Wednesday, September 12, 2007

August Update

For the month of August the Model Portfolio’s return was 2.6% versus S&P 500’s total return of 1.5%.

August was turbulent for the markets to put it mildly. The S&P went on a roller coaster ride and based on an intraday low was down to the tune of almost 6% from its July 31st close. We raised more cash by exiting out of the Tyco spin-off companies and divesting ConocoPhillips (NYSE: COP) and Anheuser-Busch (NYSE: BUD). The Tyco companies should do well in the long run. But our thesis of buying the single stock prior to the spin-off had played out. In hindsight, we should have liquidated our position immediately after the split. Conoco had performed tremendously in the short period of time since we bought it and we will maintain our exposure to oil through Diamond Offshore Drilling (NYSE: DO). Finally, a cash infusion of $50,000 gives us more flexibility in building new positions or adding to existing ones without having to trim or altogether trade out of existing positions on a continued basis. Of course if we are not able to invest this cash, it will hurt the portfolio’s performance going forward. It should be emphasized that the goal of building a concentrated portfolio will preempt us from using this new found capital to add new positions without considering the opportunity cost of holding onto existing positions.

The subprime debacle presented us with great entry points into several stocks on our watch list. Moody’s (NYSE: MCO) was a new addition as well as Lehman Brothers (NYSE: LEH) and Countrywide Financial (NYSE: CFC). Please see Margin of Safety for more comments on these companies. Another new addition is Cadbury Schweppes (NYSE: CSG) which we have written about in the past. Worries about the disappearance of private equity bidders for the drinks division depressed the stock to levels too attractive to pass on. We also continued to add to our positions which have housing exposure in one way or another.

On the earnings front, Morningstar (Nasdaq: MORN) and Expeditors International of Washington (Nasdaq: EXPD) came through with stellar results. Morningstar is trading near all-time highs. Expeditors touched a 52-week high but could not sustain it and was probably caught in the market downdraft. CEO Rose did not disappoint and continued with his colorful commentary in the quarterly press release: "This quarter's results once again illustrate that steady growth is reliant upon both consistent and fundamental execution. We experienced good solid growth in all of our major geographic areas," commented Peter J. Rose, Chairman and Chief Executive Officer. "When Yogi Berra said, 'It ain't like football. You can't make up no trick plays' he was speaking of baseball, but he might just as well have been talking about the global logistics business. Indeed, there are no 'trick plays' or short cuts that can bail you out in this game. When the final box scores are published in this business, those who have attempted to rely on either have typically found themselves thrown out at home. While the spectacular, but intermittent, long-ball game may garner the headlines, it's the more tedious, but consistent, short-ball game that takes home the trophies," Rose said. Our kind of CEO.

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