What’s wrong with sleeping well?
Balancing an equity portfolio’s risk profile is a matter of personal comfort. The focus is more on the volatility along the road to a result than the expectation of achieving the result itself.
Recently, Goodreid reduced its risk profile in its U.S. Large cap portfolio by trimming a couple of securities that have performed very well off the June market lows and skew towards the risk side of the portfolio and adding a solid defensive issue that is coupled with an exceptional growth profile.
Our new position, McKesson (MCK-NYSE), provides healthcare solutions in the United States, primarily through drug distribution. As such, it is relatively insulated from bouts of waning consumer confidence and has little exposure to the negative effects of an appreciating U.S. dollar. There have been three pronounced periods of low consumer confidence this century and in all three periods MCK has handily outperformed the broad markets. Earnings predictability is strong. In its most recent financial report, the company reported high single digit growth in both revenue and earnings and raised its EPS estimate for fiscal 2023 to $23.95-$24.65. At a stock price of $360, this represents a price to earning ratio of approximately 15 times and an earnings yield of close to 7%. MCK has an investment grade balance sheet, ample liquidity, and financial flexibility.
Our first trim, Apple, has been a stalworth of the U.S. Large Cap portfolio since 2006, when it was purchased at a split adjusted price of $2.30 per share. Surprising to some is that we have trimmed AAPL seven times over the sixteen-year association, every time for the same reason. It represented an over-sized percentage of the portfolio, and that elevates risk. From the June 2022 S&P 500 Index low to late August, AAPL gained 34% to $174/share, far outpacing the broad market’s gain of 17%. It now represents 7.5% of the S&P 500 Index weighting and over 10% of the Nasdaq 100 Index weighting. Its weighting inside the Goodreid U.S. Large Cap portfolio was approaching 8%, a 50% premium to an equal weight position. We continue to appreciate the long-term opportunity but tactically it made sense to reduce exposure.
Lowe’s was purchased in early 2021 for $171/share and appreciated to a healthy trim price of $211. It is closely associated with the housing market and consumer confidence, both of which have taken a hit during these times of rising rates, heightened inflation, and fears of a recession. While the fundamentals of LOW are solid, management is confident and valuations are compelling, this holding comprises a “risk-on” position within the portfolio. At over 7% weighting, we took the initiative to trim this position.
Defining investment success is complex. Some components like return are straight forward; other determinants more abstract, such as the risk taken to gain a result. At Goodreid, we understand that we must protect capital, in all circumstances. But we also have a responsibility to grow wealth in real terms and to outperform competitive options over time. Tactically adjusting the risk profile of our portfolios is an integral part of the process and their success.
