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Introducing The Tech-Focused Home Run Fund

This is a new portfolio project I’m working on targeting high-growth names in areas of the market I don’t typically invest in. Capital gains are the goal here, as opposed to my usual pursuit of income. I’m using this project to expand my investing horizons. This project started last Friday. Since then I’ve made 7 purchases worth roughly 21% of the fund’s starting value. I am pleased to introduce a new project I’ve started working on, a model portfolio that I’m in the process of building that I’ll call The Home Run Fund . This “fund” is a hypothetical portfolio that I manage and update in real-time focused around “owning” more high risk/high reward, speculative, momentum-driven, exciting companies in search of Alpha with a more short-term, trader-oriented mindset. I wonder sometimes how many other more traditional, conservative, buy and hold type dividend growth investors frequent other areas of this site – window shopping? I’m talking about technology, entertainment, media, biotech and the like that offer much higher growth potential than the typical blue chip, dividend aristocrat type companies that DGI portfolios are usually comprised of. These sections of Seeking Alpha are ones that I frequent as a reader, but don’t often contribute to as a writer. With the creation of this model portfolio series, I hope to change this. In my personal portfolios, I’m very satisfied chocking up on the bat, shortening my stroke, and hitting for average (and collecting those dividends). However, in this portfolio project I will be swinging for the fences. If you can’t tell, I’m a baseball fan. So, there we have it: The Home Run Fund . If you already follow me here , by now you have a pretty good idea about my investment philosophies and stock picking strategy. For those of you who aren’t as familiar with my work on Seeking Alpha, in the most basic sense, I would describe myself as a conservative dividend growth investor with a mind to buy and hold because of my very long-term investment horizon. I have exposure to some of these generally more risky sectors and industries in my personal portfolios; however, for the most part this exposure comes in the form of mature, mega/large cap “legacy” type companies. I focus on wide moats. I focus on strong, reliable cash flows and balance sheet health. More than anything, I am risk averse with capital preservation existing right at the top of my priority list alongside dividend growth. This sort of investing strategy has led to success for me, though I admit it can be lacking in the excitement department. Now obviously, excitement isn’t the name of the game when it comes to investing, making money is. However, I don’t think the two have to be mutually exclusive. This series will allow me to delve into a more risk-laden area of the market, a journey I am pleased to embark on because oftentimes, when it comes to the portfolio guidelines I’ve laid out for myself with regard to capital preservation and a conservative focus on value rather than growth, I find myself having to suppress urges to join in on the fun, exposing myself to some of the popular market darling stocks and their highly speculative valuations. I am not a professional in the financial industry. I manage a vineyard and work as a real estate agent. Portfolio management is a passion of mine; it’s rare that I make it through a day now without wishing that I had studied finance at the university level rather than English and Studio Art. Don’t get me wrong, I loved my time at the University of Virginia and the liberal arts education that I pursued. However, the degrees that I earned don’t qualify me to work in the industry that I currently love – it wasn’t until after graduation that I discovered the stock market and began managing money seriously. I say all of this for several reasons. First, to tamper down any unrealistic expectations. Although I plan on making more speculative bets that will lead to exorbitant gains in this portfolio comprised of hypothetical money, no one should be following my advice here as I admit wholeheartedly that I am a newbie when it comes to investing in high growth/non-dividend paying names. Taking this notion a step forward, no one should ever blindly follow me into or out of any trade; feel free to critique me, laugh at me, or learn with me, but don’t follow my lead without doing your own due diligence. This leads me to the second reason I highlighted my amateur status: to really highlight the point of this series and The Home Run Fund , which is, of course, education. Everything that I write related to finance is for educational purposes. Organizing my thoughts and putting them down onto paper forces me to look for weak spots in my ideas, for holes in my arguments. And once an article in completed, any comments that the piece inspires go on to further magnify my convictions and concerns, allowing me (and hopefully others as well) to take a step back and really digest the information, erasing doubts, and strengthening beliefs about stock picks and the evaluation process. I was recently at a real estate conference and something that a speaker said really stuck with me. The man, talking about being intentional as a salesman said, “If you aren’t uncomfortable, you probably aren’t making real money.” Obviously portfolio management is a bit different than building spheres of influence and making strong sales pitches; however, I do think that it is important for all investors, regardless of management philosophy, to be willing to push his or her boundaries, to make his or her self uncomfortable, all in pursuit of broadened experience and increased knowledge. Like I said before, I sometimes consider making investments in the more speculative names that I will be focusing on in this series in my actual portfolios, though I resist temptation knowing that I don’t likely have the intestinal fortitude required to cope with inherent volatility that comes along with these sorts of investments. Many of the more popular, growth-oriented, momentum-fueled stocks that I plan on targeting within The Home Run Fund have been on my wish list for years. Because of the discipline that I maintain in my personal portfolios and my prioritization of capital preservation, I simply don’t allow myself to invest in these stocks due to rich valuations no matter how much I respect, and even love, the companies themselves. However, looking back I have often regretted this conservative mindset when in hindsight I see that my target prices would have been attractive entry points, eventually leading to big-time gains. I wouldn’t exactly call my reflections on these missed opportunities regret, because I know very well why I didn’t invest in those companies in the first place (they simply didn’t fit into my portfolio’s plan); however, I do think that if I can prove a positive trend with regard to my ability to target attractive entries in less predictable, more volatile names, I would be more willing to put my capital at risk in the markets knowing that my system has proven to be successful in real time and warrants investment attention. To me, experiential knowledge is the best kind. The emotional responses to success and failure leave a much bigger impact and stick with me much longer than most academic study. In other words, “feeling” a loss or gain is much more tangible than simply reading about one or the other. This project will enable me to experience these feelings to a certain extent without putting my capital at risk in the markets. The real-time nature of this portfolio project will help me dial in my evaluation system in areas of the market that are rather foreign to me. Doing it this way should be more effective than simply back testing ideas. Although this “Fund” will be hypothetical, you can rest assured that I will be performing the same level of due diligence when making selections for this portfolio as I do my own. I am too competitive and (shamefully) prideful not to. I want positive results here; I want to prove to myself that I am just as capable of management success in a more speculative environment as I am when really crunching the numbers and patiently waiting for safety margins to widen in the blue chip dividend names. I hope that you all will take this ride with me; with any luck, it’ll be an enjoyable experience for all involved. As always, I look forward to your feedback (probably more so now than ever, because I’ll be dealing with trades in this portfolio that are undoubtedly out of my comfort zone). So, without further adieu, let me introduce the basic ground rules and strategic guidelines for this project: I will be giving myself $100,000 hypothetical dollars to build this portfolio. There will be no new cash added throughout the process. The primary goal of this portfolio is capital appreciation. Unlike my actual portfolios, income will not play a large role in stock selection. All income generated within the portfolio will be pooled in with the cash reserves fund and put to work when making future purchases. I will be comparing this portfolio to all relevant benchmarks in pursuit of Alpha. Unlike my personal portfolios, here I will be focusing more on small/mid cap companies. I will be “buying”, “selling”, and “short-selling” individual stocks or bonds. I will not be using option strategies in this portfolio. I will also not own mutual funds, index funds, close ended funds, exchange traded notes, or the like. I will give myself 30 free trades a month for this fund (the same deal I get at my brokerage); although I doubt I will ever exceed that amount, any trades above the 30 trade threshold will cost $7.99. I say I don’t plan on exceeding that number of trades because I plan on this portfolio being much more highly concentrated than my own. I don’t have set in stone targets with regard to number of holdings or asset allocation. I would like to maintain between 10 and 15 holdings (much less than the 50+ I own in my actual portfolio), though this is subject to change depending on price action and opportunities that arise in the markets. There will be no weighting or section allocation targets within the fund. Being a value investor at heart, I will be looking to capitalize on contrarian moves, more willing to take risks and attempt to catch falling knives here than I am within my actual portfolios. Similar to the portfolios I currently manage I will be looking to own companies with wide competitive moats. However, in The Home Run Fund I will also happily expose myself to companies with very narrow moats assuming that they offer a product or service that I deem to be by and large the best in breed in their industry. I will also be looking to give myself exposure to long-term trends that I believe strongly in. I do this in my actual portfolios as well, though value plays a bigger role than my belief in a trend. In this portfolio I will look past valuations when I truly believe in a movement, especially if it’s expected to play out in the short-term. And lastly, and probably most importantly for this project, I will do my best to check my fear of failure at the door when entering the confines of The Home Run Fund . This fear and reluctance to put my capital at risk has caused me to lose out on potentially lucrative opportunities in the past. I already manage a relatively conservative portfolio, that isn’t the point with this one. I began making purchases for The Home Run Fund last Friday during regular market hours. Just as I did with these purchases, I will be posting stock talks here at SA focused on each purchase/sale. This allows for transparency when it comes to my entry and exit prices. It also allows anyone interested to keep track of moves made by the “fund” in real time giving me time to write and publish detailed trade summaries. Here are the trades I’ve made thus far and a quick snapshot of the portfolio as it sits today. I will briefly describe my reasoning for each selection in this piece, but for the sake of word count, I will be posting primary ticker pieces on each trade made as well, covering my thought process involved in much greater detail later. Starting out the Fund purchasing shares of Alphabet (NASDAQ: GOOGL ) (NASDAQ: GOOG ) and Amazon (NASDAQ: AMZN ) was a relatively easy choice. It’s too bad that I waited until after their recent stellar earnings reports to begin this project. If I had started this a week ago I would have saved a nice chunk of change on these two trades. However, I couldn’t deny myself exposure to these two transformative companies. I think that any portfolio focused on growth should seriously consider holding these two names. Both companies have expanded their business operations to the point that they have their fingers in a myriad of potentially highly profitable cookie jars. I’ve been following both Google and Amazon for some time now and never allowed myself to pull the trigger due to their valuations and lack of dividend payments. Well, even though I’d obviously love to pick up shares here on dips, I decided it was best to simply bite the bullet and initiate positions regardless of current valuations because of the massive growth prospects both companies offer. (click to enlarge) Biogen (NASDAQ: BIIB ) is a company that caught my eye due to recent weakness in the biotech space. Unlike many of its brethren in the Nasdaq Biotech ETF (NASDAQ: IBB ), Biogen is a highly profitable company. Sure, recent question marks have arose that are company specific, but for the most part I think this company has traded down because of industry wide fears sparked in part by politicians posturing on price gouging and drug prices. Even if recent events in the space lead to a restructuring of the pricing models, I simply don’t believe that any changes will be impactful enough to justify the sort of selloff that BIIB has experienced as of late. Also, I am interested in the massive potential that BIIB’s pipeline could have in store, namely in the treatment Alzheimer’s disease, something that has been very difficult and elusive for biotechs thus far. Whole Foods Market (NASDAQ: WFM ) is a company that I own in my personal portfolio. I actually increased my own position by 15% at this $30.75 share price. I love what this company represents. I think the health foods movement is a long-term trend, not a fad. I think science is increasingly pointing towards the fact that humans should be consuming more natural, less processed foods. And, not only this, but I love the experience that WFM stores offer. Shopping there is a pleasure (albeit a relatively more expensive one). I understand that comps are slowing, but I think that store count growth will offset this. I also think that after recent weakness in the health food-focused grocer industry, M&A activity will pick up in the space and WFM could benefit from this, as either an acquirer or an aquiree. I like Blue Buffalo Pet Products (NASDAQ: BUFF ) for many of the same reasons that I like WFM. Just as I think the health foods movement is real and will be long lasting, I think the humanization trend with people and their pets is real as well. I think wholesome, natural pet food products will continue to gain market share within the pet food industry and BUFF is best situated to benefit from this. I like BUFF as a pure play in the space rather than the other larger conglomerate type companies that offer wholesome natural pet foods as a very small part of their overall operations. This company has fallen hard since its unfortunately timed IPO in late July. Shares initiated trading in the $27 range and now $10 cheaper, I find the value much more attractive. GoPro (GRPO) and Ambarella (NASDAQ: AMBA ) trades were announced together because I view both positions in a similar light. First, looking at GoPro I see a company with a best in breed type product that comes with a lot of fanfare. The cameras that this company makes are top notch and I don’t see it losing its spot at the top of the wearable camera space anytime soon. I also wouldn’t be surprised to see GoPro transition into the media space with some of the unique content that its hardware can create. It already has relationships with many of the biggest media and entertainment companies. Original content seems to be all the rage these days and I think as GoPro matures (if it isn’t bought out before then), it will head in this direction. AMBA makes chips for GoPro, though I see this as a more general play on this industry, as well at the drone space, which AMBA has made strides in. With the holiday season coming up, I think we may be in for another GoPro Christmas. Also, I wouldn’t be surprised if drones are one of the more popular presents purchased this year (and in subsequent years as well). Both companies have experienced major weakness over the last several months, bringing their valuations down to much more attractive levels. I know that I’m attempting to catch falling knives here but I think over the long-term I will be rewarded. Here is a snap shot of what the portfolio looks like currently. (click to enlarge) Like I said before, I hope that we’re all able to take something away from this project and put it to use in our own portfolio management practices. I hope you enjoyed this introduction and look forward to all of The Home Run Fund pieces on the way. Please feel free to leave advice, recommendations, or critiques in the comment sections as we move forward. Best of luck all!

MOAT: Have You Considered Using An ETF To Find Companies With Moats?

Summary The sector allocations were a bit surprising to me. Industrials were heavily weighted while utilities and health care were not. The fund has a 15% turnover ratio, which seems within reason for the strategy. The idea of holding attractively priced companies with solid economic moats makes sense, but applying that strategy as an ETF is problematic. The sheer size of the ETF would be a huge problem for acquiring shares in smaller companies with the equal weighting philosophy. Larger companies will receive significantly more coverage and the market should be more efficient. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds that I’m researching is the Market Vectors Wide Moat ETF (NYSEARCA: MOAT ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The net expense ratio for MOAT is .49%. I tend to be very frugal with my expense ratios, so I like to see those low levels. When I’m looking at a simple market cap weighted broad market or total market ETF I would expect to see single digit expense ratios. On the other hand, this portfolio would require analysis on the individual companies so higher expenses would be expected. Sector The following chart breaks down the sector allocations: I don’t love huge allocations to consumer discretionary, but I can believe that they would make sense for a portfolio based on having economic moats since there should be some material differentiation in the products provided by the companies. On the other hand, seeing industrials at almost 25% is quite a surprise to me. Perhaps their concept of a moat is different from mine, but they clearly don’t weight utilities high despite the utilities having regulated monopolies. I would think a monopoly that was protected through regulation would have a fairly solid economic moat. In a similar manner I would have expected stronger allocations to health care because the patent system provides long lasting economic moats. Largest Holdings The following chart shows the largest holdings for the fund from the end of the third quarter: I pulled up the daily list of holdings to verify that they were not materially changed. Since the goal here is to buy companies with durable economic moats, I would expect the allocations to remain similar with some small variations as shares go up and down in value causing them to trade places on the list. (click to enlarge) I had to pull the fund up on Schwab to find the turnover ratio, which was listed at 15%. All in all that suggests the portfolio would be turned over about once every 6 to 7 years. That isn’t too bad. The reason for the turnover seems to be that the portfolio is designed to be allocated as an equal weight portfolio across the “most attractively priced” companies that have been classified as having large moats. If the case is based on most attractively priced, then it starts to seem strange that the companies are not moving up in price enough to force the positions to be turned over the next time the index is updated. Conclusion There is nothing wrong with the concept of selecting stocks based on finding reasonably priced companies that have economic moats to prevent competition from eroding their profits. The strategy makes a great deal of sense and investors selecting individual companies would be wise to consider the influence of future competition on the success of their investment. A challenge for an ETF attempting to follow the same strategy is that it could require some fairly significant capital flows if the ETF becomes larger. The need to completely remove companies and buy up a 5% allocation in another company would risk moving market prices if the ETF were large and their strategy included fairly small companies. While moats may be much more common for established companies that rule their space, that doesn’t mean there won’t be very attractively priced smaller companies that are flying under the radar. The nature of needing to be able to suddenly buy up around $30 million to $40 million would be a difficulty for companies with a market capitalization lower than $1 billion since it could require purchasing at least 3% of the company. This will probably force the ETF to only consider larger companies. The concept makes sense, but execution of the strategy seems like a logistical nightmare unless the investment universe is significantly restricted to limit the list of potential investments to medium and larger companies. Once those restrictions are in place, it seems much more difficult to find and select the best securities because larger capitalization companies attract substantially more analyst attention and should generally be priced be more efficiently.

The Fed’s Delay On Rates Makes SDY A Good Buy

The Federal Reserve has delayed raising rates, giving a boost to dividend funds. Rates are likely to remain at historically low levels well into 2016. SDY is heavily weighted towards the financial sector, providing a nice hedge against any rising rates. The purpose of this article is to evaluate the attractiveness of the SPDR Dividend ETF (NYSEARCA: SDY ) as an investment option. To do so, I will evaluate recent market performance, its unique characteristics, and overall market trends in an attempt to determine where the fund may be headed going into 2016. First, a little about SDY. The fund seeks to closely match the returns and characteristics of the S&P High Yield Dividend Aristocrats Index. This index is designed to measure the performance of the highest dividend-yielding companies in the S&P Composite 1500 Index that have also followed a policy of consistently increasing dividends every year for at least 20 consecutive years. This is unique in that many dividend ETFs focus solely on high-yielding companies while SDY has a focus on high yield, but also a track record of a raising payment. Currently, SDY is trading at $77.04 and pays a quarterly dividend of $.49/share, which translates to an annual yield of 2.54%. Year to date, SDY is down 2.2%, not accounting for dividends, which lags the Dow Jones Index’s return of (1.5%) year to date. However, once dividends are accounted for, SDY has slightly outperformed the Dow for the year. There are a few reasons why I feel SDY is a good buy at current levels. The main reason has to do with the Fed’s unwillingness to raise rates from historically low levels. At the beginning of 2015, investors were fairly confident that rates would rise at some point this year, some believed as early as June. This negatively affected dividend ETFs, as investors had piled into funds such as SDY at record levels in search of a higher yield in a low rate environment. Because of this, SDY, along with similar funds, underperformed the Dow and other investment options. However, as we near the end of the year and an official rate hike has yet to be announced, investors are beginning to buy back into SDY as they realize that the low rate environment is here to stay for a little while longer. This is apparent in SDY’s recent rise, as the fund is up almost 7% in the last month. I believe the ETF will continue to move higher, as investors are continuously pushing back their expectations for a rate hike. According to data compiled by the Chicago Mercantile Exchange, “traders now put just a 7 percent chance of a rate move at Wednesday’s Fed meeting and a 36 percent probability for the final one of the year in December”. Traders now give a 59 percent chance of a rate hike during the March 2016 meeting, almost six months away. If that expectation turns in to a reality, SDY could be a very profitable bet in the short term. A second reason I prefer SDY over other funds has to do with its exposure to the financials sector, at roughly 25% of its total portfolio. Below is a breakdown of the sectors, by weighting, that make up SDY’s holdings : Financials 25.47% Consumer Staples 14.95% Industrials 13.54% Utilities 11.83% Materials 11.15% Consumer Discretionary 7.56% Health Care 5.92% Energy 3.41% Telecommunication Services 3.05% Information Technology 2.88% Unassigned 0.22% As you can see from the chart, financials are the top sector weighting in SDY’s portfolio. I view this as a positive, because it provides the fund with a nice hedge against rising rates, when they do eventually rise. General logic will say that these dividend funds will take a large hit once rates rise, because investors will now be able to command higher yields from less risky assets. However, SDY’s exposure to the financials sector will continue to make this fund attractive as financial companies, such as banks and insurance companies, tend to perform better in a rising rate environment. This occurs for a few reasons. One, banks will typically increase the amount they charge for loans at a faster rate than what they pay for deposits, which widens their spread and overall profit. Additionally, these firms typically have to write-off fewer bad loans, as rates generally rise during a time of economic growth. This means companies are performing better and are more likely to meet their debt obligations, and thus, no default on their loans. Therefore, SDY should experience capital appreciation from this exposure, which would cater to investors who are more concerned with the overall return, (stock price and yield), as opposed to just the yield. Of course, investing in SDY is not without risk. Investors could be wrong and interest rates could rise at a much quicker-than-anticipated pace. If this occurs, the market could move sharply lower, or investors could flee dividend funds. SDY’s yield, at only 2.50%, does not provide much of a cushion if the fund were to move rapidly lower. Additionally, SDY also has a strong weighting towards the US consumer, with weightings of 15% and 8% towards the consumer staples and consumer discretionary sectors, respectively. If the US consumer stops spending, or US job growth weakens, these sectors could be dragged lower and take SDY down with them. However, neither of these scenarios are what I expect to occur. Even if rates do rise, Yellen has made it clear that the increases will be slow and gradual. She does not intend to spook the market, and the past few years have showed investors that the Fed is being extremely cautious with regards to rates. Additionally, consumer spending continues to increase, with a 0.6 percent rise last month (September) according to the Commerce Department. Therefore, I expect SDY to perform strongly despite these headwinds. Bottom line: SDY has had a lackluster year, but has rallied recently as the Fed has delayed raising rates. With this scenario continuing, the fund continues to provide investors with an above-average yield in a low-rate environment. Until rates do rise, dividend ETFs will continue to be profitable for investors. With a fee of only .35% and exposure to the financials sector, which will serve as a hedge when rates do rise, SDY provides investors with a cheap way to profit in the short and long term. Going into 2016, I would encourage investors to take a serious look at this fund.