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The "Brand Name" Portfolio Packs A Punch
Two years ago, I created the "Brand Name" portfolio, a selection of 10 stocks with the word "brand" in their corporate name. Originally culled from a list of 27, I argued the portfolio would take off once the economy recovered and it would do so with an appropriate level of risk and diversification. Two years later, it seems my argument was on the money. While the S&P 500 was down 16.8%, the portfolio itself was up 1%, beating the index by 17.8%. I'll explain how it was able to do so well and what you can expect from it in the future.
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Stocks Not Making the Cut
Of the original 27, I cut those stocks that traded over the counter, were below $5, had a negative trailing 12-month earnings per share, were a special purpose acquisition company (SPAC) or in some way overlapped with an existing pick. A couple of good businesses didn't make the cut as a result including Collective Brands (NYSE:PSS) and Maidenform Brands (NYSE:MFB). Because Limited Brands is both a retailer and a lingerie manufacturer, it did two jobs for the price of one, allowing me to save a pick elsewhere. The strategy appears to have backfired on me as Collective and Maidenform both have seen impressive two-year returns of between 50% and 60%. Only my Lifetime Brands selection did better at 94.7%. Better luck next time I guess. You can't win them all.
"Brand Name" Portfolio vs. S&P 500 - June 19/2008 to June 19/2010 & Last Two Weeks of June
Down But Not Out
The biggest stragglers in the portfolio over the last two years are Fortune Brands and Prestige Brand Holdings losing 27.4% and 33.0% respectively. As of June 11, Citigroup rates Fortune's stock a "sell" believing it's overvalued at current levels. This rating is recommended despite Citigroup also stating the company had improved operating margins for its home and security segment. In my opinion, even if Fortune is overvalued at this point, there's a lot to look forward to. Despite revenues in 2009 that were equal to those in 2005 and operating profits that were half those five years earlier, the company is financially solid with less debt and greater free cash flow. Any improvement in the economy will lead to both top- and bottom-line growth. I see opportunity where others don't.
As for Prestige Brand Holdings, its current free cash flow yield is 15%. Investopedia's Chris Gallant considers it undervalued and so do I. There are no alarm bells here.
Moving Forward
In the opening paragraph, I suggested the portfolio when constructed back in 2008 had an appropriate level of risk and diversification. I still feel this way. Despite only having only three sectors represented in the portfolio, it's held up quite well over the past two years through a stagnant economy. In the past two weeks, its beta of 1.57 showed its teeth, dropping the portfolio 12.1% compared to 7.8% for the S&P 500. I'm not a beta fan, but that's exactly the volatility called for based on its 1.57 average. Given its performance over the past two years, I'm confident the higher beta is an advantage long-term and that short-term volatility will continue to move them all over the place. No risk, no reward. (Learn more, see: Beta: Know The Risk.)
Bottom Line
Where the markets go from here is anybody's guess. Do I think the "Brand Name" portfolio will be in the black by the end of 2010? I highly doubt it. That said, I do think it'll beat the index whether it be the next six months or six years. Simple always does better.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 6 Simple Steps To $1 Million
Stocks Not Making the Cut
Of the original 27, I cut those stocks that traded over the counter, were below $5, had a negative trailing 12-month earnings per share, were a special purpose acquisition company (SPAC) or in some way overlapped with an existing pick. A couple of good businesses didn't make the cut as a result including Collective Brands (NYSE:PSS) and Maidenform Brands (NYSE:MFB). Because Limited Brands is both a retailer and a lingerie manufacturer, it did two jobs for the price of one, allowing me to save a pick elsewhere. The strategy appears to have backfired on me as Collective and Maidenform both have seen impressive two-year returns of between 50% and 60%. Only my Lifetime Brands selection did better at 94.7%. Better luck next time I guess. You can't win them all.
"Brand Name" Portfolio vs. S&P 500 - June 19/2008 to June 19/2010 & Last Two Weeks of June
|
Company |
Total Return Two Years(excludes last two weeks) |
Total Return Last Two Weeks |
Total Return Overall |
|
Acuity Brands (NYSE:AYI) |
-13.3% |
-19.1% |
-29.8% |
|
Fortune Brands (NYSE:FO) |
-27.4% |
-13.2% |
-37.0% |
|
HanesBrands (NYSE:HBI) |
-1.7% |
-15.8% |
-17.1% |
|
Interline Brands (NYSE:IBI) |
16.4% |
-11.7% |
2.8% |
|
Iconix Brand Group (Nasdaq:ICON) |
19.4% |
-10.5% |
6.9% |
|
Internet Brands (Nasdaq:INET) |
52.5% |
-1.7% |
49.9% |
|
Lifetime Bands (Nasdaq:LCUT) |
94.7% |
-6.8% |
81.4% |
|
Limited Brands (Nasdaq:LTD) |
41.9% |
-10.5% |
27.0% |
|
Prestige Brand Holdings (NYSE:PBH) |
-33.0% |
-6.3% |
-37.3% |
|
YUM Brands (NYSE:YUM) |
19.3% |
-8.1% |
9.6% |
|
Entire Portfolio |
1.0% |
-12.1% |
-11.1% |
|
S&P 500 |
-16.8% |
-7.8% |
-23.2% |
|
Collective Brands (NYSE:PSS) |
49.7% |
-17.0% |
24.2% |
|
Maidenform Brands (NYSE:MFB) |
58.9% |
-13.0% |
38.3% |
The biggest stragglers in the portfolio over the last two years are Fortune Brands and Prestige Brand Holdings losing 27.4% and 33.0% respectively. As of June 11, Citigroup rates Fortune's stock a "sell" believing it's overvalued at current levels. This rating is recommended despite Citigroup also stating the company had improved operating margins for its home and security segment. In my opinion, even if Fortune is overvalued at this point, there's a lot to look forward to. Despite revenues in 2009 that were equal to those in 2005 and operating profits that were half those five years earlier, the company is financially solid with less debt and greater free cash flow. Any improvement in the economy will lead to both top- and bottom-line growth. I see opportunity where others don't.
Moving Forward
In the opening paragraph, I suggested the portfolio when constructed back in 2008 had an appropriate level of risk and diversification. I still feel this way. Despite only having only three sectors represented in the portfolio, it's held up quite well over the past two years through a stagnant economy. In the past two weeks, its beta of 1.57 showed its teeth, dropping the portfolio 12.1% compared to 7.8% for the S&P 500. I'm not a beta fan, but that's exactly the volatility called for based on its 1.57 average. Given its performance over the past two years, I'm confident the higher beta is an advantage long-term and that short-term volatility will continue to move them all over the place. No risk, no reward. (Learn more, see: Beta: Know The Risk.)
Bottom Line
Where the markets go from here is anybody's guess. Do I think the "Brand Name" portfolio will be in the black by the end of 2010? I highly doubt it. That said, I do think it'll beat the index whether it be the next six months or six years. Simple always does better.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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