Model Portfolio, by Mark Robertson, Managing Partner
Posted on February 1st, 2021
Got Milk? Gimme (More) Shelter. The trailing 5-year rate of return for the demonstration portfolio checks in at 19.8% as the long term relative return is now five percentage points. This month we accumulate a2 Milk (ACOPF) and M.D.C. Holdings (MDC).
This demonstration portfolio invests the maximum allowable 401(k) in stocks. In the absence of choices within the portfolio, we shop outside the portfolio using the combination of return forecast and quality rating to identify candidates to be added to the portfolio. Total assets reached $1,000,000 in 17 years. Tin Cup has outperformed the S&P 500 since inception and the rate of return since 1995 is now 15.3% vs. 10.4% for the Wilshire 5000.
Total assets are $3,456,977 (1/31/21) and the net asset value is $704.91. The model portfolio declined 0.69% during January 2021. The Wilshire 5000 checked in at -0.34% for the month.
Tin Cup: Historical Performance (1/31/2021). At the risk of jinxing a solid stock market run, our $4,000,000 moment is now viable during 2021. The rate of return for the trailing five years is now 19.8%.
With MIPAR at 5.6%, our target for the minimum overall portfolio PAR is at least 10.6%. The overall portfolio PAR is 11.4% on 1/31/2021. Quality and financial strength are sufficient at the current levels of 86.9 (Excellent) and 82%. EPS Stability is 76 for the portfolio. Sales growth is in the design target range at 10.8%.
Tin Cup Dashboard: January 31, 2021. Ranked by PAR (last column on the right.) Accumulate a2 Milk Company (ACOPF) and M.D.C. Holdings (MDC).
The pandemic and turbulent economic conditions made 2020 miserable for most of us. Tin Cup, on the other hand, was pretty much unfazed and the vertical ascension since March-2020 is pretty spectacular. (See accompanying chart) During January, Tin Cup finally took a bit of a breather and hovered near the $3,500,000 mark. Make no mistake. The distortions and dislocations that marked 2020 continue into 2021 and large numbers of individuals and establishments are challenged, some of them to the brink of extinction. For every company like Amazon that prospered, there are dozens of damaged entities hoping to ride out this storm.
All decisions with Tin Cup are fairly mechanical, as we strive to keep the portfolio within certain limits:
(1) Overall average PAR at least 5 percentage points greater than the median return forecast (MIPAR).
(2) Excellent Quality. Overall average quality ranking greater than 80.
(3) Overall average sales growth forecast of at least 10%, but preferably 11% or more.
The overall portfolio PAR is within range, so no selling considerations are “triggered.”
That said, Amazon (AMZN) is on the hot seat — checking in at 11.1% of total assets. The return forecast (PAR) is 3.3% but is based on a nosebleed projected average P/E. Under these conditions, we take some solace in checking the Projected Return on Value (PROVE). For Amazon, the PROVE is approximately 3%, an indication of overvalued but in context, the average PROVE is currently 5.2%. At 3%, 22 percent of all stocks have lower projected returns on value. In the absence of a return forecast approaching zero (money market rates) we’re compelled to “hold” and check back in a month.
Similar arguments hold for EPAM Systems (EPAM). The stock has been “red hot” and the return forecast is at 4.9% — relatively overvalued. The PROVE for EPAM is 3.9%, ranked higher than 31 percent of stocks in our coverage universe. The company continues into February on the hot seat.
At the other end of the spectrum, recent addition a2 Milk Company (ACOPF) sports a speculative PAR of 28.2% and high growth rates but represents a mere 1.9% of the portfolio. Normally, we’d avoid a cautionary forecast (like 28.2%) but this is a small portion of the total Tin Cup portfolio.
M.D.C. Holdings (MDC) is one of the promising smaller homebuilders on the Best Small Company short list and just missed inclusion. With solid growth characteristics and the opportunity field detailed by Ken Kavula during recent Round Table presentations and his selection of D.R. Horton (DHI), qualified homebuilders are welcome at Tin Cup.
The monthly contribution and dividends are therefore ingested into accumulating additional shares of ACOPF and MDC.
The ferocity and velocity of this surge can’t last forever. Let’s all slide out on this limb and admit that someday we’ll see another maniacal moment with prices swooning. In honor of that reality — no matter ominous that may sound — we know that the best time-honored approach is to “load up” on quality and insist on financial strength typified by enterprises with excellent management.
Tin Cup has an average quality ranking of 86.9 and an overall financial strength of 82%. You’ve seen us augur for increased emphasis on not aiming for excessive returns and doubling down on quality and financial strength characteristics. This may well be one of those times to be prudent. Be careful out there.
Go shopping for some excellent companies. Assume ownership if the price (return forecast) is right. Maintain stewardship for as long as it makes sense to do so.
Tin Cup: Portfolio Worksheet (Dashboard). Accumulating 700 shares of a2 Milk (ACOPF) and 1600 shares of M.D.C. Holdings (MDC). With the overall portfolio PAR in the target range, Amazon and EPAM survive their moment on the hot seat — a feat we’d expect to continue so long as their return forecast is greater than money market rates.