Portfolio Update end of October
October has seen two sales and more deploying of capital into beaten-down opportunities.
Before we start, I’d like to offer you a discount on Seeking Alpha Premium, a service I use and contribute to daily. If you want to check out the service, with my affiliate link you can save $50 for the first year!
In October I sold out of a long-term holding of mine: Watsco WSO 0.00%↑. While this might surprise a few people, let me explain. Watsco has been a successful holding for me, but the numbers going forward don’t make much sense. They are still a cyclical company after all, even though not as bad as some others, with industry growth of 4-6%. I expect Watsco to outgrow its market, but I don’t expect growth to exceed 10%. Furthermore, as a distributor, there is not too much operating leverage in the business. Gross margins were 24% for a very long time and then rapidly expanded to 28% since the pandemic. I can not fully explain this and there is a risk of reversion to the mean. At the very least I wouldn’t bet on further operating leverage in the near future. Watsco pays out most of its cash flow as a dividend and is trading at 25 times earnings or a 5% Owner Earnings yield. This is far from cheap and I exited Watsco at a 30% gain (taxes offset by prior capital losses in other holdings).
Additionally, I sold out of my Veralto VLTO 0.00%↑ shares, which I received from the Danaher DHR 0.00%↑ spinoff. You can read more about my decision to sell Veralto in my recent article on Seeking Alpha.
Due to the two sales, I had plenty of cash to redeploy into beaten-down holdings. I added to my position in Ulta Beauty ULTA 0.00%↑, Mercado Libre MELI 0.00%↑, Danaher DHR 0.00%↑, RCI Hospitality RICK 0.00%↑, Lifco $LIFCO, Ashtead AHT 0.00%↑ and Adyen $ADYEN. This reduced my exposure to industrials a little, although I did buy more shares of some industrials as well. I want to improve the revenue quality/decrease cyclicality of the portfolio, so this was one step towards that goal.
Last month saw strong declines in some of my stocks like Danaher (even after the spin), Napco NSSC 0.00%↑, AO Johansen, Atkore ATKR 0.00%↑ and Texas Instruments TXN 0.00%↑. My best-performing stock was Nemetschek, up 20% in the month.
Looking forward, my goal is to deploy more capital within my portfolio holdings and potentially open a position in Mettler-Toledo MTD 0.00%↑, a very high quality business that I’d love to own at the right price (and it is getting there).
As always I’ll share the articles I published on Seeking Alpha in the last month:
Should Danaher DHR 0.00%↑ Investors sell new Veralto VLTO 0.00%↑ shares?
Zebra ZBRA 0.00%↑: Post Mortem of why my investment thesis broke
Mercado Libre MELI 0.00%↑ is becoming a cash flow monster
A hidden German Champion: Mensch und Maschine
Lifco $LIFCO: An undervalued Swedish gem
Constellation Software CSU 0.00%↑: Is bigger better?