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 had introduced no-liability insurance in some areas, the company had extended its clientele to higher risk categories, and there were inadequate provisions made for future claims.
In 1976, GEICO announced a loss of $126 million. The company’s shares, which had traded as high as $42, were down to just under $5. The 1976 Annual General Meeting was a near riot with angry shareholders challenging management – by that point, the shares were down to about $2.
Buffett had always kept his eye on the company and took the view that despite its problems, the company’s core business was sound.
Following the annual meeting, there was a change in company management with JJ Byrnes taking over the key role. Byrnes made some drastic changes, cancelling high-risk policies, laying off staff, and moving the headquarters. Through Katherine Graham, of the Washington Post, Buffett arranged to meet with Byrnes and was apparently impressed enough to buy (via Berkshire Hathaway) 500,000 shares in the company with a standing order to buy more.
The company started to improve, managing to offload much of its reinsurance risk. Salomon Brothers came to the party with an underwritten preferred stock issue (of which Berkshire took 25 per cent) and Buffett interceded with the insurance regulators to ensure that GEICO kept its licenses.
Six months later, shares had risen to $8. Warren Buffett made 300% on this deal, in just a few months.
The same strategy of buying shares in companies that are temporarily struggling, but with sound core businesses, is paying off for me in 2014. Two of my biggest holdings this year, JC Penny (JCP) and Ecopetrol (EC), were up more than 18% in March, bringing my total portfolio up 5.94% for the month.
Summary Portfolio Performance
Since inception (01/19/12), the model is up 46%, versus the S&P 500 50.2%. The return of the S&P 500 in March 2014 was 0.69%, compared with 5.94% for my Dividend Paying Large Caps portfolio. Year to date my portfolio is up 4.87% compared with 1.3% of the S&P 500.
Acquisitions in March 2014
In March 2014, I didn’t add any new position to my portfolio, but I increased two of my current holdings: JC Penny (JCP) and Ecopetrol (EC). As it turns out, these holding increased by more than 18% in March alone, contributing to a stellar performance of my portfolio with +5.25% more than the S&P 500. Only two positions in my portfolio went down: Aflac (AFL) -1.6% and American Express (AXP) -1.4%. Both positions were up in February, and I’m not concern about the small decrease in March. Both Aflac (AFL) and American Express (AXP) are still fantastic companies with bright futures and they are still very reasonably priced.
In April, I don’t anticipate selling any of my current positions. I will only sell if I find another opportunity I believe is better than what I currently have. The positions that I am monitoring closely are JP Morgan (JPM) and Intel (INTC). JP Morgan (JPM) has the lowest price/book value ratio in my portfolio, and is still paying good dividends, so for now it is a keeper. Intel (INTL) is also paying great dividends, PE ratio is low at 13.77, and debt to equity is also the second lowest in my portfolio after Apple (AAPL). So I will continue with this one as well.
In summary this quarter, and more specifically this month, was great for my portfolio. My strong portfolio is now prepared in the event that the stock market goes south in 2014. Something that may happen the minute the Fed relaxes its monetary policies. I plan to keep a close eye on that of course and make any adjustments to my course as necessary.