This article gives a review of the 2020 second-quarter earnings and 2020 YTD performance of The Good Business Portfolio (My IRA portfolio). So far, this year is an interesting year with the Virus correction taking the market for a wide ride down before recovering strongly and being roughly even for the year. Boeing (BA) was the portfolio’s largest position had a big dip because of the pandemic compounding the 737 Max problem. Earnings data for some of the top positions in the portfolio and recent changes to the portfolio are included in the earnings section.

Guidelines (Company selection)

The Good Business Portfolio guidelines are used to create a portfolio that is a large-cap balanced portfolio between the different styles of investing. Income investors take too much risk to get their high yields. Bottom-fishing investors get catfish. Value investors have to have the foresight to see the future. Over many years, I have codified 11 guidelines for company selection. These are guidelines and are not rules. For a complete set of guidelines, please see my article,“The Good Business Portfolio: Update to Guidelines, March 2020”. They are meant to be used as filters to get to a few companies on which further analysis is done before adding them to the portfolio. So it’s all right to break a guideline if the other guidelines indicate a Good Company Business. I’m sure this eliminates some really good companies, but it gets me a shortlist to review. There are too many companies to even look at 10% of them.

You see from the portfolio below that I want a defensive portfolio that provides income and does not take significant risks. I limit the portfolio to 25 companies, as more than this is almost impossible to follow. I have 23 companies in the portfolio, so the portfolio has two open slots.

Portfolio Performance

The performance of the portfolio created by the guidelines has, in most years, beat the Dow average for over 28 years, giving me steady retirement income and growth. The table below shows the portfolio performance for 2012 through 2019 and 2020 YTD. The chart data is after the close on August 14.

Year

DOW Gain/Loss

Good Business

Beat Difference

Portfolio

2,012

8.70%

16.92%

8.22%

2,013

27.00%

39.70%

12.70%

2,014

6.04%

8.67%

2.63%

2,015

-2.29%

5.68%

7.97%

2,016

13.38%

8.68%

-4.70%

2,017

25.10%

21.28%

-3.82%

2,018

-5.63%

-4.33%

1.30%

2,019

22.33%

24.19%

1.86%

2020 YTD

-2.12%

-2.42%

-0.29%

In a great year like 2013, the portfolio did fantastically. In a normal year like 2014, it beat the Dow by a fair amount. So far this year, the portfolio is behind the Dow by 0.29% total return below the Dow average loss of 2.12%, for a total portfolio loss of -2.42% which is not great, but with many months to go in the year Boeing and General Electric may begin to recover yet when the 737 Max is flying again to get an increase in earnings. The present volatility because of the Covid-19 virus may slow down as we get close to a remedy and vaccine. T he other good business companies are doing well, beating company earnings estimates with JNJ and HD leading the pack. Fundamentals will continue to shine this year and for years to come for the portfolio of good businesses.

Companies in the Portfolio

The 23 companies and their percentage in the portfolio and total return over a 56-month test (starting January 1, 2016, to 2020 YTD) period are shown in the table below. This time frame was chosen since it included the great year of 2017 and 2019 with other years that had a fair and bad performance. The Dow baseline for this period is 55.64%, and 17 of the positions easily beat that baseline. There are six companies that did not beat the Dow baseline missing by 10% but are still great businesses and will come back as the United States economy restarts. Only one of the six companies that underperformed lost money over my test period. I limit the portfolio to 25 companies and generally let the winners grow until they reach 8%-9% of the portfolio, and then I trim the position. The three companies in trim position are Home Depot (HD) at 11.95% of the portfolio, Eaton Vance Enhanced Equity Income Fund II (EOS) at 9.11% of the portfolio, and Johnson & Johnson at 8.74% of the portfolio. Therefore EOS, JNJ, and Home Depot are now in trim position, but I am letting them run a bit since they are great companies and defensive in this correction environment. I start the companies at a base percentage of the portfolio of close to 1% and add to the position if they perform well during the next six months. At 4% of the portfolio, I stop buying and let the company percentage of the portfolio grow until it hits 8%, then it’s time to consider trimming the position.

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Company

Total Return

Difference

Percentage of Portfolio

Cumulative Total

56 Months

From Baseline

Percentage of Portfolio

Home Depot (HD)

131.54%

75.91%

11.95%

11.95%

Eaton Vance Enhanced Equity Income Fund II (EOS)

81.60%

25.96%

9.11%

21.06%

Johnson & Johnson (JNJ)

63.80%

8.16%

8.74%

29.80%

Omega Health Inv. (OHI)

20.31%

-35.33%

7.07%

36.87%

Walt Disney (DIS)

46.10%

-9.54%

7.38%

44.25%

Texas Instrument (TXN)

180.69%

125.05%

6.87%

51.12%

Mc Donald’s Corp. (MCD)

97.22%

41.59%

6.82%

57.94%

Boeing (BA)

63.72%

8.08%

6.52%

64.46%

Automatic Data Processing (ADP)

97.50%

41.86%

5.74%

70.20%

Ingersoll-Rand plc (IR)

139.40%

83.76%

5.43%

75.64%

Digital Realty Trust (DLR)

123.53%

67.89%

5.00%

80.64%

Philip Morris INTL INC. (PM)

12.00%

-43.64%

4.25%

84.88%

Altria Group Inc. (MO)

2.29%

-53.35%

4.18%

89.06%

Trane (TT)

50.48%

-5.16%

1.60%

90.66%

Simulation Plus (SLP) *

547.53%

491.89%

1.60%

92.26%

Danaher Corp. (DHR)

205.99%

150.35%

1.34%

93.60%

Freeport McMorran (FCX)

123.25%

67.62%

1.38%

94.98%

American Tower (AMT)

185.12%

129.48%

1.09%

96.07%

Realty Investors (O)

42.30%

-13.34%

0.65%

96.72%

Lockheed Martin (LMT)

102.57%

46.93%

0.85%

97.57%

General Electric (GE)

-76.87%

-132.51%

1.03%

99.60%

Visa (V)

166.45%

110.81%

0.43%

99.03%

PepsiCo Co. (PEP)

59.25%

3.61%

0.65%

99.68%

The graphic below shows the Dow average/100 for the past five years, a fair chart with nice gains as the United States economy is growing again with better-increasing growth to come when the Covid Virus is controlled.

Chart

The above is the full list of my 23 Good Business positions. I have written individual articles on all of these businesses, please see my full list of articles if you are interested.

Earnings and Company Comments

For the second-quarter earnings season, the 23 portfolio companies did well considering the conditions created by the virus. Nineteen beat earnings estimates, one matching estimates, and three below estimates (BA, GE, MCD). The other good businesses are holding up well.

On 7/16/20, Johnson & Johnson’s earnings were above expected at $1.67 compared to last year at $2.58 and expected at $1.48. Revenue beat expected revenue by $606.12 million, with total revenue down 10.85% at $18.34 billion. The strong dollar is hurting JNJ, but they are still growing and have plenty of cash to buy companies and continue their growth. JNJ will be pressed to 12% of the portfolio because they’re so defensive in this Covid-19 Virus world and have a vaccine that they are developing. JNJ announced that they are planning on its Phase 3 trial testing COVID-19 vaccine candidate, Ad26.COV2.S. The study is expected to launch by late September will recruit up to 60K people, twice as many as other vaccine developers. E arnings in the last quarter beat on the bottom line but were lower on the top line. The lawsuits against JNJ are a headwind, but they have been winning lawsuits on the Talc issue on appeal. JNJ is not a trading stock but a hold forever a SWAN. If you want a hold forever top-notch medical supply company with a growing 2.8% dividend (58 years of increases), JNJ is for you.

On 5/25/2020, Home Depot earnings were expected at $2.26 and came in at $2.08 and compared to last year at $2.27, a fair quarter Y/Y. Revenue beat compared with expected by $690 million. Total revenue was $28.26 billion, up 7.1% Y/Y. HD had a fair report, showing slow growth. HD will be pushed to 12% of the portfolio then trimmed down to 10%. HD is a great business, but they must start to expand its foreign business to get good growth going forward. They are holding well during the Covid-19 Virus slow down, and the company is a solid investment long term.

In the portfolio, one company is losing money over the 56-month test period General Electric. My first job out of college was with GE testing the Lunar Module at Grumman. So my love for the company has had me holding the position much too long when I should have sold.

GE has much-hidden value, and at the present price, it’s a buy for the deep value investor. The portfolio position is losing money and is behind the Dow over the test period of 56 months. On 7/29/2020, General Electric’s earnings were at ($0.15), compared to the expected at ($0.094) and last year at $0.16. Total revenue was $17.7 billion, down 38.4% year over year, and total revenue beat by $480 million. They are reorganizing, which should help if you are patient. They are almost all industrial now and have great products. The new CEO is taking action, but it will take time to cut costs; hold for now and give the new CEO some time. He is acting and making deals to reduce the debt. The Covid-19 Virus is not helping this recovering industrial company with an impact on the jet engine business. GE will be good over time, but the new management (Mr. Larry Culp) needs time, about a year more, to see the gains from the reorganization of GE’s companies and the return of the United States economy. The balance sheet is getting better, and the GE recovery will start as the airline industry starts to recover.

One company Simulation Plus (SLP) that I wrote about almost two years ago when it was $20/share is now $60/share. I picked this business while I was researching prostate cancer treatments. I said the company was a speculative buy, and it paid off. Simply put, they make software that allows the testing phase of new drug development to be accelerated. On July 10, their earnings were $0.16, beating the expected of $0.095 by $0.065. Revenues increased to$12.3 million by 23.7% year over year. Right now, I am holding my position and think there is future growth, but at this price, it’s fairly valued.

One company I was worried about was OHI since a lot of COVID deaths were in nursing homes, and the company’s business is skilled nursing homes. The management is great, and FFO earnings come through beating expected at $0.80 beating expected by $0.04. Revenue also increased to $256.39 million by 13.8% year over year. The $0.67/Qtr. is easily covered by the FFO income.

Portfolio Management Comments

I am not selling in this correction and will wait it out until the stay at home order is over in many more states, and the United States economy is growing again. The good businesses in my portfolio have gone up with the latest increase in the economy and excellent reported earnings of my portfolio companies, and I expect it to continue for the rest of the year. The market has almost recovered from the COVID-19 virus dip with the future looking good with zero interest rates and people returning to work and school. When I make the next trade, I will note it in this section of my articles. My last trade from early February 2020 is listed below.

On July 9, reduced Ingersoll Rand to 1.0% of the portfolio.

Each quarter after the earnings season, I write an article giving a complete portfolio list and performance like this article. Become a real-time follower, and you will get each quarter’s performance and portfolio companies after the next earnings season is over.

Conclusion

The 11 guidelines referenced in the article give me a balanced portfolio of good companies that are large-cap and can grow their revenues, earnings, and dividends for years. They have the staying power to fix whatever goes wrong. In each case, the company has the size and good management to fix the problem. The portfolio has growth companies, defensive companies, income companies, and companies with international exposure, giving it what I call balance. Of the 23 companies in the portfolio, four are underperforming the Dow average in total return by more than 10%. All four companies are being hurt by the strong dollar since they are multinational and have a portion of their income coming from foreign operations. The portfolio is 0.29% behind the Dow average YTD, with increases in earnings expected in the third quarter for almost all of the portfolio companies. When Boeing gets the 737 Max flying again, that should give the portfolio a nice bump up. I intend to continue writing separate comparison articles on individual companies. I have written articles on all of the companies in the portfolio and others, and you can read them in my list of previous articles if you are interested. If you would like me to do a review of a company you like, please comment, and I will try to do it.

Disclosure: I am/we are long JNJ, HD, BA, MO, EOS, DIS, PM, GE, MCD, ADP, OHI, IR, TXN, FCX, DHR, PEP, AMT, DLR, V, SLP, LMT, O, TT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.



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