Nick's February Portfolio Update

February portfolio update: I posted strong outperformance during volatile times and sured up the quality of my holdings.

Sorry that I’m running a little late with my portfolio’s February update. One of those bomb cyclones (I’m no longer keeping track of names) knocked out my power for four days and as soon as Dominion (D) restored my electricity, March Madness began and I was locked into the ACC basketball tournament. Well, I’m proud to say that not only did my Virginia Cavaliers win the ACC regular season title, but the tournament title as well. Now, we’re heading into NCAA’s, but today I received terrible news that one of my favorite players, De’Andre Hunter, broke his wrist during the conference tournament and will not be participating in the NCAA tournament and I decided to bury my head into some work to forget about the sickness I was feeling in my stomach due to the disappointment. So, without further adieu, let’s get into the February action for awhile so I can forget about my non-market related troubles in March.

As I’m sure that many of you know, February was an amazingly volatile month. The market experienced one of the quickest double digit downslides of all time. Thankfully, the indexes recovered a bit towards the end of the month. From February 1st to February 28th, the S&P 500 fell 3.89% and the Dow Jones Industrial Index fell 4.28%. My portfolio was down during this period of time as well, but only 2.67%.

As I stated in my January portfolio review, I slightly underperformed the market during January, which was one of the strongest starts to a year that we’ve seen in recent memory. The major averages were up well ~5.5% while my portfolio returned ~5.1%. I wasn’t necessarily thrilled about this 0.40% relative underperformance, but I also knew the year was still young and -40 bps in January didn’t put my goal of outperforming the S&P 500 for the year in jeopardy.

What’s more, when putting my portfolio together, my relatively conservative equity selection process that focuses on fundamentals, cash flows, sustainable dividends, and attractive/fair valuations wasn’t about outperforming during strong bull markets, but instead, posting relatively out performance when the bears rear their ugly heads. In a perfect world, I’d love to have my cake and eat it too. I’ve been fortunate enough to do this over the past 5 years or so, beating the market over that period of time, but it’s worth mentioning that a large percentage of that relative alpha to the S&P 500 came from 2015, when my portfolio posted gains north of 7% while the S&P was essentially flat. My feeling is this: it’s relatively easy to do well in a bull market, everyone invested in the stock market should be making money; however, bear markets are when fortunes are gained or lost and that is what I want to be most prepared for.

Fortunately for us all, I haven’t had much bear market experience since I began managing my money in 2012. I’ve been operating in a secular bull market and my personal net worth is significantly higher now than it was back then because of my equity holdings. You’ll never hear me complain about that. But, February of 2018 was the most violent negative volatility that I have ever faced and I was very pleased to see that my portfolio posted significant out performance during those trying times. The 1.2% outperformance I posted in February more than canceled out my relative underperformance during the high flying January and I couldn’t be happier with my YTD performance thus far.

All happiness aside, February’s volatility did signal a change in market sentiment to me and my response has been a higher than normal volume of trades. Dip buyers have come back into the market, but not as strongly as they have in the recent past. I think this sell-off represents a crack in the secular bull theme we’ve all witnessed and with the spread in the 2’s and 10’s narrowing, I’m becoming ever more cautious, fearing a looming recession. Because of this, I’ve been working on rebalancing my portfolio, focusing on strength via secular growth stories, attractive valuations, and low debt loads.

February Trades:

On 2/2, I liquidated my entire J.M. Smucker (SJM) position at $124.22, locking in ~34% gains, and continuing my trend of reducing exposure to slow growth consumer staples names. SJM pays a very reliable dividend, but the yield is relatively low at ~2.4%. Also, many of SJM’s major products or even product segments are facing secular headwinds, in my opinion, and I see much better growth prospects elsewhere.

During volatile times, I found myself moving to the extremes on either end of the growth/yield spectrum. I suspected that the greatest long-term growth prospects and the highest reliable yields would bolster stocks, on a relative basis, as weak handed investors ran for the hills. With this is mind, I immediately used the proceeds from that trade to initiate exposure to Realty Income (O) at $51.09. O has been beaten down due to fears of rising interest rates and was trading near 52-week lows with a yield that above the 5% threshold that I’d been waiting for ever since selling my O shares back in 2016 at $69/share. O has a bit of a cult following because of its amazing monthly dividend and my sale back in 2016 wasn’t a popular one amongst my readers. However, that sale was at $69 dollars and I’m very happy to have bought back shares ~37% lower.

Several days later, on 2/5, I added to another beaten down REIT, Gramercy Property Trust (GPT) at $24.01. O is a retail focused triple net play and GPT gives me nice real estate diversification into the industrial space. GPT’s buildings are some of the largest and newest warehouses in the publically traded industry. The company doesn’t have much of a dividend growth history, but I believe the ~6.5% yield is safe. I don’t see the U.S. 10-year rising much above 3.5% anytime in the near future, meaning that I thought GPT had been irrationally punished by the market (the spread between its dividend and the upper end of the treasury expectations was too wide to justify 52-week lows).

On 2/5 I also added to my largest holding, Apple (AAPL), at $157.00. Apple is an easy company for me to buy on weakness. Shares were down ~13% from their recent highs at $157 and with a big capital return announcement coming in April, I had a feeling that these shares would outperform in 2018, regardless of the market conditions.

On 2/6, I continued my consumer staples sale, liquidating stakes in Hershey (HSY) and Nestle (NSRGY), at $100.03 and $82.43, respectively. These sales resulted in gains of ~17% on Hershey and ~14% on Nestle.

A few days later, on 2/8, during some of the worst weakness of the month, I trimmed my overweight Bristol-Myers Squibb (BMY) position at $63.33 and $62.69. These two sales ended a BMY trade that I put on throughout 2016/2017 as I accumulated BMY shares on Opdivo related weakness. I wrote an article about this move specifically, here’s the link. At the time that I sold BMY, the market was down more than 10% and Bristol shares were down less than half of that. I decided to take advantage of BMY’s relative strength to take profits (I sold one lot of shares for a ~13% profit and another for a ~27% profit). At this time, I had no idea how quickly the market would rebound and I was looking to raise funds from trades/speculative investments to add to a handful of very high quality names that were nearing my price targets.

On 2/21 I sold out of my stake in Omega Healthcare Investors (OHI) at 26.24 on news that they wouldn’t be increasing their dividend for the foreseeable future. I dividend freeze is typically a sell signal within my portfolio (a frozen dividend isn’t contributing to my passive income streams organic growth and they sometimes have a nasty habit of turning into dividend cuts; at the end of the day, it’s easier to just avoid these situations). I sold OHI for a ~7.6% loss, though I held these shares for more than 4 years and because of the company’s high yield, my total return on the investment was over 17%. This still underperformed the market over this same period of time; however, I’m happy to have made money with OHI along the way.

I immediately put the proceeds from my OHI sale into another beaten down, income oriented stock: Altria (MO). I sold approximately half of my MO shares last year when they experienced volatility surrounding possible nicotine regulations. I sold those shares for $66.58, locking in a 7.8% gain at the time and ever since I’ve been watching MO, waiting for a chance to get back in at a better valuation. For months, I’d been waiting for the stock to hit $60; however, tax reform certainly helps MO much more so than many other companies I follow due to the fact that MO is focused on domestic markets, so that change, combined with the company’s unexpectedly high dividend increases since my sale, was enough for me to push my position back towards a full weighting. I bought MO at $64.60, and while I still have regulation concerns, tax reform changes the EPS picture looking forward and I believe that MO is now trading in a fair value range once again.

The next day, on 2/23, I was disappointed to learn that another one of my holdings in the REIT space was also freezing its dividend. Hannon Armstrong Sustainable Infrastructure Capital (HASI) was a company that I enjoyed owning and had been accumulating via monthly selective re-investment over the past couple of years; however, when management paused its dividend growth plans, I had to look elsewhere for potential investments in the sustainable infrastructure space. I made ~7% on this trade, which was somewhat disappointing considering the fact that it wasn’t long ago that I was up more than 20%; however, I try to stay disciplined as a rules based investor and I know that dividend freezes/cuts are oftentimes signals of more trouble issues for a company.

I spent that evening looking for a suitable replacement for HASI and I ended up settling on W.P. Carey (WPC), a diversified REIT with a similar yield to HASI’s so that I didn’t disrupt my portfolio’s cash flow too much with my recent sales. WPC is now my largest individual REIT holding. WPC owns property that spans a wide variety of industries. It’s property portfolio is also diversified internationally, which differentiates it from my other REIT holdings as well. WPC has a much longer dividend growth history than HASI and at the end of the day, I view it as a much stronger holding in the income oriented space and moving forward in a rising rate environment, I think we’re going to see the cream rise to the top in terms of the performance of rate sensitive names.

So, there you have it; those are the trades I made in the month of February. As I said before, my portfolio produced negative total returns, but much less so than the broader market indexes. What’s more, while I was sitting in my chair, watching wild market swings throughout the month, I maintained a sense of solace due to the fact that I knew I had my income stream to fall back on should the negative volatility continue.

In February, my dividend income stream posted 24.75% y/y growth. February’s dividend income was 4.71% higher than January’s total. I increased my cash position during the month but due to several dividend increases my 2018 expected income remains significantly higher than 2017’s. A handful of my holdings have already announced dividend increases that were well above my expectations and I wouldn’t be surprised if this trend continued throughout the year as corporate c-suites continue to use extra cash from the recent tax cuts to generously reward their shareholders.

No. 1-2
Nicholas Ward
Nicholas Ward


Paul, thanks for the comment. People have always seemed to enjoy these types of portfolio updates so my plan moving forward is to continue to update readers with a wide lens like this on a monthly basis (oftentimes, individual trades are covered in their own articles in a more time sensitive manner).


Thanks for the recap! Insightful stuff.