My Stock Market Portfolio

Four years into investing I have accumulated shares in 23 companies and keeping track of them all is no easy task!

To be completely honest - 23 is too many companies to be holding considering the size of my portfolio (Just £20,000). This means that many of my positions are quite small. This makes all the time I spend keeping track of them seem a bit silly.

Because of this, over the coming year I am seeking to reduce my portfolio to just 15 outstanding companies.

Some long-term followers would have noticed that this list has already reduced by 10 from a nauseating 33 holdings.

Below I have arranged my companies by risk;

As well as arranging my portfolio by risk, I have also illustrated the weightings of each stock below. More than one stock on the same line denotes a similar weighting.

Summary of each holding (In progress - Keep checking back).

Facebook Summary

Facebook is the earliest example of my tilt away from Dividend Growth Investing. This non-dividend payer owns the namesake 'Facebook' app as well as Instagram, WhatsApp and Messenger. These apps are integrated to the lives of most of the Western World giving Facebook an enviable economic moat due to the network effect.
Facebook has managed to monetise users through ads on its namesake Facebook platform very successfully and the substantial surge in stock price since its IPO reflect this. Many people are now worried that the monetisation of the Facebook platform has come to an abrupt halt and as such growth will begin to fade rapidly, with Q2 revenues missing analyst's expectations. Couple this with increasing concerns surrounding privacy and Facebook's hand in democratic elections and bears are convinced that Facebook will enter reverse gear.

This current negativity surrounding the stock has created an opportune time to buy. Facebook has HUGE further potential with increasing integration of games, the ability to send payments and Facebook Video. Instagram has just begun on its monetisation and the launch of IGTV is exciting albeit a bit of a long-shot. WhatsApp and Messenger are yet to be touched. This mass of potential will drive Facebook's growth over the medium term and with such a wide range of possibilities, not everything has to pay off.

Over the longer term I believe that Facebook will seek to integrate mini-apps into its platforms in the way that Tencent integrates mini-apps into its WeChat app. Chinese consumers do pretty much everything inside of WeChat, from ordering food to booking a taxi with Tencent taking a cut of the proceeds. If Facebook could do the same thing then the stock price's upside would be staggering.

Imagine visiting your favourite store's Facebook page and placing an order for an advertised product on the spot? (With Facebook getting a cut of-course)

Nevertheless having bought shares at $154 and $175, if future growth fails to materialise then there could be significant downside, hence the high risk rating of these shares.

I remain confident and will monitor progress closely.

Unilever Summary

Unilever have an enviable portfolio of brands.

From Ben and Jerrys ice cream to Persil detergent, I'm pretty sure that you've used a Unilever product, I'd even bet that you use at least one every week.

It's always important to add stability to any portfolio and owning a consumer staple is a very good way to do just that. These boring slow growers are usually very reliable dividend payers and are well placed to weather any economic downturn.

After all, people are always going to have to eat and wash clothes!

With countless consumer staples out there, Colgate-Palmolive, Kraft Heinz, General Mills and Procter and Gamble (a stock that is in my portfolio) why have I decided to include Unilever as my second biggest holding?

Here's why.

My portfolio focuses on trying to balance stocks that offer incredible growth with defensive stocks that will hold strong in a recession.

When I looked at Unilever, it became clear to me that this stock offered a bit of both. It has a lot of exposure to emerging markets which helps fuel the company's growth but it also enough exposure in mature markets to act as a stabiliser for the stock.

What excites me about Unilever is this focus emerging markets (55% of FY'17 sales) along with its portfolio of growth brands. The sale of the company's admittedly boring spreads business signifies this change of tact brilliantly and may be a sign that management is getting its act together after Kraft Heinz showed interest in purchasing the company.

I'm also excited to see the company's commitment to sustainability and ethical products and production, something that aligns well with an increasingly conscious consumer.

But I always like to offer a bear case to my readers.

Although I'm usually a fan of share buybacks, I have to admit that I remain slightly weary of management's commitment to buyback €5bn worth of shares considering the stock's current valuations. Shares look fully valued to me here, although the individual investor should still consider a purchase. The old me would have tried to convince you to wait for the price to drop but as I have painfully learnt, missing out on countless outstanding stocks, good stocks often sell at higher valuations - sometimes you have to pay what Keith Ashworth-Lord calls a "workmanship like price" for a company.

Anyway, I think it would be a bit more exciting to see management look for ways to compound that money internally, maybe through an acquisition of a fast-growing brand? But maybe there aren't any opportunities out there? Who knows? Maybe I'm just being picky! Net margins also look slightly thin at 11%, considering P&G sports net margins of 15.65% and Kraft Heinz margins of 14% but I feel this is duly balanced by the larger growth prospects of Unilever.

The dividend lovers out there will be pleased to see the near 11% bump in the dividend between 2016/17 and announced a 8% dividend increase in Q1 this year, both covered by Free Cash Flow. (2017 dividend was 70% of Free Cash Flow).

Over the longer term Unilever investors should enjoy copious rewards from the company's growth in emerging markets, new leaner and meaner strategic plan having cut some fat from the company and a reduction in share count.

Apple Summary

Tencent Summary

Tencent is by far the riskiest pick of my portfolio, rivalled only by the 75 p/e Fever-tree.

Tencent started out its journey as a tech giant with its social-networking dominance in China via its WeChat app (a bit like WhatsApp on steroids). If you don't know how WeChat works, I highly recommend you give this video a watch to find out.

Today, Tencent has evolved into a conglomerate holding company that makes the majority of its money through gaming, particularly through the smash hit 'Glory of Kings'. The company expects future growth to come through new game releases and through monetising Player Battle Ground Unknown and Fortnite in China.

The Westeners among us would be interested to know that Tencent owns significant stakes in Epic Games, Riot Games, Bluehole and a smaller stake in Activizon Blizzard.

Tencent's focus on games excites me since just 17% of Tencent's revenue comes via advertising, compare this with Facebook's 97%. Since the company has been firmly focused on growing via gaming with its advertising ventures more of a sideshow, there is good potential for advertising growth in the medium to long term. Their WeChat platform currently boasts 1billion active users.

But Tencent is not without its issues.

Annoyingly, their low-profile CEO, Ma Huateng, seems hell bent on burning the company's cashflow on ridiculous investments in companies with little value such as Snapchat and Tesla. Luckily for investors the sheer size of Tencent's cashflow before investing activity (circa RMB70,000 million in 2017) means that such poor investment decisions have a limited effect on the company bar annoying investors.

The company stumbled in its Q2 results, delivering a rare dip in profits citing the struggles it is having getting approval from the Chinese Government to monetise existing gaming titles and to release new gaming titles. The government recently forced Tencent to introduce restrictions to make their games less addictive. As with any Chinese business, expect them to do what's in the interest of the Chinese government over what's in the interest of shareholders.

Despite this, I expect these issues to be resolved once the company bows to the demands of the Chinese Government be it sooner or later. My guess is that the expected gains from these titles to be pushed into the latter quarters of 2018 or into 2019.

Have no doubt, Tencent comes has an enviable user-base and its remarkable ability to monetise its very addictive games successfully gives the company a juicy 30% Net Margin. The Q2 dip and the ongoing 'trade war' between China and the US have pushed down the share price from a high of HKD476.60 to an appetising level.

Next Summary

Microsoft Summary

"Selling winners is like picking flowers and watering the weeds"

Microsoft has seen me gain 150% on my initial investment.

Had I not been so much of an idiot to sell half my shares after the stock doubled then my portfolio would be in even better shape than it is today.

It's a lesson learned. As Peter Lynch says in his book One up on Wall Street - never sell a share based on arbitrary rules such as:

"Sell when the price doubles"
"Sell half when you're up 50%"

and so on...

Doing so is like picking the plants in one's garden and watering the weeds.

It's tough psychologically to do but how many of us here are comfortable averaging down but seldom average up?

The moral of this story is that stocks that perform well go up in price and it's silly to sell a good stock. Stocks should only be sold based on its fundamentals as opposed to anything else.

It's clear to see that by selling half of my Microsoft holding I not only sold a good stock, it is an outstanding stock.

The strength of this company is truly remarkable.

Even during Steve Ballmer's tenure as CEO where he was hell bent on incinerating money via acquisitions the company pulled through due to its outstanding, mind-boggling economic moat. Not only did the company pull through, it still managed to see revenue surge from $25bn to $70bn.

All of this despite Ballmer being regarded as one of the worst CEOs of his era.

Let's just let this sink in. This guy ran Microsoft..... and it not only survived but thrived.

Ok, I've had my fun.

So why do I own Microsoft?

Quite simply Microsoft is now positioning itself as one of the premier go-to cloud computing companies, and the triple digit growth we have seen in the cloud computing division is incredibly encouraging.

The company has also completed its switch from one off software sales to a Software as a Service model through, for example, shifting Office onto the cloud. This has resulted in more reoccurring revenue and a more user-friendly experience. Office's shift to cloud has also enabled the package to be very compatible with mobile devices. This is extremely important considering Microsoft lacks a mobile OS.

The credit for this transition largely goes to Microsoft's current CEO, Sataya Nadella, who has undoubtedly turned this bloated tech behemoth into a leaner, nimbler and more modernised company.

Backing up Nadella's cloud-based growth strategy is the insane amount of revenue Microsoft collects as a result to its entrenchment in pretty much every IT system one can imagine, largely via the Windows operating system and Windows server.

There are seldom more powerful economic moats than moats that are a result of a very deep entrenchment into the way people and companies conduct their day-to-day business. This entrenchment allows Microsoft to earn above-average returns on entrenched products leading to a very impressive 27% net margin for the company.

Although tech is usually risky, Microsoft's wide economic moat and its survival despite falling far behind in mobile technology for a considerable length of time proves that this company can survive pretty much every change that's thrown at it.

Microsoft's strength and investment potential can be summed up very simply.

The company holds $134 billion in short-term cash and investments with $72bn in long term debt (outstanding really when one considers the money burned on Nokia and the $26bn plonked on to fund the purchase of LinkedIn)

The company has generated an average of $26 billion in free cash flow over the past five years.

Commercial cloud is still growing rapidly, although not at triple digits anymore with a 50% jump year-on-year to $6bn.

Need I say more?

Johnson and Johnson Summary

Johnson and Johnson is as solid a company as they come.

It operates in a recession-proof industry and is one of only a handful of companies to have a AAA credit rating from Moodys - that's a better credit rating than the UK has as a country.

I initially bought Johnson and Johnson as a low-growth dividend play for $92 a share when lawsuits surrounding their 'cancer causing' talcum powder first came to notoriety in the summer of 2015.

The company has a remarkable record of increasing its dividend for 55 years straight, even during the 2008 recession. This steady stream of increasing dividend helps investors get an instant and growing return on their investment. Johnson and Johnson's main role in my portfolio today is to buoy it during recessions.

Johnson and Johnson's current prospects look brighter than at the time of my initial purchase. As of late, I'm pleased to see that growth in its high margin drugs business is picking up substantially, contributing significantly to a 18.5% EPS jump in the most recent quarter.

What's great about JNJ is that it has a very wide economic moat derived from its broad patent portfolio, the switching costs present in its device division and its long-established consumer division where its 'Johnson's brand' commands a premium over comparable rival products.

If I say baby wipes you say - Johnson's baby wipes!

I'll have to admit that I don't really keep a close eye on Johnson and Johnson, it's one of those stocks that I'm happy to let compound in the background.

Regardless, it's the only pharmaceutical company that I own and to be quite frank, I don't really like pharmaceuticals - mostly because I don't understand them. I'm not a pharmacist nor do I have any insight into the pharmaceutical or healthcare sector. I rather stick to what I know.

What I do know about the pharmaceutical industry is that although patents allow pharmaceuticals to earn above average returns, they usually attract heavy and expensive litigation and eventually expire. On top of that, the expiration of patents creates a huge need for R&D (research and development) spending from pharmaceutical companies something that can create massive strain on the balance sheets of smaller companies.

Earnings can also get very patchy for pharmaceuticals as patents expire and new drugs come online. But, with Johnson and Johnson's the spread of its income over drugs, devices and consumer products helps it smooth out some of those earnings bumps.

Sorry I can't be much more of a help - but I must acknowledge my limitations and not waste your time waffling on about something I know very little about.

It may be useful for readers to know that Morningstar considers the stock slightly overvalued at present and have a fair value estimation of $130.

Starbucks Summary

"Be greedy when others are fearful, be fearful when others are greedy"
- Warren Buffett

This mantra certainly holds true when it comes to Starbucks. This stock was once the darling of Wall Street having galloped 1,200% since the depths of the recession to a high of around $62 a share.

The stock fell to a low of $48 this June and I jumped in at around $50 a share.

There's no doubt that Starbucks faces significant challenges with growth slowing in the US (an anaemic 1% in Q3 this year), increasing competition from low-cost alternatives such as McDonalds and Dunkin' Donuts et al and the decision of their long-time CEO Howard Schultz to step down.

But let's put things in perspective. This iconic brand is now selling at a 16-17 p/e. (depending on whether you want to use the adjusted earning figures or not).

To be quite frank, future growth would be a bonus at this point as the company can continue to increase EPS through share buybacks and reward shareholders through a growing dividend, all powered by their insane free cash flow of $2.6bn for the trailing twelve months.

But, I do think that future growth will materialise and that investors that buy in at this valuation will be rewarded over the long term.

I for one am very excited by Statbuck's recent deal with Alibaba to use its delivery network and the way that the pair, in partnership, have managed to create a virtual reality styled experience in the Shanghai roastery which reflects the increasing demands of consumers for 'experiences' as well as great tasing coffee.

No-one else is doing this.

On top of this, the company is investing heavily into mobile/digital and loyalty offerings, and the data collected through these ventures may mean that the company can pin-point consumer tastes and increase footfall.

But - consumer tastes HAVE changed and Starbucks has suffered as a result. There seems to be an increasing reluctance to pay top dollar for a product that can be bought for a third of the price elsewhere and the people who do go to Starbucks have increasingly complex demands.

But I remain bullish and I welcome the ramping up of store closures. This should stop cannibalisation of sales and help lift margins over the medium term.

I still rate Starbucks as a relatively high-risk investment as there's always a risk that competitors really take them to town - It's an interesting one. One could say that the sheer power of the Starbucks brand and the sheer scale and purchasing power that the company possesses mean that the company has a wide economic moat. But the fact remains that consumers face no switching costs. It's just as easy to get a coffee from Dunkin' (US) or from Costa (UK).

Card Factory Summary

"When ideas fail, words come in very handy"
- Johann Wolfgang Von Goethe

I always worry when a company's management starts stuffing reports with excuses.

Unfortunately this is what I have been seeing in Card Factory's reports as of late.

Excuse after excuse with little progress.

When you see that declining sales are "due to weak consumer environment and extreme weather conditions" it's time to worry.

After all, I don't think anyone doesn't have a birthday due to extreme weather.

Make no mistake, I still think that Card Factory is a solid stock to own. It's deeply undervalued at 11 p/e. Having already averaged down on three occasions I'm pulling the handbrake here as I become increasingly concerned of the company's management.

Despite us living in the 'Internet of things', demand for physical cards has remained robust.

In my opinion, Card Factory does not benefit from an economic moat despite its vertically integrated business model.

Being both the producer and seller of cards, Card Factory can react rapidly to changing consumer trends and more importantly keep costs under control. Although this model and control over costs means that Card Factory has a very respectable 13.81% Net Margin (albeit lower than its 3 year average of 16%) competition within the space remains fierce with most shops and supermarkets now selling cheap cards.

Worryingly Card Factory's margins have been squeezed as of late due to increasing costs as a result of minimum wage increases.

This squeeze can be demonstrated by the relationship between the company's revenue and cost of sales. Although revenue is up 29% since 2014 , costs of sales are up 33%. A relatively small rise isn't particularly worrying in itself but by considering that like for like sales at Card Factory stores have been anaemic and that growth has been mostly due to new store openings I am left to ponder the following. What happens when the market saturates? Any slowdown in revenue growth could spell trouble if costs of sales continue to rise through government mandated wage increases. It's clear to me that Card Factory need to do much more in existing stores. The cautious investor should keep a close eye. Let me be clear - alarm bells aren't ringing here. We're just keeping a close eye.

The attraction to Card Factory stems mostly from its very strong free cash generation which totalled £60m in 2018. But, it's important to note that the company paid out £83m due to a generous special dividend. Investors therefore shouldn't count on such generous special dividends much longer, management has since guided a 5-10p special dividend for the year end, I would venture to say that this would be comfortably on the lower end of estimates.

At its current market cap of circa £600m, Card Factory is spitting out 10% of its market cap in Free Cash Flow which is quite remarkable and may indicate deep value as long as things don't deteriorate dramatically.

Why management aren't buying back shares at this levels is beyond my realm of comprehension. If the company were to use all its Free Cash Flow on buybacks they could retire around 10% of the stock's shares at the current market cap, although this would likely be more around 5-7% in reality as the share price would rise as the company buys back shares.

Management, in my opinion, is being incredibly short sighted here and are more focused on the short-term reward of special dividends as opposed to the long term path of creating tax-free shareholder value through buybacks.

Furthermore the performance of GettingPersonal.co.uk is embarrassing. A further 8.5% decline in sales according to managements latest trading update is cringeworthy and they increasingly look like fish out of water.

Poor management and the lack of buybacks make Card Factory a risky buy but there is doubtless deep value to be found at the current valuation.

Lloyds Banking Group Summary

Again - I have to hold my hands up, I am surely out of my circle of competence here, just as with Johnson and Johnson.

Finance companies really aren't my strong point and my usual advice is to steer well clear of what you don't know. Despite knowing little about finance companies, I do think it's important to have at least have some exposure to the finance sector to deal with potential interest rate rises here in the UK. I opted to pick what I saw was the most in-shape UK bank and as the first bank to suffer from the 2008 crisis to restart dividend payments I figured, back in my amateur investing days in 2013, that Lloyds would be a good pick. Of-course, I wouldn't buy a stock on such a basis these days.

Today, Lloyds remains in my portfolio as some protection against rising interest rates.

Lloyds Bank was just the second ever stock I bought. I blindly bought shares at 75p and at 58p. My weighted price is 65p.

Today, taking a more measured approach at analysing the stock I remain confident - I suppose I got lucky.

Lloyds appears years ahead of other banks in its transition to online banking and its closure of branches. Politically sensitive I know, but branch closures are undoubtedly beneficial for banks as more people bank online and branches experience less footfall.

I was encouraged by the fact that Lloyds comfortably passed the Bank of Englands very extreme 2017 stress test and by the fact that Lloyds announced a encouraging £1bn share buyback programme. The programme was recently completed and retired 1,577,908,423 ordinary shares.

Moving forward Lloyds looks set to continue to increase its dividend with an increase of 7% to the most recent interim dividend from 1.00p to 1.07p. Last year's final dividend was a 20% increase on the prior year so it will be interesting to see what rise the management has in mind for this year. All I know is that it'll almost certainly outpace inflation.

The big drag on Lloyds shares is Brexit and continued lethargic interest rate rises something that nobody could have foreseen. With 95% of its operations in the UK, Lloyds is in a very precarious situation and may well suffer a significant decline if we end up with a no-deal Brexit and continued record-low interest rates.

On the other hand, US based banks continue to record brilliant gains in their flourishing economic environment and rising interest rates. How stupid was I to turn my nose up at Wells Fargo at $45?

Again, I'm very sorry I can't be of much help when it comes to Lloyds, it's not a position that I actively monitor personally, opting instead to trust in what Morningstar reports about the company. As they remain bullish, I must trust in their judgement.

It may be useful for potential investors note that Morningstar holds a 76.00p fair value estimate for the shares and awards them a narrow economic moat based on its 'robust business franchise' and 'multi-brand, multichannel strategy',

Disney Summary

Disney is one of my favourite positions due to the wide economic moat the company enjoys.

It's hard to think of any other stock that has a place in the mind of every single generation.

Your grandmother would remember Pinocchio, Snow White and Dumbo.

Your mother - Jungle Book and The Aristocats,

You yourself - Hercules, Tarzan and Toy Story,

Your kids, if you have any, are probably obsessed with Frozen or Zootopia.

If they're teenagers, they'd probably be more interested in Guardians of the Galaxy.

The film industry is a tough one. It's very hard to predict the success of a release (just ask John Travolta about Gotti) and they cost a lot of money upfront to make.

Treasure Planet cost Disney $140m yet they only grossed $109m at the Box Office.

Tangled cost a whopping $260m yet luckily grossed close to $600m at the Box Office.

Imagine if that would have flopped?

High capital expenditures like this should make investors nervous especially as it's all being spent upfront with no guaranteed success.

After all, the best type of businesses are those where a customer pays money up front for a service they will later receive.

This lets the company put that money to work right away.

Insurance is a great example and a lot of the reason why Buffett bought GEICO.

But, this isn't what scares me most about Disney.

I'm mostly concerned about how hard it is to keep a track on what exactly is going on with Disney.

It's business sprawls across cable television, movies, production and theme-parks.

I would be lying if I said I fully understood every bit of Disney's business.

I find it useful to try and split Disney's business into two distinct, separate businesses.

The first business being its media operations which include its dominant TV channels: ESPN, ABC and the Disney Channel along with the film operations including Pixar and Lucasfilm.

The latter business being Disney's remarkable licensing operations. Be it licensing character use in games, clothing or whatever.

Now cable tv/media generally is usually ultra competitive with channels bidding for content, sports rights and celebrity presenters. Hell, bidding on Football rights nearly killed BT! When I first looked at Disney, this worried me.

But, after researching further into the stock it would appear that ESPN is very profitable thanks to the 'critical mass' of subscribers it holds from owning the rights for the NFL, NBA and college football and basketball. Having all these sports on one channel has attracted enough eyeballs to make it a highly profitable operation. On the other hand, any channel seeking to take just one of these sports away through a high bid would find it hard to make it economically viable as they wouldn't have the critical mass Disney enjoys from holding all sports in one basket and as such would be likely to take a heavy loss.

However, it is worth noting that ESPN subscriber numbers have been steadily declining.

Disney's other TV operations are in the form of ABC and Disney Channel. Although I know little about ABC, I do know that Disney Channel boasts an array of trademarked shows stuffed with unique, irreplaceable characters and franchises. A catalogue of this magnitude takes decades to build and significant investment and creative talent.

Through M&A Disney now owns a mind-boggling array of franchises.

They own;

- Lucasfilm (Yup, star wars)

- Marvel (Avengers, Guardians of the Galaxy)

- Fox (Fantastic 4, X-men/Deadpool and unfortunately the rubbish Kingsman)

Tell me there isn't a moat derived from these world known franchises?

Through building and owning these franchises, characters and properties Disney is then able to go on to licence these to manufacturers and producers which forms the second part of its business.

All of the above means that Disney is able to consistently operate with a 25% net margin.

YUM!

It may be that the complexity, unpredictability and high upfront costs the would steer me away from buying shares in a business is driving away competitors from trying to enter the space.