Just as the Super Bowl had an awful start last Sunday, so did the stock market in January after the largest annual jump in 16 years (29.6%). This is a year to be conservative and focus on established companies paying large dividends and implementing wide buybacks programs. Monetary policies will most likely tighten this year and that’s going to be bad news for the stock market. It was easy for the stock market to outperform in 2013 with interest rates at 0%, but as economic conditions improve, we move closer and closer to the end of the stimulus.
As I mentioned in my previous post, financial problems continue at all levels – in banks, the private sector, and the government, so in my opinion, last year was an exception, not a trend. We likely have years ahead before we see the light again.
The S&P 500’s return in January 2014 was -3.56%, as compared with -4.95% for my Dividend Paying Large Caps portfolio. Certainty not a good start for me, already down -1.39 against the S&P 500. Regardless, I am confident in my choices for 2014, and comfortable with my decisions. I have holdings in 12 quality companies with great potential, all selling at a reasonable price.
The main issues that dragged my portfolio down in January were:
Apple (AAPL) -10.77%
In January, Apple announced better-than-expected first-quarter results, with net income of $13 billion, or $14.50 per share, which was ahead of the $14.07 analysts expected for the fiscal first quarter. Revenue of $57.6 billion also exceeded estimates. Believe it or not, despite all that, the stock was down. In just one day the stock went down 8%, the biggest drop in a year. The reason? A silly one. Apple sold fewer iPhones than analysts were expecting (54 million vs 56 million). With the stock down -10.77%, the dividend yield is now higher at 2.38%. Very attractive for a company that is at the same time buying back stock and still has a lot of business opportunities ahead. If the Apple Watch or Apple TV ever take off it could easily return Apple to their previous $700 stock price. Since Apple took a big hit in January, and their stock represents 9.9% of my entire portfolio, it is easy to understand why my portfolio underperformed against the S&P 500 this month. I’m not selling Apple now, and I probably won’t this year. I’m still a believer.
Ecopetrol (EC) -10.90%
Ecopetrol took a double hit in January. The first was the “flu” affecting emerging markets, in Colombia the home of Ecopetrol, the stock market lost 9.5% in January. This was more than twice the loss we saw in the United States. Other emerging markets also experienced big drops in January, which in turn made investors switch on the panic button and pull their money out of these markets. The second problem was that the entire oil industry is taking a hit. As the economy lags, oil prices are being pressured, and revenues drop. All together, Exxon Mobil (XOM), Chevron (CVX), Ecopetrol (EC) and ConoccoPhillips (COP) lost more than 8% in January. The good news is that as a result dividend yields have shot up – Ecopetrol is now at 8.07%, ConoccoPhillips (COP) is at 4.35%, Exxon Mobil (XOM) is at 2.81%, and Chevron (CVX) is at 3.65%. As the economy improves worldwide, oil prices will rise and these stocks will outperform the market once again.
In January, I liquidated 4 positions: Dupont (DD), JPMorgan Chase (JPM), Microsoft (MSFT) and Sprint (S). The timing for Sprint could not have been better, as the stock was down -23.1% in January. All of the other stocks I sold in January with the exception of Microsoft (MSFT) underperformed the S&P 500. I may come back to Microsoft or JPMorgan in the future if I see that the business conditions for these companies have improved or their price has become more attractive.
None of my stocks were in positive territory in January 2014, but four stocks outperformed the S&P 500.
Oracle (ORCL) -3.55%
Oracle is my favorite stock for 2014. The company is buying stock back at unprecedented levels. 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 still fairly priced at 15.30 PE (TTM).
Oracle, much like Microsoft, IBM, and Adobe, stands to benefit immensely from the emerging “cloud computing” model. Among those companies, Oracle is by far my pick.
Qualcomm (QCOM) -0.04%
I am a firm believer in this company. You can find my extensive stock analysis here. I’ll keep Qualcomm for all of 2014, and plan to keep an eye on what happens with Mirasol displays and Femtocell, two of the most promising technologies being developed at Qualcomm.
US Bancorp (USB) -1.66%
One of Warren Buffett’s favorites, US Bancorp is a solid bank that could rise to new heights once the economy fully recovers. USB makes up 10.5% of my portfolio, and I plan on keeping this stock for a very long time.
Wells Fargo (WFC) -0.13%
This is the largest position in my portfolio, and was the second best performing stock for me in January. This is a stock that I will continue acquiring as long as the PE stays at around 12 and the dividend yield above 2%. This is a strong company selling at a very reasonable price. I may increase my position in Wells Fargo from 19.5% of my portfolio to 25% in the coming months.
Summary Portfolio Performance
Since inception (01/19/12), the model is up 30.8%, versus the S&P 500 40.2%. In 2014, I plan to stick to my guns. I don’t expect another 29.6% increase in the S&P 500 so I’ll be focusing on companies that pay dividends and buy back stocks. This will offer me some stability, and will allow me to be better prepared for what promises to be an uncertain 2014. The pressure on the stock market this year will be high, and I anticipating a lot more of the volatility we saw in January.