalytics, SPARC SuperCluster and our other engineered systems grew at a rate of 45% in Q4 as we took considerable market share from our primary competitor — IBM P-Series — which declined 32% in their most recent quarter.”
Oracle, much like Microsoft, IBM and Adobe, will benefit immensely from the emerging “cloud computing” model. Cloud services increase user loyalty and at the same time decrease piracy. Once the economy begins to recover, these tech companies will bloom.
DuPont (DD) +5.85%
This is the company I understand the least in my portfolio. DuPont offers a wide range of innovative products and services for markets including agriculture, nutrition, electronics, communications, safety and protection, home and construction, transportation, and apparel. The reason I purchased the stock in the first place was because I knew that the housing recovery would create greater demand for DuPont’s construction and materials line of business. This turned out to be true and actually created some momentum for the stock, which has risen 44.51% since I first purchased it. I’m selling the stock now to cash in my profits, but also because I don’t fully understand the company and its businesses. The materials and construction divisions of the company are only responsible for about 30% of their earnings. The rest comes mainly from agro-science products (31%), and performance chemicals (23.7%). Since I don’t understand these areas as clearly as I would want to in order to be a long-term investor, I’m closing this position for 2014 and am cashing out on my 44.51% gain.
My biggest laggard in December continued to be:
Ecopetrol (EC) -5.83%
In December, the only stock that went down significantly in my portfolio was Ecopetrol (EC) -5.83%. This was in addition to the -13.79% drop the stock experienced in November. The stock continues to suffer due to the upcoming presidential elections in Colombia (the government controls 88.5% of Ecopetrol), and widespread industry pessimism. In 2013 global oil companies had a bad year, and as of this past October, only a handful have started to recover, including Exxon Mobil (XOM) and BP (BP). I’m very optimistic that Ecopetrol and other oil companies will recover in 2014. One of the reasons for my optimism is that these companies are paying high dividends, and the price of oil will likely go up as the global economy recovers. I plan to increase my stake in Ecopetrol, because I believe the company will get back on track in 2014. The stock price is also low and the dividend yield is high at 7.81%. Debt to equity is only 0.18 and return on equity is 23.42%
My portfolio was up 26.92% for the year, as compared to the S&P 500, which was up 29.6%. The reason I underperformed against the market in 2013 was because I stuck with Apple for too long even as the stock was going down at the beginning of the year. Since Apple was the largest position in my portfolio, the performance of the entire portfolio suffered. This was a mistake I won’t repeat moving forward.
Since inception (01/19/12), the model is up 37.5%, versus the S&P 500 46.7%.
My goal for 2014, as I mentioned in my previous update, is to concentrate on 12 value stocks. The reason for this approach is that I can track them closely and make quicker and more informed decisions. In 2014 I’m ready to outperform the market and add greater value to my investors.