Nine months ago I argued in favour of a portfolio with a weighted beta of 0.72, comprising the following six stocks: 25% of ARM Holdings (LSE: ARM), 12% of Diageo, 18% of SABMiller (LSE: SAB), 30% of BP (LSE: BP), 10% of National Grid and 5% of ASOS (LSE: ASC).
Here’s how it has performed so far, and why BP and ARM will continue to make up to 55% of my virtual portfolio.
A Balanced Portfolio
The value has increased by 9% over the period, for an all-in pre-tax return of about 12%, including dividends and excluding costs, since 9 June 2014. The average yield of the portfolio is roughly in line with that of the market, but the FTSE 100 is up only 2% over the period.
The rise in ARM has been offset by the fall in BP, but I’d retain exposure to both stocks in the same amount. The former is a strong growth play, while the latter is a decent recovery story.
While I am not too disappointed with the performance of SAB, ASOS and National Grid, I think Diageo is not a stock I’d be happy to retain. Instead, I’d replace it with Unilever (LSE: ULVR).
Remember: we are after steady, long-term gross returns in the double-digit territory on an annual basis.
Diageo & SAB
I am not one of those who argue in favour of changes in a portfolio every year or on a quarterly basis, but I am glad to make an exception because Diageo looks a bit expensive, and I am not convinced its management team is doing all it can to deliver value to shareholders.
Last year, I thought Diageo would offer more value than SAB, but the latter’s performance has convinced me that Diageo is not the safest bet in the sector.
SAB has been the subject of recurrent takeover talk for a long time, and its shares have been boosted by takeover rumours in the last 18 months: I don’t buy into an imminent change of ownership, to be honest, and I am betting instead on a recovery in emerging markets and SAB’s strong fundamentals.
As far as M&A talk is concerned, however, it’s more likely that SAB will make another attempt at striking a deal with Heineken, which would benefit its own valuation in the short term.
Unilever
Elsewhere in the consumer space, Unilever is not incredibly cheap but its stock offers a higher yield than that of Diageo, and its valuation will likely continue to dictate a premium because investors will likely pay up for its quality earnings, particularly if volatility springs back. That means Unilever’s trading multiples will likely rise over time.
I am a big fan of Unilever’s portfolio of products, and its management team boasts a strong track record. On top of that, targeted divestments will boost value in the next 18 months, in my view.
BP, ARM & ASOS
BP continues to be a rather attractive investment proposition right now, although it’s down 10% since June last year. It will benefit from rising oil prices, which I think are likely from the third quarter onwards. I am cautiously optimistic about its dividend policy, too. BP could comfortably rise above 500p, where it traded in the spring of 2014, and I would be surprised if it disappointed investors in its upcoming results.
I still like ARM, too, in spite of a terrific rally for its stock in recent months — a price target in the region of £14 is justified based on its realistic growth projections for earnings and dividends, which combine with a rising market share for its core products.
Finally, ASOS has been holding up pretty well in recent times, and its shares have recovered from a terrific plunge in 2014. They look expensive, but there are a few reasons why shareholders may want to stay invested. Of course, volatility in its stock price could be just around the corner, particularly if operating profit margins remain under pressure or fall, but that’s why only 5% of the portfolio would be invested in this high-risk stock.
