The 4.5% portfolio

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REAP RE-ESTABLISHED
A month ago, I re-established (for the most part) the Relational Equity Allocation Program (see previous posts for how it works) that re-allocates amongst a fixed group of stocks based on their relative price movements (with respect to each other).  This systematic re-allocation creates a compounding effect over and above what the portfolio would do if you just held it.  The balance of the performance would come from any income created.

Testing showed that the optimal mix is a blend of conservative income-producing stocks coupled with a few highly volatile stocks, further diversified across industries and capitalizations (e.g. big cap, mid-cap, and small-cap).

In the current environment (market near its highs) I chose to create a more defensive mix, using some very high-yielding Canadian income trusts and a few brand name dividend-paying stocks to offset the lack of income from a selection of volatile stocks whose job is to create price diversity.  While demonstrating significant internal volatility, the portfolio currently yields about 4.5% – meaning that no matter what the market does right now, there will be at least that much coming in from dividends (that is also re-cycled back into stock).

 The portfolio is not complete, because I want a slightly more aggressive mix.  I will be swapping out some stocks for others with a better permanent profile, if and when those can be captured at better prices (for example I like Broadcom and Nvidia, but not so much at these prices).  But for now, here’s the line-up (presented in the same order as in the last portfolio update entry in the right hand column).   The price and yield are current as opposed to when I bought them – I didn’t want to be bothered calculating out all the yields.  Parts of the company blurbs/excerpts are from the Globeinvestor site of the Globe and Mail.

Batting first …

EVEREADY INCOME FUND – (TSX: EIS.UN) – $4.46 - YIELD 16.1% -PE 10
Eveready Income Fund provides industrial and oilfield services; health, safety and environmental services; and oilfield equipment rental and lodging services to the energy, resource and manufacturing sectors.
PROS – Exposure to energy sector; high yield, and earnings strength (hopefully)
CONS – Taxing of trusts in 2011; weak natural gas prices; Alberta royalty hike; declining drilling activity in Western Canada

HBP GOLD BEAR + ETF – (TSX: HGD) – $13.08 – YIELD 0% – PE n/a
The Horizons BetaPro Gold Bear Plus Fund seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to two times (200%) the inverse (opposite) of the daily performance of the GSCI® Gold Excess Return Index.  Essentially it bets against gold stocks.  Right now I think gold has gone far and fast, my intention is to swap this out for a long ETF, or perhaps Goldcorp, on a pullback in gold (and rise in the value of this fund).
PROS – as an ETF no single-stock risk; volatility from 2X leverage
CONS – embedded derivatives risk

ING CANADA – (TSX:  IIC) – $38.50 – YIELD  2.81% - PE 8.6
Just fell off a cliff (after I bought, of course.)  ING Canada Inc. provides automobile, property, and liability insurance to individuals and businesses through its insurance subsidiaries.  Also notorious for the “Save your money!” commercials by the little Dutch guy with the accent.  (I’d like to see him do this commercial for a sperm bank.)
PROS – value; yield; and now volatility I guess
CONS – potential exposure to environmental disasters; financials now in the dog-house

NEWALTA INCOME FUND – (TSX: NAL.UN) – $16.75 – YIELD 13.25% – PE 12
NewAlta Income Fund focuses on maximizing the value inherent in industrial waste through the recovery of saleable products and recycling. It also provides environmentally sound disposal of solid, non-hazardous industrial waste.  There you go, something for the environment.
PROS – environmental theme; yield; relative safety of earnings
CONS – income trusts to be taxed in 2011

PRIME RESTAURANTS ROYALTY INC. FUND – (TSX:  EAT.UN) – $7.68 – YIELD 14.7% – PE 6.7
Badda-boom Badda-bing.  One of their restuarant chains is East Side Mario’s Italian restaurants.  They actually say “badda-boom badda-bing” in their commercials.  Prime Restaurants Royalty Income Fund earns royalty income from Prime Restaurants of Canada, which operates and franchises a portfolio of brands of casual dining restaurants and premium pubs. PRC franchises and operates three core brands under the trade-marks East Side Mario’s and Casey’s restaurants, as well as pubs identified under names such as Fionn MacCool’s.
PROS – High yield; steady earnings stream (hey, people still godda eat)
CONS – income trusts to be taxed in 2011; they actually say “badda-boom badda-bing” in their commercials

PROGRESS ENERGY TRUST – (TSX: PGX.UN) – $10.60 – YIELD 11.3% – PE 11.3
Progress Energy Trust is a natural gas and crude oil exploration and production trust, operating mostly in Alberta, and mostly producing natural gas.
PROS – energy sector; relatively cleanliness of natural gas; high yield
CONS – weak current gas prices; taxation of income trusts in 2011; Alberta government royalties hike

BIOVAIL CORP – (TSX: BVF) – $16.67 – YIELD 9.0% – PE 19.3
Biovail Corp is a Canadian specialty pharmaceutical company engaged in the formulation, clinical testing, registration, manufacture and commercialization of pharmaceutical products.  BVF has been under heavy short-selling pressure from hedge funds, and is actually in defamation litigation with several.  Will the yield hold?  Who knows?  But its still a reasonably big player in pharmaceuticals and Canada, and bumping alongs its lows.
PROS – baby boom demographic for health care; yield if it holds; decent volatility
CONS – clouds over its reputation whether warranted or not; currently out of favour: generics competition; maybe the Canadian dollar.

PRECISION DRILLING TRUST (TSX: PD.UN) – $15.98 – YIELD 9.8% – PE 5.3
Precision Drilling is one of Canada’s largest oil services companies providing land drilling services, camp and catering services, procurement and distribution of oilfield supplies, the manufacture and refurbishment of drilling and service rig equipment, well completion and workover services, snubbing services, oilfield surface equipment rental, tubulars, well control equipment, and wellsite accommodations.  The way the drillers (especially the Canadian ones) are going, you’d think no-one is going to ever drill another hole again. 
PROS – exposure to the energy sector; particularly cleaner natural gas; high yield; shows up on my REAP value screen
CONS – taxation of income trusts in 2011; Alberta royalty hike; weak natural gas prices; global warming maybe.

BANK OF MONTREAL – (TSX: BMO) – $56.52 – YIELD 4.8% – PE 8.1
My friend and stock market mentor Sheriffe Halawani (one of my first posts is about Sheriffe) used to tell me Canadian banks are a license to mint money.  He held his BMO stock for decades and watched it just split and split and split.  BMO is one of the big 5 banks in Canada, is generally considered the top target whenever talk of bank mergers comes up, and also has operations in the U.S., mainly through Harris Bancorp.
PROS – yield; growth with a strong Canadian economy; takeover potential (perhaps in my lifetime)
CONS – low volatility; in today’s financials environment it has the word “Bank” in its name

MULLEN GROUP INCOME FUND (TSX: MTL.UN) – $16.85 YIELD 10.7% – PE 11.3
Mullen Group Income Fund is an open-ended income fund that provides specialized transportation and related services to the oil and natural gas industry in western Canada, and supplies trucking and logistics services in Canada. Mullen provides its business units with management and financial expertise, technolgy and systems support.  If Mullen were to use a stock symbol like Prime’s EAT.UN, then it’s might be TRUCK.UN.  Given that Western Canada’s energy sector is behaving like a nuclear winter while the rest of the energy market is still partying, and that trucks and $100 oil don’t mix, Mullen’s doing not badly.
PROS – yield; exposure to energy sector (long term); earnings holding up
CONS – taxation of income trusts in 2011; Alberta energy royalty hike

FORMFACTOR (NASDAQ: FORM) – $38.75 – YIELD 0% – PE 27.7
FormFactor Inc, designs, develops, manufactures, sells and supports precision, high performance advanced semiconductor wafer probe cards used by semiconductor manufacturers to perform wafer probe test whole wafers in the early stages of the semiconductor manufacturing process. Its products are based on its proprietary technologies, including its MicroSpring interconnect technology and design tools.   FORM is diversified in the sense it serves semiconductor manufacturers rather than manufacturing semiconductors itself.  All semiconductors need to be tested, but not all will be successful in the marketplace.  FORM nosedived recently on news that it had to re-state some earnings in the past two years.  Otherwise, it has a solid rep.
PROS – volatility; exposure to technology; growth
CONS – class action suit(s) from the re-statement announcement

HARLEY DAVIDSON (NYSE: HOG) – $48.16 – YIELD 2.5% – PE 12
If you don’t know what a Harley is, get off my blog!    Harley Davidson is one of the great American brand names synonymous with motorcycles and the freedom of the open highway.  When you can get a great brand, growth, and yield all packaged into one, go for it.
PROS – great brand; growth; yield; and what’s not to love about a company who’s stock symbol is “HOG”!
CONS – economic downturn and high oil prices will pressure sales

PROSHARES ULTRA-SHORT QQQ – (AMEX: QID) – $40.82 – YIELD 5.4% – PE n/a
UltraShort QQQ ProShares is a leverage short ETF that seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ-100 Index^® .  A little insurance against things getting too rough.  QID has a negative correlation to the market, so when everything else is going down it should go up.  Because of the way it is structured, it also has a very nice yield (at the moment).
PROS – inverse market correlation; yield; volatility (optimum REAP characteristics)
CONS – embedded derivatives risk (which is why I don’t want to rely on leveraged ETFs too heavily)

ROCHESTER MEDICAL – (NASDAQ: ROCM) – $14.99 – YIELD 0% – PE 5.4
Rochester Medical Corp. develops, manufactures and markets a broad line of  technologically enhanced latex-free urinary continence and urine drainage management care products to the home care and acute/extended care markets. The company’s home care products include its FEMSOFT INSERT, a soft, liquid-filled, conformable urethral insert for managing female stress urinary incontinence in adult females, a line of male external catheters for managing male urinary incontinence and a line of intermittent catheters for managing male and female urinary retention.  If Prime Royalty’s symbol is “EAT.UN”, then by the same logic Rochester’s could have been “PISS”.  This is a very small-cap medical supplies company that plays into the baby-boom demographic and the growth in “urinary incontinence”.  Pass the diapers, Bob.
PROS - exposure to health care and baby-boom demographic; volatility 
CONS – limited options when it comes to TV advertising; small-cap and lack of product diversification

HOME DEPOT (NYSE: HD) – $28.05 -YIELD 3.2% – PE 10.9
Are you shitting me?  Another of America’s premier brands and growth companies at fire-sale prices?  OK, they had a whacky CEO that they’ve now gotten rid of.  With the US housing market in decline, people’s main option for increasing the value of their home will be renovating.  Do the math.
PROS – great brand name; growth; yield
CONS – growth temporarily stalled; tarred with US real estate woes.

MATTEL INC (NYSE: MAT) – $19.96 – YIELD 3.3% – 14.1
Ken and Barbie with thier 1.8 kids are looking a little haggard these days.  A big drag on Mattel is the lead-paint in toys from China issue.  Otherwise, like HOG and HD, we’ve got a decent growth brand name selling at a very low price with a good yield.
PROS – yield, growth, brand name; currently showing up on my REAP value stock screen
CONS – possible lawsuits relating to lead paint; economic slowdown and a poor Christmas season (short term)

TRINA SOLAR (NYSE: TSL) – $56.54 – YIELD 0% – PE 55.4
Woo-hoo!  This stock flits around like a quantum particle.  Now it’s here, oop, no it’s over there.  Trina was set up with Merrill Lynch backing, and sells its solar panels mostly to Germany.  It is in the pack with the other wild and crazy solar stocks.  Remember the Internet craze?  At least is has earnings.
PROS – very volatile; direct play in alternative energy
CONS – pricey – could get hammered when the Chinese market takes a hit

Q-LOGIC CORPORATION (NASDAQ: QLGC) – $14.17 – YIELD 0% – PE 22.9
QLogic Corporation makes networking storage equipment for OEMs, resellers and system integrators with the only end-to-end infrastructure in the industry, consisting of controller chips, host bus adapters, network switches and management software to move data from the storage device over the network to the server. QLogic designs and produces solutions based on all storage network technologies including SCSI, iSCSI, InfiniBand and Fibre Channel.  <- What he said.  A member of the S&P 500 Index. 
PROS – volatility; exposure to technology; mid-cap; reasonable valuation going in
CONS – subject to economic slowdowns as companies/telcos cut spending

CREDO PETROLEUM – (NASDAQ: CRED) – $9.85 – YIELD 0% – PE 14.9
A small-cap growth natural gas producer in the US.  Credo also has a special technology they call Calliope, that allows them to extract trapped gas from otherwise spent or abandoned fields.  Credo hedges its production, and grows by discovering new supplies.
PROS – good growth history; buying back stock, small-cap; can be volatile; showing up on REAP value stock screen
CONS – weak natural gas prices; limited interest in Calliope by potential partners

CREE INC (NASDAQ: CREE) – $25.03 – YIELD 0% – PE 41
Cree, Inc. manufactures semiconductors for low-power applications and LEDs.  It plays into the reduced energy-usage theme, and has established a business in Hong Kong for strategic access to mainland China.   It also specializes in silicon carbide and gallium arsenide for use in semi-conductors.
PROS – volatility; technology; environmental theme
CONS – unsteady earnings growth; perhaps a little pricey

MYLAN INC. (NYSE: MYL) – $15.21 – YIELD 1.6% – PE 12.8
Mylan Laboratories Inc. and its subsidiaries develop, license, manufacture, market, and distribute generic and branded pharmaceutical products. It’s one of the larger generics, has been beaten down of late, but I was attracted to it by recent insider buying.
PROS – health care and baby-boom demographic; low price; bit of a yield; insider buying
CONS – more debt than I normally like

And that’s it.  Boy that took a long time.  If you’ve read this far I’m impressed.

For now just about everything is under water because the market’s been down in the past month.  This is true to form, as I always tend to have lousy starts but strong finishes when buying “value”.  Now I just have to stick to the plan.

Cheers,
Allocator

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