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Performance Overview
For Q3 2020, the portfolio is up 4.49% and is up 9% year to date. The Q3 starting balance was $89,241.80, and finished the quarter at $96,383.61. Contributions to the portfolio during the quarter amount to $3,135.
No stocks were sold during this quarter, but nine new positions were added. The nine companies I have bought are Barrett Business Services (BBSI), Hexcel (HXL), Friedman Industries (FRD), George Risk Industries (RSKIA), Paul Mueller Co. (MUEL), Richardson Electronics (RELL), Surge Components (SPRS), FutureFuel (FF), and FirstEnergy (FE).
FirstEnergy is a sizable position, while the rest of the purchases were smaller allocations. FRD and RELL were net-nets (trading below net current asset value) at purchase. The rest of the smaller positions make up my foray into deep value investing, meaning they trade at very low EV/EBIT ratios. Many of these stocks are microcaps, meaning their market capitalization is below $300 million.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 69.8% of the portfolio is in stocks, while 30.2% is in cash and safe haven assets. I would prefer to deploy more of the cash to undervalued stocks, but I am remaining cautious despite the market surging during the third quarter.
During the quarter I received $318.08 total in dividends, which is broken down in the table below.
| Ticker | Quarterly Dividend |
| FF | 8.28 |
| BBSI | 10.50 |
| FRO | 81.50 |
| STNG | 6.80 |
| DHT | 103.20 |
| EMR | 42.50 |
| COF | 5.50 |
| SPG | 59.80 |
| Total | 318.08 |
My Thoughts
This quarter has been pretty drama free for my portfolio. The pandemic and economic difficulties have appeared to mellow out…but I wouldn’t be surprised if there is more trouble on the horizon. Despite my cautiousness, I did some buying this quarter. My goal of building out about 20 deep value positions started this quarter, with my purchase of eight companies. For the foreseeable future, I want to move towards an allocation of 70% stocks, 30% safe haven assets. I believe this will allow me to put some cash to work, while also having some ammo if the market corrects again.
As for the market, it still appears irrational. Everyone and their plumber is making easy money in the market right now. Everything seems easy when the market keeps going up, but let’s not forget everyone freaking out in March. I strongly believe there is a difference between gambling speculation and investing (ok oil tankers are a speculation, but at least there’s a reasonable thesis behind it). I’m here trying to build wealth, not make quick gains.
Also, the election is coming up, which I’m sure will be completely drama free…but if you think your portfolio is going to tank because the other guy won, well, you’re doing it wrong. As Buffett has said, don’t bet against America. Our businesses and country have been the place to be for 200 years. And if you’re that worried about a Great Depression 2.0, then you can always invest in a resiliant multi-asset portfolio.
Discretionary Summary
Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.
| Avg Price | Cost Basis | Current Value | Current Gain (Loss) | |
| COF | 63.25 | 3,478.75 | 3,952.3 | 13.61% |
| EMR | 41.00 | 3,485.00 | 5373.45 | 59.93% |
| SPG | 74.50 | 3,427.00 | 2975.28 | -13.18% |
| FE | 28.00 | 3,500.00 | 3,588.75 | 2.54% |
FirstEnergy
FirstEnergy (FE) is an Ohio based electric utility company. FE services Ohio, Pennsylvania, West Virginia, Virginia, Maryland, New York and New Jersey. The reason FE is cheap is because it has been caught up in a bribery case involving Ohio Bill HB 6. FirstEnergy contributed to a political action committee to support this bill. This piece of legislation deals with the bankruptcy of FirstEnergy’s previously owned nuclear power plants.
These nuclear plants were spun off from FE a few years ago, into a new company called First Energy Solutions (now named Energy Harbor). FirstEnergy’s management separated from spin off three years before the HB 6 bill was proposed, and FirstEnergy Solutions went bankrupt a year before HB 6. FE management claims they did nothing wrong. Based on the info so far, it appears FE washed their hands of the nuclear plants years before the bill, and the legislation does not benefit FE that much.
Part of my strategy is to find stocks that are heavily sold off from negative news. These situations can create opportunities because oftentimes the market becomes overly pessimistic on the stock. I believe FE has a good chance of coming away clean from these allegations, but I will monitor the situation in the coming quarters.
This holding could either be a “value flip” or a longer term, bond substitute that will protect against inflation. Once this negative news gets settled, it is possible FirstEnergy will revert back to its pre-selloff price. I purchased FE at $28 at share, and it was trading around $45 a share before the negative headlines. While I wait for this reversion, I will get a safe 5.5% dividend yield and hopefully enjoy the low volatility typically associated with utilities.
Tanker Stocks
Tankers have continued to be disappointing, despite their great profitability this year. I probably bought these stocks at the top, which is frustrating, but I’ll continue to push through the pain. Frontline and DHT have been rewarding shareholders with juicy dividends, so that somewhat alleviates the sting. The Twitter account @calvinfroedge has been a great resource for oil tanker investors, and he nicely sums up tankers so far this year:
| Avg Price | Cost Basis | Current Value | Current Gain (Loss) | |
| DHT | 8.17 | 1,755.90 | 1,109.40 | -36.82% |
| FRO | 10.66 | 1,738.29 | 1,059.50 | -39.05% |
| STNG | 26.63 | 1,742.67 | 752.76 | -56.8% |
| TNK | 23.86 | 1,765.88 | 802.16 | -54.57% |
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.
My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers. This quarter I added eight positions, which can be seen in the table.
| Avg Price | Cost Basis | Current Value | Current Gain (Loss) | |
| BBSI | 50.50 | 1,767.50 | 1835.40 | 3.84% |
| FF | 13.00 | 1794.00 | 1569.06 | -12.54% |
| FRD | 5.10 | 1800.10 | 1643.95 | 13.74% |
| HXL | 36.80 | 1803.20 | 1643.95 | -8.83% |
| MUEL | 26.00 | 1768.00 | 1836.00 | 3.85% |
| RELL | 4.45 | 1802.25 | 1688.85 | -6.29% |
| RSKIA | 8.25 | 1740.75 | 2557.70 | 29.70% |
| SPRS | 1.31 | 1819.30 | 1869.75 | 2.77% |
401k and Precious Metals
My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.
I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
| 12/31/19 | 9/30/20 | YTD Gain (Loss) | YTD Contribution | |
| Precious Metals | $7,861.00 | $9,964.00 | 26.75% | |
| 401k | $10,962.24 | $23,687.33 | 11.36% | $10,863.00 |
Interesting Articles
If you think this post is boring, then check these articles I read this quarter.
Monopolies are Distorting the Market
Buying Stocks Trading Above 10x Sales A Good Idea?
Books I’m Reading
A few weeks ago I went to the local used book store for the first time since the pandemic and found a copy of the classic Buffettology. This book contains a lot of info that Buffett die hards will have seen elsewhere. However, I think it is a great book for a newer investor to gain the right mindset about investing. One of the main points is thinking about a stock like owning a piece of a business, which is something I totally agree with. The book presents an interesting business valuation method. A gripe I have is that I think this method suffers from some hindsight bias, so I’m not sure how practical it is to use.
Another book I read this quarter was Capital Allocation: The Financials of a New England Textile Mill 1955 – 1985. This book is the history of Berkshire Hathaway in the decade prior to Buffett taking control, and his capital allocation decisions up until the mid 80’s. Capital Allocation tells the story of how a struggling textile mill became one of the strongest companies in this country. My favorite part of this book is the deep dive into the financials of Berkshire and its early investments that I have not seen elsewhere. I loved nerding out over all of the financial statement snippets. Capital Allocation has a new place in my top 5 investing books.
For more value investing fundamentals check out:
The Many Flavors of Value Investing