We use this approach called the Core and Explore in investing our own money and we apply more or less the same principles to the money we manage for your family. Same exact process, similar investments with the only difference stemming from the total value of your investible assets with us and where you are in the process of meeting your goals. Once your family reaches a certain asset threshold, 80-90% of that is invested in rock-solid can’t fail investment strategy that forms the Core with the remaining 10-20% diverted to alternative investments that feed into the Explore segment of your portfolio. Explore could be anything – real estate partnerships, hard money lending, small/micro-cap stocks, investing in early stage companies etc. but whatever it is, the due diligence process will be thorough with avoidance of total capital loss being the primary objective.
This particular aspect of Explore is about a collection of small/micro-cap stocks – 52 of them in total – chosen towards the end of 2011 post quite a bit of quantitative and qualitative analysis and which eventually became part of your portfolios with us. Some got the full shebang, others a smaller slice depending upon how much money you had to invest. The plan at the time was to design an equal-weighted portfolio of these stocks and come back to it in say 5+ years with a bit of review and analysis in between, especially when it came to replacing the stake in a company that got acquired. The goal as always with Explore is to create the possibility of eking out a percent or two above and beyond what a pure market portfolio would deliver.
So what companies comprised this aspect of Explore? A few names below. Some big winners, a few duds and the rest just muddled along. And that was by design. A few big wins should compensate for a bunch of losers and that is exactly what happened.
The duds first…
QSII – Quality Systems, Inc., together with its subsidiaries, develops and markets software and services that automate various aspects of practice management (PM) and electronic health records for medical and dental practices in the United States. This one started out strong, had amazing finances with great margins, had a bit of moat but the company floundered in gaining traction for some of their key products. -54%.
VIVO – Meridian Bioscience, Inc., a life science company, develops, manufactures, distributes, and sells diagnostic test kits primarily for various gastrointestinal, viral, respiratory, and parasitic infectious diseases worldwide. Solid repeat purchase business, great finances and a hefty dividend yield. -29%.
CLB – Core Laboratories is in the business of providing reservoir description, production enhancement, and reservoir management services to the oil and gas industry in the United States, Canada, and internationally. So right there, we know there is this tie to the price of oil but this was and still is a fantastically run company with great finances. -13%.
CHRW – C.H. Robinson Worldwide, Inc., a third party logistics company, provides freight transportation services and logistics solutions to companies in various industries worldwide. Very profitable, repeat purchase business with a decent moat. -6%.
SRCL – Stericycle, Inc., together with its subsidiaries, provides regulated and compliance solutions to the healthcare, retail, and commercial businesses in the United States and internationally. Talk about a solid moat and this one has it all. Try to get regulatory clearances to dispose off medical waste and you know. -1%.
And the winners…
FIZZ – National Beverage Corp., through its subsidiaries, develops, produces, markets, and sells a portfolio of flavored beverage products in North America and internationally. +633%.
EXPO – Exponent, Inc., together with its subsidiaries, operates as a science and engineering consulting company worldwide. Its services include analysis of product development, product recall, regulatory compliance and the discovery of potential problems related to products, people, property, and impending litigation. +559%.
CPRT – Copart, Inc. provides online auctions and vehicle remarketing services. It offers a range of services for processing and selling vehicles over the Internet through its Virtual Bidding Third Generation Internet auction-style sales technology to vehicle sellers, primarily insurance companies, as well as to banks and financial institutions, charities, car dealerships, municipalities, fleet operators, and vehicle rental companies. +535%.
MASI – Masimo Corporation, a medical technology company, develops, manufactures, and markets noninvasive monitoring technologies worldwide. +502%.
PETS – PetMed Express, Inc. and its subsidiaries, doing business as 1-800-PetMeds, operates as a pet pharmacy in the United States. +454%.
Companies that were acquired in the process…
PLL – Pall Corp., a maker of water filtration systems was acquired by Danaher Corp. August 28, 2015 was the last trading day for the stock. +120%.
MJN – Mead Johnson Nutrition Co., maker of infant formula such as Enfamil brand, was acquired by Reckitt Benckiser Group. June 14, 2017 was the last trading day for the stock. +26.1%.
CLC – Clarcor, a maker of filters for automotive and heavy industrial applications was acquired by Parker-Hannifin. February 27, 2017 was the last trading day for the stock. +63.2%.
KDN – Kaydon Corp., a maker of industrial bearings and shock absorber systems was acquired by SKF. October 15, 2013 was the last trading day for the stock. +12.7%.
BRLI – Bio-Reference Labs, a provider of clinical laboratory testing services for the detection, diagnosis, evaluation, monitoring, and treatment of diseases in the United States was acquired by Opko Health. August 19, 2015 was the last trading day for the stock. +111%.
SIAL – Sigma-Aldrich, a company that develops, manufactures, purchases and distributes a range of biochemical and organic chemical products, kits and services that are used in scientific research was acquired by Merck. November 17, 2015 was the last trading day for the stock. +120%.
So how did the portfolio do? The plot below is the performance of a one-time $1000 investment in each of the companies that were part of this aspect of the Explore portfolio since the beginning of 2012. And that’s about the time when we started populating your plans. Some of you had a bigger exposure to this portfolio, others not as much. It all came down to the investible dollars at hand. For performance comparison, a small cap index and a small cap value index is used because this Explore portfolio with its small and value tilt is designed to compare well with these two indices.
The annualized return without dividends for the Explore portfolio is 15.9%, for the small cap index is 12.7% and for small cap value index is 12.6%. Add in about a 1.5% dividend yield for each of these portfolios and the annualized total return for the Explore stands at 17.4%, for the small cap index at 14.2% and for the small cap value index at 14.1%.
A complete list of all the holdings in this Explore portfolio is below.
FIZZ, SJM, SAM, BF.B, SRDX, MJN, MASI, NEOG, HAE, BDX, BCR, IDXX, VIVO, ATRI, VAR, ZMH, SRCL, CLB, MTSC, EXPO, MGLN, PETS, JEC, PAYX, LDR, ECOL, BRLI, CHRW, EXPD, CPRT, NEU, SIAL, HWKN, BCPC, TECH, WDFC, CBOE, FDS, SEIC, MSM, HRS, WAB, LNN, BMI, DCI, CLC, RAVN, PLL, ROLL, ZBRA, QSII, KDN.
So that was that. This collection of companies is in the process of getting revamped and will be replaced with some of the old and with a lot of new but we are in no hurry and being value conscious buyers, the values today are few and far between. But the time will come and we will be ready.
Image credit – Pixabay