Nick's Portfolio Tournament First Round Results
Alright basketball fans and portfolio managers, here we have it: the first round results of the 2018 Nick’s Portfolio Tournament. For those of you who missed it, I said out the selection committee's decision in this introductory piece a week ago. First of all, let me preface this piece by saying that this was a bit of a marathon type-fest, so I ask that you please forgive any typos ahead of time. Secondly, I want to re-hash the competition criteria. When looking at these match ups I did my best to ignore the seeding so that I remained objective when choosing which of the two companies I would be (if forced to) with fresh cash in today’s market. As a younger investor, I maintained my long-term mindset when thinking about the purchase decisions, though I used the same income oriented, value based mindset that I would any other time. There were close calls and a handful of upsets. I’ll be working on round two this week. Let me know what you think!
1 seeds vs 16 seeds
I am terribly saddened to say that my Virginia Cavaliers just made history, becoming the first ever one seed to lose to a sixteen seed. Will that happen in this bracket challenge as well? Spoiler alert: no!
AAPL vs. EZU
Apple’s shareholder returns are unparalleled, the company’s user base is bigger than ever, and management is leveraging this hardware base into service related sales which have high margins and reduce the cyclicality of the iPhone upgrade cycle. Europe, on the other hand, is lacking major technological names. I’ve actually sold EZU since creating this portfolio challenge a little more than a week ago. Obviously, the 1 seed advances.
T vs. IBM
To me, both of these companies are income plays. T’s yield is significantly higher, though IBM likely offers better dividend growth profits. T has a ton of Debt while IBM has had growth issues for years now. I’m especially bullish on T because of the Time Warner deal, should that eventually be approved. Neither company is perfect, that’s for sure; however, I’d buy T ahead of IBM any day of the week when it’s yielding ~1.5% more.
DIS vs EXPE
The fact that Disney is my second largest holding and I recently liquidated my Expedia stake should make this one clear. Disney faces tough competition from the likes of Netflix, Amazon, Alphabet, and other big tech names looking to get into the content production/distribution space; however, I still believe the Mouse House is the king of content. Disney has been a major under performer for a couple of years now due to cord cutting concerns; however, I think the depressed valuation (relative to DIS’s long-term historical norm) has been irrationally overblown. Expedia faces somewhat similar competition as Disney, with fears that one of the big tech names could get into the booking space and take a significant share of their business. My one fear of selling my EXPE shares is that the company would be an acquisition target and I would miss out on the big M&A premium, though buying/holding shares because of M&A speculation isn’t a sound way to manage a portfolio. Expedia is an speculative, up and coming DGI play, but Disney is an established blue chip and when forced to choose between the two, I think the choice is clear.
GOOGL vs XLK
This was actually a pretty interesting match up. Alphabet versus the technology sector as a whole. The XLK is actually a pretty successful DGI vehicle, so wins in the shareholder return category. However, Alphabet is one of the cheapest growth plays in the market, has boat loads of cash to use in R&D and/or M&A post tax reform, and has its hands in so many attractive cookie jars (high margin digital ads, search, maps, social media, streaming content, cloud, AI, and autonomy, just t name a few). Alphabet is essentially a diversified technology holding company, making these two competitors somewhat similar. I like XLK a lot, but Alphabet is my favorite tech growth play and because I think the cream always rises to the top (eventually), I’ll stick with my guns when it comes to Alphabet outperforming the broader technology sector over the long-term.
8 seeds versus 9 seeds
Eight versus nine match ups are typically toss ups in the NCAA tournament. This appears to be the case in my portfolio bracket challenge as well. While this doesn’t make my selection process any easier, it does make me feel good about my portfolio weightings (apparently, I haven’t unjustly over/under weighted individual holdings).
JPM vs. XLF
For the sake of expediency, all I’ll say here is that I used the same logic that pertained to the GOOGL over XLK decision in the 1/16 game. JPM is my favorite big bank (and one of the largest positions within the XLF) and while I also really like Berkshire (which is the largest position in the XLF at ~10% of the index fund) I’ll stick to the best in breed company rather than siding with the index for diversification purposes.
C vs BLK
It’s interesting that the 8/9 line had another all financial match up. Granted, Citibank and Blackrock are very different companies even though they share a sector. I liked Citi as an undervalued big bank play a year or so ago when its price/book value was so low; however, the stock as risen so much since then that the strong value is no longer there, in my opinion. I don’t think BLK is particularly cheap either, but I think it has stronger long-term tailwinds behind it (passive investing is here to stay), a slightly higher yield, and better long-term dividend growth prospects (though I wouldn’t be surprised to see C’s capital returns be greater in the short-term as regulations are removed from the banking sector). This was a close call, but as a long-term investor, the choice between the two is BLK.
TCEHY vs BX
This was the easiest 8/9 match up for me to pick. I like holding BX as a high yield, contrarian play on the markets (I suspect BX management will be able to capitalize on a weak economy with their massive cash pile); however, Tencent is one of the largest, fastest growing technology names in the world and it’s the winner hands down. I’ve been slowly building exposure to the big Chinese tech names and I’d like for that trend to continue. My BX position is full and my TCEHY position is not. Exposure to the Chinese market comes with outsized risks; however, the growth potential of Tencent, which is essentially a massive holding company in the high growth tech space, is definitely worth it for the potential rewards (in my opinion, at least).
WPC vs MRK
This is an interesting match up of two beaten down, high quality, high yield names. Merck is the last healthcare name that I bought back in late October and WPC is the most recent REIT that I purchased, just a few weeks back. Both companies are still hovering near 52-week lows. I like Merck’s oncology portfolio and I’m happy to own shares, though at the end of the day, WPC’s ~6.5% yield is simply too juicy to pass up. The yield appears to be safe. I suspect that it will continue to grow in the 3-4% range annually. With this in mind, I like the total return prospects from WPC moving forward.
5 seeds versus 12 seeds
And now we come to the dreaded five/twelve match up (dreaded, if you’re a 5 seed that is). Every year it seems like a couple of twelves advance. Twelve seeds are oftentimes conference champions from smaller conferences; they may not have the same levels of talent as their five seed match ups, but they’re winners with momentum on their side. In today’s age of one and done prospects, twelve seeds are oftentimes senior laden, allowing them do deal with drama well, staying cool and rational when lessor teams might crack under the pressure. The five/twelve lines in my bracket makes for some interested match ups. Will see see any Cinderella twelves making a deep run?
AVGO vs. UL
Broadcom has been all over the news recently with its failed bid to acquire Qualcomm. I liked the idea of a potential merger there; however, I don’t think AVGO needed the deal (I also wouldn’t be surprised to see them begin shopping around for another, albeit lessor deal, once they re-domicile). AVGO just reported a strong quarter and I really like their cash flows moving forward. Sure, R&D/future growth always comes into play when you’re looking at the Hock Tan operational model; but compared to Unilever, which is a best in breed company, I think AVGO’s total return and dividend growth potential outweighs the defensive nature of UL shares.
NKE vs. UTX
Technically, BLK over C was an upset, but as I said before, the 8/9 match ups are essentially tie ups. I’m picking United Technologies over Nike, for the first real up set of this tournament. I really like both companies. Nike is the best in breed company in the appareal space and United Technologies is right up there alongside Honeywell and the defense majors in the industrial space, in my opinion. UTX’s dividend yield is higher than NKE’s, though I think NKE has better long-term top-line and dividend growth prospects. To me, NKE is a potential core holding while UTX remains a solid ancillary DGI play. With that said, the relative valuation in the present makes UTX the buy over NKE. NKE is currently trading for ~28x 2018 EPS expectations and UTX is trading for ~18x 2018 EPS expectations. As a value investor, I can’t ignore this gap. NKE doesn’t have the growth prospects to make up for it and therefore, UTX is the upset winner.
CMCSA vs STORE
This game wasn’t much of a contest, in my opinion. I think STOR is a fine REIT to hold; however, it doesn’t hold a candle to Comcast, in terms of overall quality and dividend growth prospects. Sure, STOR’s yield is much higher, but because of my long-term horizon, I suspect that a few decades down the road, my yield on cost would be much higher with an investment in CMCSA today, as opposed to one is STOR. I do worry a bit about a reversal of the NBC Universal deal that makes Comcast so attractive to me (I love the fact that CMCSA has pipes, content, and entertainment assets all under one corporate umbrella). There’s a lot of consolidation going on in the entertainment space at the moment and these rulings could chance my long-term bullish sentiment regarding CMCSA, but for the time being, it’s an easy winner over Store Capital.
QCOM vs. PEP
In the QCOM/PEP match up we come to the second 5/12 upset in this bracket. QCOM is a high quality company that pays a hefty dividend yield, but until it ends its dispute with Apple and returns to strong top-line growth, I have no desire to add shares. I’ll happy collect the ~3.75 yield while I wait for growth to return, but in the present, Pepsico is the clear buy. I think PEP is currently trading a bit above fair value (in a recent piece over at Seeking Alpha I said that my current price target for PEP is in the $100 area), but I still like the company’s product portfolio, marketing strategy, and dividend growth prospects within the consumer staples space and because of this, PEP gets the win over QCOM, who is limping into the tournament with injuries and late season losses via the AVGO deal falling through and ongoing disputes with major technology players.
4 seeds versus 13 seeds
Twelves beat fives on a regular basis, but thirteens don’t often beat fours. However, in this year’s NCAA tournament there were two 13/4 upsets. Will there be a huge upset in my bracket? Let’s find out!
JNJ vs. BAC
Honestly, this game would have been a much closer call if JNJ hadn’t sold off recently. At ~$140, I thought JNJ was overvalued and BAC might have pulled off the upset. However, at ~$125 JNJ is trading back down near fair value, which makes it a great long-term buy and hold. I like BAC in a rising rate environment, though I view many of the financials as late cycle trades as opposed to long-term investments and with this is mind, I’ll be siding with JNJ in this 4/13 match up.
MA vs. DLR
I didn’t go with the financial play in the previous game, but in this match up, MA will be getting the victory over DLR. MasterCard is a long-term investment play, in my opinion. The fin-tech companies have strong secular tailwinds behind them (although, I acknowledge the disruptive potential for crypto-currencies) and don’t rely as much on interest rates. Digital Realty not only faces interest rate pressures, but also technological disruption (which is why I sold half of my position last September at at ~$120). DLR’s weakness since my sale makes it an interesting lower seed, but with rates expected to rise I’d like to see the shares yield a bit more before buying again, which is why I’m siding with the high growth MA in the first round, even though it’s trading with a massive premium.
CSCO vs VTR
When it comes to reliable dividends in the ~3% range, I don’t think it gets much better than CSCO right now. CSCO recently returned to growth and post tax reform, the company is in the process of returning billions to shareholders in the form of its dividend & buyback. VTR is an interesting contrarian play, trading near 52-week lows and with a yield that investors haven’t seen in years; however, I’m not interested in adding exposure to the healthcare REIT space because of uncertainty regarding healthcare related legislation. I’m content to hold my VTR shares and collect the hefty dividend, but I’m not interested in adding at this time. Because of this, CSCO got an easy victory in its opening match up.
BRK.B vs DEO
This was an unfortunate first round match up for Diageo, which is a best in breed company that I love owning, but it has little hope of defeating the perineal powerhouse that is Berkshire Hathaway. Diageo is actually the type of company that I could imagine Buffett taking a large stake in. However, as much as I like Diageo and the alcohol industry as a whole, I had to go with Berkshire, which is one of my largest non-dividend paying holdings, because of its diversified nature and strong cash flows. This is my favorite defensive holding, making it an attractive asset in what I believe to be the final innings of the current bull market.
3 seeds versus 14 seeds
This line is similar to the four/thirteen line above it. Fourteens rarely beat three’s, but it happens. These are true David versus Goliath match ups. I won’t even string you along: the three/fourteen lines are chalk in my bracket.
FB vs. NNN
I’m not going to lie, at this point in time, my fingers are getting tired so I’m not going to go on and on about these 3/14 match ups. Facebook is one of the cheapest growth companies in the market and although it faces issues regarding the potential for regulatory oversight, it still wins big against NNN. NNN is a high quality REIT with an attractive yield, but it simply can’t stack up against FB’s PEG ratio.
MSFT vs. GPT
Here we have another formidable technology name facing off against a REIT. GPT is in the industrial space, rather than the retail space like NNN, but that doesn’t change the fact that it simply doesn’t have the growth firepower to match up with a company like Microsoft. MSFT is one of my favorite dividend growth names in today’s market and although it trades at a historically high premium, it wins this match up against GPT going away.
AMZN vs. VZ
The growth triumphing over yield play narrative continues in this 3/14 match up between Amazon and Verizon. Amazon’s valuation hasn’t made sense for years and years now, but this company has the best CEO in the business and a growth runway whose length in matched by very few companies worldwide.
V vs. BUD
BUD’s last quarter was impressive, but there aren’t very many growth stocks that can go head to head with Visa. What’s more, V has proven itself to be incredibly generous to shareholders since its IPO. It’s rare to find a growth name with such high shareholder returns; this unique combination makes Visa a title contender within my bracket. BUD is a high quality globalized consumer staples company, but it simply can’t compete with the likes of V.
6 seeds versus 11 seeds
This is a line ripe for an upset. Ask the Miami Hurricanes how that Loyola Ramblers buzzer beater felt last night. Being an ACC guy I was pulling for the Canes, but you have to love the little guys getting a tourney win (and who doesn’t love Sister Jean?). The Ramblers could become this year’s tournament darling. Will an eleven seed steal the hearts of America in my broker challenge?
PFE vs. BIP
I wrote an article in early march over at Seeking Alpha outlining my recent purchase of BIP shares. This is a very interesting partnership that owns a wide variety of global infrastructure assets with high cash flows (that lead to large shareholder returns). BIP’s management team has strong value oriented principles and targets double digit returns from its acquisitions. Pfizer has a strong yield and offers dividend growth well above the expected inflation rate but in due to its size and maturity, Pfizer is likely to produce slow (and hopefully steady) growth/annual returns. I think Pfizer is a fine holding for DGI investors, but BIP’s upside potential forced me to pick it as an upset winner.
INTC vs. MDT
While investors may not be as familiar with Medtronic as they are with Intel, MDT is likely the better income oriented holding here. However, income isn’t my soul purpose when making investment decision and I think INTC is a great late cycle holding. INTC also pays a solid dividend and while its dividend growth history doesn’t quite match up with MDT’s, I chose INTC as the winner here because I like the long-term tailwinds behind semiconductors more so than I do the medical device space, in general.
KO vs. GILD
This was a really close call for me. I think Coca-Cola is a high quality holding, though I acknowledge the headwinds that many of its major brands face (the health foods trend). Because of slow volume growth, KO has faced top-line growth issues that have trickled down to the rest of the balance sheet and the dividend growth. KO has increased its annual dividend for 56 consecutive years, but I fear its best growth is behind it. Gilead, on the other hand, has the flexibility to re-invest itself constantly with science and technology. GILD’s dividend yield is not quite as high as Coca-Cola’s is; however, I think GILD has the potential for better dividend growth moving forward. What’s more, GILD is much cheaper than KO on a price to earnings basis. GILD’s more attractive valuation combined with better dividend growth potential made it an upset winner here.
FDX vs. BEP
I bought BEP recently when I bought BIP, but I didn’t pick BEP as a winner here because while its yield is higher than BIP’s (and FDX’s, for that matter), it is more speculative. I think that sustainable energy is an attractive industry to invest in, but the same thing goes for logistics. FedEx has strong, long-term tailwinds behind it and although the stock is trading at a premium right now, tax reform is expected to massive bolster its 2018 EPS figure which could make the stock seem cheap on a PEG basis if it comes to fruition. Both companies appear to be dedicated towards their dividends and dividend growth, though I think FDX has better growth prospects long-term, which is what makes it the winner here.
7 seeds versus the 10 seeds
Like the eight/nine match ups, the seven/ten lines are basically toss ups. These are oftentimes close games that go down to the wire.
UPS vs. JD
With that said, the UPS vs. JD.com wasn’t a close one for me. UPS has the same tailwinds as FedEx behind it; however, I think FedEx is a much better operator. UPS has union exposure to deal with and while its dividend yield is larger than FedEx’s (and JD, which doesn’t pay a dividend at all), I don’t think it has quite the same dividend growth potential due to a higher payout ratio and fewer growth opportunities. Speaking of growth, JD is one of the best international growth stories out there. It’s one of the largest eCommerce plays in China (whose market is much larger than the United State’s). I missed out of my opportunity to invest in Amazon when its market cap was only ~$50b and although I admit that JD represents a speculative investment at this time, I’m not going to miss out on a chance to potentially reap similar rewards with JD. These growth prospects make JD potential Cinderella story as an eleven seed.
BABA vs. HON
HON fans were probably terrible upset when they saw the selection committee’s original seeds because it seems clear to me that BABA is under seeded. It’s really a shame, because I actually just made a move within my portfolio (trimming SBUX to raise funds to increase my HON exposure because of my strong bullish sentiment on this name). I think HON is a wonderful dividend growth opportunity and benefits from several strong headwinds we’re seeing economically and politically at the moment. However, the growth potential of BABA is undeniable and although its Chinese roots make it somewhat speculative (potential accounting/transparency issues, communist government oversight issues, etc), I couldn’t overlook them in a head to head match up.
NVO vs. BMY
I was interested to see this healthcare vs healthcare match up in the first round. I think both of these companies are high quality. Novo Nordisk dominates the diabetes space, which is a disease that seems likely to continue to grow and more and more of the world’s population consumes unhealthy foods and lacks exercise. Bristol-Myers has one of the world’s leading oncology portfolios and as unfortunate as it is, cancer doesn’t seem to be heading anywhere anytime soon. From an operational standpoint, I view both names in a similar light; however, from a dividend growth standpoint NVO takes the cake, which is why it is my winner in this match up.
MO vs. MMM
This is surely a heavyweight match up in the first round. We’re talking about a couple of DGI blue bloods duking it out. Out of the two, I think MMM has the better long-term growth potential due to falling cigarette volumes. MO has several options at hand to potentially diversify its product portfolio which would change this narrative. However, this pick wasn’t about growth, but instead, overvaluation. I don’t think either stock is cheap, but MMM is trading at a valuation that investors haven’t seen in years. Even on a forward basis, accounting for tax benefits, MMM is trading for ~23x 2018 EPS expectations. MO, on the other hand, is trading in the ~16x range when it comes to forward looking EPS estimates, and this cheaper valuation, alongside MO’s ~$4% yield, as opposed to MMM’s ~2.3% yield, allowed Altria to advance to the next round.
2 Seeds versus 15 Seeds
There weren’t any 2/15 upsets in this year’s NCAA tournament. Every now and then you’ll see one. My brother played football at Lehigh University and I remember a few years back when CJ McCollum lead them to a fifteen seed victory against the powerhouse Duke Blue Devils. There are some interesting match ups in this set of match ups and if I were scoring them, a couple would have been very close calls. But, at the end of the day, I went chalk, mainly because of long-term growth prospects.
AMGN vs. IEUR
The Amgen vs. iShares Core MSCI Europe ETF wasn’t one of the close match ups. Since creating this bracket, I’ve actually sold out of my European ETF exposure. There simply isn’t enough growth in Europe on the individual company level. There are mature healthcare names, oil majors, and globalized consumer staples plays, but there is little growth tech to speak of. I was happy to take profits on IEUR and move on. AMGN remains my largest individual healthcare name and I look forward to my future with this company that offers a unique combination of growth potential and generous shareholder returns. AMGN is one of the best performing stocks in the market over the last couple of decades and I wouldn’t be surprised to see this trend continue. It’s the clear winner in round one.
SBUX vs. MS
I recently trimmed my SBUX position to add to HON, but that doesn’t mean I’m not bullish on SBUX. Even after the trade, SBUX is my 7th largest position. I think this company has a bright future ahead of it, though I am concerned about valuation in the present. Morgan Stanley is a high quality company as well, though I view the big banks as more of a trade than a long-term core position. I wouldn’t be surprised if MS out performs SBUX in the short term, with regard to both capital appreciation and dividend growth, but over the medium to long-term, I’ll pick SBUX any day of the week. SBUX is the winner.
NVDA vs. O
Realty Income is a wonderful dividend growth stock, without a doubt. It has paid a monthly dividend for 571 consecutive months. The stock has given investors an average annual total return of 16.3% since its IPO in 1994. This is tremendous performance and I’m sure there are many investors who’re wealthy now because of O’s compounding. However, retail (and society as a whole) are changing and I think NVIDIA is going to be one of the most disruptive companies as we move forward into the future. It’s a leader in the AI chip space. Its CUDA software is widely used by AI developers and it may well end up being the go-to system for programmers. It’s yield is minuscule compared to O’s, but NVDA’s growth potential dwarfs O’s, which is why it is the winner here in round one.
BA vs. MTN
And last, but not least, we come to the match up of Boeing and Vail Resorts. I really like both of these companies…however, I like one a lot more than the other. Boeing is a core holding for me. I’m a big believer in the long-term tailwinds behind the aerospace industry. Vail is one of my favorite consumer discretionary names, but it’s not a core holding. Like MTN, BA is cyclical, though its products and services are much more necessary to the inner workings of global systems. Demand for air travel and freight is likely going to increase for decades. What’s more, if space becomes the next profitable frontier for corporations, I’m sure that BA will be a leader in that expansion as well. Needless to say, Boeing advances.
Disclosure: I am long every company discussed except for EZU, IEUR, and EXPE.